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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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
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(State or Other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
631 U.S. Highway #1 Suite 309
North Palm Beach, Florida 33408
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including 561-842-0678
area code ------------
Securities registered pursuant
to Section 12(b) of the Act:: None
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Securities registered pursuant
to Section 12(g) of the Act: Common Stock, par value $.01
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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
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As of March 10, 2000, the registrant has 15,298,607 shares of Common Stock
outstanding and the aggregate market value of the voting stock held by
non-affiliates of the registrant, based on the closing price, was approximately
$9,485,136.
Registrant's revenues for the fiscal year ended December 31, 1999 was $21,228.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. (X)
Transmittal Small Disclosure Format: Yes No X
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Document Incorporated by Reference
Portion of the Company's definitive Proxy Statement in connection with the 2000
Annual Meeting of Stockholders are incorporated by reference into Part III
hereof, which the Company intends to file with the Securities and Exchange
Commission no later than 120 days after the end of the fiscal year covered by
this report.
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PART I
ITEM 1. BUSINESS
CORPORATE HISTORY
Creative Industries, Inc. was incorporated in the State of Florida in
April 1989, and operated 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. ("DMP"), 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).
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 Bankruptcy
Code in the Southern District of Florida. On July 6, 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 Company's Reorganization Plan provided for an infusion of $800,000
by a lender, which was secured by CFI's assets. The Company received $311,920,
net of expenses of $106,900, of funding under the Plan. 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 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 stockholders of Series "A" and "B" convertible preferred
stock received 2,000,000 shares of common stock in exchange for the preferred
stock in the reorganized CFI. The preferred stockholders of Series "C"
convertible preferred stock have received 2,500,000 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.
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The effective date of the Plan was on August 2, 1999. The only
additional liabilities the Company can incur would be the issuance of additional
common stock to creditors with disputes approved by the Court. 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 these creditors would be paid in the Company's Common Stock.
The dilution resulting from the Reorganization is significant. As a
result of the Reorganization, the Company issued 4,500,000 common shares in
settlement with the Company's holders of Convertible Preferred Series "A", "B",
and "C". In addition, 2,157,116 common shares have been issued to the creditors
in the bankruptcy petition.
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
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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.
POST BANKRUPTCY ACQUISITIONS
On December 15th , 1999 the Company entered into a purchase agreement
to acquire PMC Mortgage Co. of Evansville, Indiana, a privately held nationwide,
direct retail operation that specializes in the origination of sub-prime
mortgage loans. PMC Mortgage Co. focuses on niche marketing opportunities
through the use of targeted direct mail and outbound telemarketing strategies.
The Company originated in excess of $175 million in 1998. The Company maintains
3 primary call centers in Evansville, Indiana; Grand Rapids, Michigan; and
Asheville, North Carolina. Additionally, PMC is licensed to do business in 42
states, and has warehouse facilities available for loan fundings of $108 million
The Agreement was subject to numerous financial covenants that could
only be verified by performing due diligence work on the Company's books and
records. The result of that process resulted in several misrepresentations in
breach of the agreement's representations and warranties. The Company, by
letter, informed MG Investments, Inc. of the violations in the Covenants and
terminated the Agreement on March 31, 2000.
On January 14, 2000 the Company completed the acquisition of
controlling interest (65%) in Inventek, Inc.; doing business as Surfside
Software Systems(R), of Clearwater, Florida. Surfside is a leader in the
development of advanced software and management solutions for the transportation
industry.
Surfside's flagship product is TranWare which offers modules for order
processing, scheduling and dispatch, driver cashiering, account billing /
receivables, fleet vehicle maintenance as well as mobile data dispatch and
automatic vehicle location (AVL) using utilizing Global Positioning Satellite
(GPS).
The TranWare(TM) software suite offers management tools for the many
types of transportation businesses, including trucking, non-emergency medical,
courier, taxi, limousine and premium sedan. It also provides on-site training
and configuration services as well as 24-hour customer service for its clients.
CURRENT BUSINESS
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CFI Mortgage (A)
CFI Mortgage Inc. (the "Company") is a 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.
The Company had negotiated "Net Branch Agreements" with several
Mortgage Banking Companies. The agreements allow the Company to market their
services to mortgage brokers in multiple states. The agreement calls for the
Company to pay between 1/2% and 1% of the loan amounts originated under the
arrangement. These Net Branch Agreements allowed the Company to restructure its
operating procedures and to commence operations late in the third quarter.
Currently, the Company's operating division is doing business in several states
through these net branch agreements. The Company sells substantially all of the
mortgages it originates and purchases, including the right to service such
loans, to institutional purchasers, including national and regional commercial
banks and mortgage banks. These institutional purchasers thereafter portfolio or
resell the mortgages as mortgage-backed securities. The Company as of November
1, 1999 has operated under the MG Investments net branch relationship.
The Company operated through a "net branch" agreement with Paradigm
Mortgage Associates, Inc. a Jacksonville, Florida Corporation (PMA). The
agreement allowed the Company to market its mortgage products on a wholesale
basis to retail mortgage professionals, especially the PMA's network of over 200
retail branches. PMA's sole responsibility in the process was to close and fund
approved loans on the day of closing. PMA continuously made material errors in
the closing and funding of the loans. Paradigm Mortgage Associates, Inc. failed
to deliver premium checks to the Company's brokers in a timely manner. Due this
untenable situation, the Company elected to pay the Broker premiums out of its
operating account and receive reimbursement from PMA upon the sale of the loans
on the secondary market.
SURFSIDE SOFTWARE SYSTEMS (B)
With the acquisition of Surfside Software Systems ("Surfside") the
Company is in the business of providing PC-based, DOS and WINDOWS 95 solutions,
under the name TranWare to the taxi, courier, para-transit, shuttle and
limousine industries. TranWare consists of the following products: dispatch
management, scheduling and reservations, account billing/accounts receivable,
driver cashiering/shifting, insurance claims management and vehicle maintenance.
It interfaces with a number of different wireless technologies as well as
stand-alone financial products. Surfside provides the base products,
customization, product support and product training.
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The telephone operators enter in trip request information, including
pickup and drop off addresses, customer names and account information. Caller-ID
interfaces, will automatically pop the customers name and telephone number into
the order entry screen when they call. If the particular customer had ridden in
the past, the previous trips are presented. The order taker can then simply pick
one of the previous trips without having to retype the pickup and drop off
information. This provides for better customer service and a quicker response
time.
The trip information is then presented to a dispatcher in an organized
fashion on a "dispatch screen". The dispatch screen shows current trips that
need to be dispatched to vehicles. There are a variety of ways that the trips
can then be dispatched to vehicles. By voice over radio, alphanumeric pagers or
mobile data terminals (MDT). Fleet operators can choose to have the trips
dispatched automatically by zone or by closest vehicle utilizing global
positioning system (GPS) receivers which relay back very accurate vehicle
location through the MDT system This system offers a complete automatic dispatch
function that processes orders and offers them to vehicles based on their
position and status time related to the trip. Drivers press buttons on the
terminals to book into position, load the trip, complete the trip and update
their status. The TranTrac (TM) AVL (automatic vehicle location) program
provides an attractive and accurate real-time display of vehicle locations and
statuses on a computer map display in the dispatch office.
All accounting between the fleet operator and drivers is handled with
the Driver Cashiering module. This module will automatically charge drivers for
their vehicle leases, insurance, security deposits and other items. It can keep
track of car loans, automatically calculate commission based trips and generated
gross pay information for salaried or hourly drivers.
Customer accounts can be automatically billed for transportation
services with the Accounts Billing and Receivables module. Once trips are
processed through the dispatch system, they can be billed to customers on
customized, detailed invoices that show trip pickup and drop off details.
Customer payments are posted into the receivable module and the system provides
a variety of aging and payment reports.
For fleet operators that maintain their own vehicles, Surfside offers
Fleet Vehicle Maintenance module. This system maintains detailed records of
individual vehicles, schedules vehicles for preventive maintenance, tracks labor
costs, and handles inventory tracking and purchasing. This system is tied in
directly with the driver cashiering as drivers shift vehicles in and out, the
mileage is forwarded to the maintenance module for scheduling preventive
maintenance work.
By offering a complete, turnkey system including Order Taking,
Scheduling, Dispatch, Cashiering, Billing, Receivables, Vehicle Maintenance and
Insurance Claims Management, Surfside's TranWare suite is the only one of its
type available to the transportation industry. This complete system allows
transportation fleet operators to manage the entire operation of their business
with a seamless set of applications that share a common interface and data
structure.
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With all of the data for the operations of a company within one
software suite, generating a true profit / loss report is only a touch of a key
away. Reports can be generated to show which vehicles and drivers are losing
money and which ones are profitable. Preventative maintenance scheduling can
extend the life of and reduce operating costs of the vehicle. Inventory tracking
prevents theft and maintains a proper inventory level, and reduces parts and
maintenance cost. Simplified billing and accounts receivable functions reduce
staff requirements as well as the time needed to bill customers and collect
payments.
The flexible reporting and interfacing allows us to customize reports
for individual customers without effecting the programming and design of the
core software system. The system also allows us to include custom interfaces to
accounting programs, phone systems, pagers and other external programs and
device that are unique to a particular customer's site.
The design of the system allows Surfside to support our customers
remotely via computer modem, saving on expensive travel costs. Upgrades to the
software and program upgrades can be sent via the modem. Surfside's Internet
site provides a medium for customers to share information by using on line users
group and Email. Surfside provide software downloads and technical support
documents on the site for customers to access and download.
GENERAL
CFI Mortgage Inc. (the "Company") is a financial services
Company headquartered in 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 either an individual or bulk basis
to institutional and private investors. The Company originates and purchases
loans originated 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.
With the acquisition of Surfside Software Systems the Company is in the
business of providing PC-based, DOS and WINDOWS 95 solutions, under the name
TranWare to the taxi, courier, para-transit, shuttle and limousine industries.
TranWare consists of the following products: dispatch management, scheduling and
reservations, account billing/accounts receivable, driver cashiering/shifting,
insurance claims management and vehicle maintenance. It interfaces with a number
of different wireless technologies as well as stand-alone financial products.
Surfside provides the base products, customization, product support and product
training.
Substantially all Surfside Software customers subscribe to Company's
service and support programs, which provide ongoing product and, where
applicable, updates. The Company's cost structure is relatively fixed and the
cost of generating, in aggregate, does not vary significantly with changes in
revenue. As a result, the Company typically generates significantly greater
profit margins from incremental sales once fixed costs are covered.
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BUSINESS STRATEGY
The acquisition of Surfside Software Systems represents a significant
milestone in the Company's history. The transaction is an important step in
fulfilling CFI's goal of becoming a diversified eCommerce financial services
company with 50 state lending capabilities.
The market is quickly realizing that the success of eBusiness depends
on world-class service being delivered to online customers at every stage, along
with measurable return on investment for the Company. Due to the synergies
gained from the acquisition, CFI will be able to develop an integrated software
suite that manages all of the essential contact points with on-line customers,
in both business - to - business, and business - to - consumer environments, and
will set a new standard for eService. Our goal is to introduce a solution into
the financial services marketplace, offering it as the most efficient and
flexible web-enabled mortgage solution that supports all borrowing channels,
consumer direct, retail and wholesale.
FINANCIAL SERVICES STRATEGY
The Company's business strategy is to increase profitably the volume of
its loan purchases and the size of its broker network by (i) continuing to
provide quality service to its network of brokers /correspondents; (ii)
broadening its sub-prime product offerings; (iii) selling its mortgage loans in
bulk for cash; (iv) continuing its investment in "mortgage loan origination
systems"; (v) maintaining its underwriting standards; (vi) expanding onto the
Internet to offer mortgage related services to the companies broker network
through E-Commerce.
Management believes that lending through correspondents can be an
efficient and cost efficient method of producing loans because of the low fixed
expenses and capital investment required. Correspondents are paid for the loans
purchased by the Company based on a percentage of the loan balance purchased.
Such percentage is determined based upon a daily rate sheet that reflects market
demand for particular loans on that day. If efficiently utilized, correspondent
lending can allow the Company to match its costs more directly with the volume
of loans purchased so that a portion of the Company's cost is variable rather
than fixed. The correspondent origination approach also allows the Company the
flexibility to adjust to varying market conditions by quickly entering or
exiting geographic markets as economic conditions dictate.
The Company provides a high level of service to its brokers and
correspondents. These services include preliminary approval of most brokered
loans and certain correspondent loans within one day, consistent application of
its underwriting guidelines and funding or purchase of loans generally within
three to ten days of preliminary approval. In addition, the Company services
each broker and correspondent with a team of professionals that includes a
business development representative, experienced underwriters and, in the case
of brokered loans, loan officers working primarily on a commission basis with
processors assisting them to handle applications
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submitted by each broker. The Company believes that this commitment to service
provides a competitive advantage in establishing and maintaining productive
broker and correspondent relationships.
The Company frequently reviews its pricing and loan products relative to
its competitors and introduces new loan products in order to meet the needs of
its correspondents and brokers. For example, the non-conforming home equity loan
market is a logical extension of the Company's end product offering. The Company
is beginning to enter this market through its wholesale division, specifically
by lending to individuals who generally have impaired or limited credit profiles
or higher debt to income ratios and typically has substantial equity in their
homes.
TECHNOLOGY BASED STRATEGY
The Company believes that wireless communications and Internet
capabilities are the wave of the future. In that respect, we have developed
numerous interfaces to third party communication devices such as alphanumeric
pagers, caller ID decoders, PCS units and mobile data terminals. We are
continuing to work with the major companies in this industry to create new
interfaces. Traditional types of communications such as radio frequency will
still play a part in the industry for years to come, but new digital technology
is becoming more prominent.
The Company is positioning its products and technologies to integrate
uniquely to meet the mandates of e-business in every relevant area -
architecture, deployment time, and return - on - investment. Current strategies
are to:
o Develop application rich code, world-tested by customers.
o Develop application code that is reliable, modular, and easy to
support.
o Price the code by module and at such a level as to quickly gain market
share. Once customer base is established, sell additional modules,
training, and support.
o Identify related technologies and co-sell to the industry. Support
other products as well.
RISK FACTORS
FINANCIAL SERVICES:
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
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from October through April. Refinancing tend to be less seasonal and more
closely related to changes in interest rates. The mortgage servicing business is
generally not subject to seasonal trends, except to the extent that growth of a
mortgage-servicing portfolio is generally higher in periods of greater mortgage
loan originations.
COMPETITION
The mortgage banking industry is highly competitive. The Company
competes with financial institutions, mainly mortgage companies, commercial
banks and savings and loan associations and, to a certain extent, credit unions
and insurance companies, depending upon the type of mortgage loan product
offered. The Company competes principally by purchasing or originating a variety
of types of mortgage loans, emphasizing the quality of its service and pricing
the loans at competitive rates. Many of the Company's competitors have financial
resources substantially greater than that of the Company. Many of the nation's
largest mortgage companies and commercial banks have a significant number of
branch offices in areas in which the Company's correspondents and wholesale and
retail branches operate. Increased competition for mortgage loans from larger
lenders may result in a decrease in the volume of loans originated and purchased
by the Company, thereby possibly reducing the Company's revenues. The top five
competitors in the market are a) The Associates, b) Household Financial, c)
Conseco, d) Saxon Mortgage 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"), Federal National Mortgage Association
("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 the Real Estate
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Settlement and Procedures Act ("RESPA") and the regulations promulgated there
under 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 remediation 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.
SOFTWARE RISK FACTORS:
MARKET CHANGES.
The market for the Company's software products and services is
characterized by technological advances and evolving standards. In addition,
changes in the transportation requirements and new product introductions could
render the Company's existing products unmarketable. The Company's future
success depends upon its ability to enhance current products in a timely fashion
and to develop and introduce new products that keep pace with technological
developments and changes in the transportation industry. Further, the Company's
future success depends on ground fleet transportation companies to adopt new
technologies for acceptance in this evolving market
NEED FOR ADDITIONAL FINANCING
The Company believes that the funds to be generated by the Company's
operations will provide the Company with sufficient funds to finance its
operations. However, if additional funds were needed to support working
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capital or to complete acquisitions, the Company would seek to raise such funds
through one or more public or private financings of equity, or from other
sources. Additional financing may not be available or, if may not be obtainable
on terms favorable to the Company.
GROWTH
The growth in the size and complexity of the Company's and the
expansion of its product lines and its customer base have and are expected to
continue to place a significant strain on all aspects of the Company's business.
The Company will be required to upgrade or implement operational and financial
systems, procedures and controls. The future success will depend on its ability
to expand its support and infrastructure commensurate with its expanding base of
products and on its ability to attract, hire and retain skilled employees.
KEY EMPLOYEES AND SOFTWARE ENGINEERS
The Company believes that the future success will depend to a
significant extent upon the contributions of executive officers and key sales,
engineering, marketing and technical personnel. The Company does not have "key
person" life insurance on any of its employees. Competition for highly skilled
personnel, particularly qualified development engineers and systems
implementation experts is intense. The Company has, at times, experienced
difficulty in locating personnel with requisite levels of expertise and
experience
SALES AND IMPLEMENTATION CYCLES
The license of the Company's software generally requires the Company to
educate prospective customers the use and benefits of the Company's products. In
addition, the purchase of the Company's products involves a significant
commitment by prospective customers and can be associated with substantial time
in workflow, processing or the configuration of hardware. The license of the
Company's software products can often require a level or executive decision by
prospective customers. The period between initial indications of interest by a
customer in the Company's product and the ultimate sale and implementation of
the Company's product to the customer can be lengthy (often ranging from three
months to six months) and is subject to a number of significant delays over
which the Company has little or no control.
COMPETITION
The market for the Company's products is intensely competitive and ever
changing. A number of companies offer competitive products addressing some of
the Company's target markets. A number of prospective and existing customers of
the Company have the capability to provide alternative solutions to the
Company's products and may, therefore, be viewed as competing with the Company.
Some of the Company's competitors have significantly greater financial,
technical, sales and resources than the Company. The Company believes that the
primary factors in this market include product quality, reliability, price,
vendor and product
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reputation, financial stability, features and functions, ease of use, and
interoperability with other applications or systems. The Company believes it
competes favorably in each of categories. A significant portion of the Company's
revenue is derived from a limited number of products
GROUND FLEET TRANSPORTATION INDUSTRY
Substantially all of the Company's revenues are derived from licenses
and services, and its future success is dependent on increased sales to the
ground fleet transportation industry. Demand for the Company's products and
services can be disproportionately affected by instability or downturns in the
transportation industry, which may cause existing or potential customers to
delay, cancel or reduce planned expenditures for technology, including those
offered by the Company
LIABILITY RISKS; SOFTWARE DEFECTS
The Company's software products are complex and sophisticated and
could, from time to time, contain designer software errors that could be
difficult to detect and correct. The implementation of the Company's products
may involve a significant amount of customer-specific customization and may
involve integration with systems developed by third parties. Such errors could
give rise to warranty or liability of the Company and cause delays in product
introduction and require design modifications, which could result in loss of or
the delay in marketing of the Company's products or loss of existing customers
DEPENDENCE UPON PROPRIETARY TECHNOLOGY; INTELLECTUAL PROPERTY RIGHTS
The Company's success and ability to compete are dependent in part upon
its technology. The Company relies primarily on a combination of copyright,
trademark laws, confidentiality procedures and contractual provisions to protect
its proprietary rights. Despite the Company's efforts to protect its rights,
other parties may attempt to reverse, engineer, copy or engage in unauthorized
use of the Company's proprietary information. Technology or proprietary
information incorporated in the Company's products can be licensed from third
parties, generally on a non-exclusive basis. The failure of the third-party
licensors to maintain or update their products could result in delays in the'
Company's ability to ship certain of its products. While it may be necessary in
the future to obtain rights to third party technology, there can be no assurance
that the Company will be able to do so.
EMPLOYEES
As of December 31, 1999, the Company had 12 employees whom were
undertaking the plan of reorganization, as all other subsidiary operations had
ceased. None of the Company's employees are represented by a union. The Company
considers its relations with its employees to be satisfactory.
ITEM 2. PROPERTIES
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The Company's financial services offices are located at 631 U.S.
Highway # 1, Suite 309, North Palm Beach, Florida 33408, where the Company
leases from a stockholder on a month-to-month basis and certain office equipment
on various operating leases. The office leases generally require CFI to pay
certain escalation costs for real estate taxes, operating expenses, usage and
common area charge. The Company considers its facilities to be satisfactory for
its current needs.
ITEM 3. LEGAL PROCEEDINGS:
As a result of the confirmation of the bankruptcy plan, the Company is
no longer threatened with any litigation, claims and assessments, which may have
existed as a result of the Bankruptcy Filing.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. PRICE RANGE OF COMMON STOCK
Effective November 18, 1998 the Company's stock is quoted on the OTC
Bulletin Board Market. From May 27, 1997 through November 17, 1998 the Company
Common Stock was quoted on the NASDAQ Small Cap Market under the symbol "CFIM."
The following table sets forth for the time periods indicated the range of the
high and low bid quotations for the Company's Common Stock on the NASDAQ
Small-Cap Market and OTC-Bulletin Board Market during the applicable periods.
These quotations may not represent actual transactions and do not reflect
inter-dealer mark-ups, markdowns and concessions.
- ---------------------------------------------------------------------------
1997 High Low
- ---------------------------------------------------------------------------
Second Quarter $ 9.81 $7.12
Third Quarter $14.75 $7.37
Fourth Quarter $12.25 $7.87
- ---------------------------------------------------------------------------
1998 High Low
- ---------------------------------------------------------------------------
First Quarter $10.00 $5.00
Second Quarter $14.56 $6.53
Third Quarter $ 8.50 $1.25
Fourth Quarter $ 2.37 $0.12
- ---------------------------------------------------------------------------
1999 High Low
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- ---------------------------------------------------------------------------
First Quarter $ 0.34 $ 0.07
Second Quarter $ 0.34 $ 0.06
Third Quarter $ 0.42 $ 0.17
Forth Quarter $ 0.68 $ 0.18
There were approximately 300 stockholders of record of Common Stock as
of March 31, 1999. This number does not include beneficial owners holding shares
through "street" names. The Company believes that it has more than 800
beneficial holders of Common Stock.
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.
During the bankruptcy proceedings, the Company reached a settlement with the
holder for the exchange of 2,500,000 shares of common stock for 1,700 shares of
convertible preferred stock.
The preferred stockholder of Series "A" and "B" convertible preferred
stock received 2,000,000 shares of common stock in exchange for the preferred
stock in the reorganized CFI.
During the nine months ending September 30, 1999, 75 shares of
preferred stock were converted into 525,521 shares of common stock and
accordingly additional paid-in capital decreased by $5,255.
On November 29, 1999, Ronco Funding, Inc., had funded debentures in an
amount of $311,000 net of expenses of $106,900. The 15% convertible debentures
were converted into 2,004,986 shares of the Company's common stock.
During the Chapter 11 Bankruptcy Proceeding in 1999, certain
non-management employees were issued 750,000 warrants for the purchase of one
share of common stock of CFI at .39(cent) per share. The price represents 125
percent of the bid price of CFI stock on the effective date of the bankruptcy
plan, August 2, 1999.
During the third quarter of 1999, after the bankruptcy confirmation,
CFI was short of cash for operational expenses, and accordingly, entered into
two loans. One loan was from Footbridge LTD Trust in the amount of $100,000 on a
balloon note at 10% interest, which has been subsequently repaid. As part of the
consideration for that loan, the lender was granted 100,000 warrants to purchase
one share of common stock of CFI at .20(cent) per share, which represents 110%
of the bid price of CFI stock on date of the loan agreement. Also, as part of
that transaction, a finders fee of $10,000 was paid together with 10,000
warrants to purchase one share of CFI common stock at .20(cent) per share. Again
this warrant price represents 110% of the bid price of CFI stock on the date of
the loan agreement.
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Additional financing was provided by a Company owned by the Chairman of
the Company, Vincent C. Castoro who made a loan to the Company in the amount of
$116,756 at 9% interest. As an inducement to make this loan, Mr. Castoro was
granted 150,000 warrants for the purchase of one share of CFI common stock at
.25(cent) per share, which represents 105% of the bid price as of the date of
the loan. This loan has not yet been repaid by CFI.
After the confirmation of the bankruptcy but before the end of the
year, the Company sold through a private placement of securities to Mr. Frank
LaForgia. He invested $300,000 and received 2,000,000 shares of common stock of
CFI, plus 150,000 warrants to purchase one share of CFI common stock at 25(cent)
per share, which represents the 125% of the bid price on the date of the
investment, November 8, 1999. The Company has relied upon Section 4(2) for an
exemption from registration afforded by Section 4(2) of the Securities Act of
1933, as amended.
As a result of the Reorganization Plan and additional 2,157,116 common
shares have been issued to creditors of the bankruptcy petition.
OTHER EVENTS
On or about December 15, 1999, CFI entered into a Stock Exchange
Agreement to acquire all of the capital stock of MG Investments, Inc. ("MGI").
MGI does business as Pyramid Mortgage Corporation, PMC Mortgage and Premier
Mortgage, and is a full service mortgage ompany. During 1999, MGI had a maximum
of 29 offices in 11 states, and focused primarily on the retail sub prime
mortgage business. MGI's principal place of business is in Evansville, Indiana,
where it owns two office buildings and last year employed a maximum of
approximately 1301 employees. While performing due diligence on the Company's
books and records, CFI recognized that the significant earnings that had
characterized MGI's performance in the first half of 1999 and in 1998 were not
sustainable, and accordingly, on March 31, 2000, the Stock Exchange Agreement
was terminated.
To avoid litigation in connection with the termination of the Stock
Exchange Agreement, MGI and CFI entered into a Settlement Agreement which
included, among other terms, an agreement for MGI to pay certain damages, costs
and expenses incurred by CFI, by MGI absorbing certain current expenses of CFI,
plus a payment to CFI of $100,000 which is deferred until March 31, 2002.
In addition, MGI entered into a consulting agreement with CFI for an
initial term of three months to provide MGI with assistance in its mortgage
operations, management, legal and accounting functions. Negotiations are also
continuing with MGI with respect to the purchase of certain assets, specifically
two office buildings, in exchange for CFI stock.
DIVIDEND POLICY
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
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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 in the Company's financing agreements, the earnings of such
subsidiary and various business considerations.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS OF THE COMPANY AND ACCOMPANYING NOTES SET FORTH THEREIN.
GENERAL
During the year ending December 31, 1999, the Company administered the
bankruptcy filing and subsequent reorganization process resulting in the
bankruptcy plan being confirmed on August 2, 1999, and the claims objection and
settlement phase of the Reorganization. The judge ruled that the claims
objections would be better handled post confirmation since the creditors were in
favor of the plan. The process has resulted in many of the claims being
negotiated at less than claimed by the creditors and in several cases less than
as described originally by the Company on the Reorganization schedules. The
aforementioned process has taken time and money, but the result has been a
reduced amount of dilution, or forgiveness of debt, as might have been the case
had not this process been undertaken by the Company. The Company successfully
defended over 140 claims, in excess of $5,000,000.
The Company, as of December 31, 1999 had not finalized settlement with
Nikko Financial Services, Bank One and App Online.Com. In addition the Company
has not finalized settlement with Chris Castoro, a current Director and Vincent
John Castoro, a former Director. The basis of the Castoro's claims revolve
around, among other things, the reimbursement and indemnification on certain
liabilities on behalf of the Company.
In 1998, the Company operated two wholly owned subsidiaries, BDMC, the
Company's retail production arm originating both conforming and non-Conforming
products, and DMP, the non-conforming production platform for the Company. DMP
originated non-conforming loans on a wholesale basis through mortgage brokers,
mortgage bankers and lenders.
The following comparative analysis and discussion may be misleading due
to the following. The 1998 information includes nine months of operations of
Bankers Direct Mortgage Corporation "BDMC" and eleven months for Direct Mortgage
Partners "DMP". The Company made a subsequent filing for a voluntary petition
for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code in
March of 1999.
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RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 AND 1998
For 1999, commissions and fees were $21,228 as compared to $14,164,911
in 1998. The decrease in revenues was attributable to the Company's filing a
voluntary Petition for Relief under Chapter 11 of Title 11 of the United States
Bankruptcy Code in March of 1999 and the Company having no operating
subsidiaries for the majority of the year.
Interest income was zero in 1999 as compared to $4,897,733 in 1998.
This is attributable to the Company closing its sub-prime mortgage subsidiary
and having no credit facilities for the year.
Total operating expenses decreased to $3,686,191 from $30,340,704 in
1998. 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 substantial increase in the loan loss provisions from November 24,
1998 through December 31, 1998 was overwhelmingly due to the devaluation of the
mortgage portfolios of the Company's subsidiary, DMP. The subsequent filing of a
petition for relief under Chapter 11, and workout with warehouse lenders
increased loan loss provisions to $7,135,304 in 1998.
Interest expense decreased to $58,764 in 1999 as compared to $4,580,049
in 1998. This is attributable to the Company closing its sub-prime mortgage
subsidiary and having no credit facilities for the year.
The Company experienced a loss from continuing operations, before
taxes, of $3,664,963 as compared to a loss of $16,175,793 in 1998. The largest
factor for the decrease in net loss was due to the closing in 1999 of the
subsidiary and subsequent filing for relief under Chapter 11 of Title 11 of the
United States Code in March of 1999
The Company recorded a gain of $3,646,371in debt forgiveness in 1999 as
a result of the confirmed bankruptcy plan and the subsequent issuance of one
share of CFI Common Stock for every $1.00 a creditor was owed. This is compared
to $1,908,913 in 1998.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997
For 1998, revenues increased $5,897,647 (71.34%) to $14,164,911 in 1998
from $8,267,264 in 1997. Commissions and fees increased by $2,551,937 (38%) to
$9,267,178 from $6,7715,241 in 1997. The increase in commissions and fees were
primarily attributable to an increase in sub-prime wholesale production volume.
Interest income increased $3,345,710 (215.57%) to $4,897,733 in 1998
from $1,552,023 in 1997. The increase in interest income was primarily due to
the Company increasing its sub-prime origination's, which carry a higher
interest rate than that of conforming loans, combined with holding mortgage
loans for sale longer and thus earning additional interest income over this
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time period. Total loan volume in 1998 was $525,000,000 compared to $257,000,000
in 1997, an increase of $268,000,000 representing a 104.28% increase.
Total expenses increased $16,122,939 (113.40%) to $30,340,704 in 1998
from $14,217,765 in 1997. The expenses increased at a much faster rate than
total revenues primarily due to not realizing during 1998 economies of scale and
the efficiencies associated with the Company's implementation and investment in
technology, and due to the addition of experienced staff. 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 substantial increase
in the loan loss provisions from November 24, 1998 through December 31, 1998 was
overwhelmingly due to the devaluation of the mortgage portfolios of the
Company's subsidiary, DMP. The subsequent filing of a petition for relief under
Chapter 11, and workout with warehouse lenders increased loan loss provisions by
$7,135,304 or 44% of the increase.
Selling expenses increased $1,607,210 (30.83%) to $6,820,835 in 1998
from $5,213,625 in 1997. Commissions and benefits accounted for approximately
two-thirds of this increase, which was directly related to the increased volume.
The remainder was the result of the national expansion and the up-front costs
associated with establishing the support functions required for this expansion
to be successful.
General and administrative expenses increased $3,939,106 (53.5%) to
$11,325,638 in 1998 from $7,386,532 in 1997. Salaries and benefits accounted for
over half of this increase. The Company added senior management personnel
experienced in the mortgage industry. Additional expenses were incurred in 1998
as part of the national expansion and the up-front costs associated with
establishing the production support functions required for this expansion
Interest expense increased $3,394,441 (286.30%) to $4,580,049 in 1998
from $1,185,608 in 1997. This was primarily due to the increase in loan volume
of 104.28% in 1998 as compared to 1997. In addition, the average cost of
borrowings increased due to the rapid growth of non-conforming loans, and loans
were aggregated for a longer period of time by the Company to take advantage of
bulk sale premiums.
The Company experienced a loss from continuing operations, before
taxes, of $16,175,793 in 1998 compared to a net loss, before taxes, of
$5,950,501 in 1997 as a result of the national expansion and the up front costs
associated with establishing the support functions required for this expansion.
The second, third and fourth quarter losses were significantly attributable to
the increases in selling, general and administrative and interest expenses
associated with the above activities. The first quarter loss was primarily the
result of the seasonality of home sales in Florida. Home sales typically decline
in the first quarter of the year due in part to Florida's homestead laws, which
reduce a purchaser's taxes resulting in many home purchasers buying before year
end. The increased demand at year end tends to drive up administrative costs in
the first quarter.
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The Company recorded a one-time gain of $536,664 from the sale of the
Bankers Direct Mortgage Corporation, the Company subsidiary, to the purchaser,
Island Mortgage Network Financial for the assumption of liabilities.
FINANCIAL CONDITION
DECEMBER 31, 1999 COMPARED TO DECEMBER 31, 1998:
Cash in banks increased $5,203 to $7,574 at December 31, 1999 as
compared to $2,371 at December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company operated on a negative cash flow basis. Historically, the
Company's cash requirements include the funding of (i) mortgage originations
pending their sale, (ii) the points and expenses paid in connection with
acquisition of wholesale loans, and (iii) ongoing administrative and other
operating expenses.
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.
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.
The Company had relied upon a few lenders to provide the primary credit
facilities for its loan originations and purchases. The Company entered into a
$50,000,000 credit agreement with Bank One on June 30, 1997 and a $50,000,000
warehouse line with Nikko in November 1997. The warehouse line with Bank One,
Texas, NA., was discontinued as of September 30, 1998. The Company's warehouse
line, 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
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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.
During the third quarter of 1999, after the bankruptcy confirmation,
CFI was short of cash for operational expenses, and accordingly, entered into
two loans. One loan was from Footbridge LTD Trust in the amount of $100,000 on a
note at 10% interest, which has been subsequently repaid. As part of the
consideration for that loan, the lender was granted 100,000 warrants to purchase
one share of common stock of CFI at .20(cent) per share, which represents 110%
of the bid price of CFI stock on date of the loan agreement. Also, as part of
that transaction, a finders fee of $10,000 was paid together with10,000 warrants
to purchase one share of CFI common stock at .20(cent) per share. Again this
warrant price represents 110% of the bid price of CFI stock on the date of the
loan agreement.
Additional financing was provided by a Company owned by the Chairman of
the Company, Vincent C. Castoro who made a loan to the Company in the amount of
$116,756 at 9% interest. As an inducement to make this loan, Mr. Castoro was
granted 150,000 warrants for the purchase of one share of CFI common stock at
.25(cent) per share, which represents 105% of the bid price as of the date of
the loan. This loan has not yet been repaid by CFI.
After the confirmation of the bankruptcy but before the end of the
year, the Company made private placement of securities to Mr. Frank LaForgia. He
invested $300,000 and received 2,000,000 shares of common stock of CFI, plus
150,000 warrants to purchase one share of CFI common stock at 25(cent) per
share, which represents the 125% of the bid price on the date of the investment,
November 8, 1999. The Company has relied upon Section 4(2) for an exemption from
registration afforded by Section 4(2) of the Securities Act of 1933, as amended.
As a result of the Reorganization Plan and additional 2,157,116 common
shares have been issued to creditors of the bankruptcy petition.
On November 29, 1999, Ronco Funding, Inc. had funded debentures in the
amount of $311,020 net of $106,900 in expenses. The 15% convertible debentures
were converted into 2,004,986 shares of the Company's common stock.
For the year ended December 31, 1999, net cash used in operating
activities was $(705,217) resulting from the net loss from the year. The losses
were financed by the proceeds from the Company's common stock offerings, the use
of short term borrowings, and long term debt. The cash proceeds from the
offerings and long term debt were used to fund the Company's operations while
completing the bankruptcy reorganization process.
HEDGING, INFLATION AND INTEREST RATES
The Company had actively managed the interest rate risk associated with
conforming loans by committing applications to permanent investors at the time
that the rate and price are guaranteed to the applicant, with the
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investor agreeing to honor the rate and price committed provided that the
resulting loan is closed and presented for purchase within a specific time
frame. The time frame was set with ample time for delivery based on the rate and
price expiration date given the applicant.
The Company had elected not to hedge against the interest rate risk
associated with nonconforming loans. This decision was subject to review on an
ongoing basis but given the then profit margins and the lack of volatility
associated with pricing for nonconforming loans sold on a whole loan basis, the
Company decided against employing hedging techniques utilizing costly financial
instruments. The period where risk existed was limited since the rate and price
are only guaranteed once the application has been approved with whole loan sales
of closed loans occurring on a bi-monthly basis.
CERTAIN ACCOUNTING PRONOUNCEMENTS
SFAS 128
In March 1997, the Financial Accounting Standards Board issued
Statement No. 128 ("SFAS 128"), "Earnings Per Share," which supersedes
Accounting Principles Board No. 15, Earnings per Share ("APB 15"), and is
effective for the Company for the year ended December 31, 1997. SFAS 128
establishes standards by simplifying the computation and presentation of
earnings (loss) per share, and applies to public entities with publicly held
common stock. It replaces the presentation of primary earnings (loss) per share
with a presentation of basic earnings (loss) per share. SFAS 128 also requires
dual presentation of basic and diluted earnings (loss) per share on the face of
the statements of operations. Basic earnings (loss) per share excludes dilution
and are 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 contracts, 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. Diluted earnings (loss) per share is computed similarly
to fully diluted earnings (loss) per share pursuant to APB 15. The Company
adopted SFAS 128 for the year ended December 31, 1997.
SFAS 125
In June 1996, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"), which provides accounting and
reporting standards for transfers and servicing of financial assets and
Extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. SFAS No. 125
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings. Implementation of SFAS No. 125, effective as of January
1, 1997, did not have a significant effect on the financial condition or results
of operations or the Company.
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SFAS 123
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 establishes financial accounting
and reporting standards for stock-based employee compensation plans. Those plans
include all arrangements by which employees receive shares of stock or other
equity instruments of the employer or the employer incurs liabilities to
employees in amounts based on the price of the employer's stock. Examples are
stock purchase plans, stock options, restricted stock awards, and stock
appreciation rights. This statement also applies to transactions in which an
entity issues its equity instruments to acquire goods or services from
non-employees. Those transactions must be accounted for, or at least disclosed
in the case of stock options, based on the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measurable. The accounting requirements of SFAS No. 123 are effective
for financial statements for fiscal years beginning after December 31, 1995, or
for an earlier fiscal year for which SFAS No. 123 is initially adopted for
recognizing compensation cost. The statement permits a Company to choose either
a new fair value-based method or the current APB Opinion 25 intrinsic
value-based method of accounting for its stock-based compensation arrangements.
The statement requires pro forma disclosures of net earnings and earnings per
share computed as if the fair value-based method had been applied in financial
statements of companies that continue to follow current practice in accounting
for such arrangements under APB Opinion 25.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, certain matters
discussed in this Form 10-KSB are "forward- looking statements" as defined in
the Private Securities Litigation Reform Act (PSLRA) of 1995, which involve risk
and uncertainties that exist in the Company's operations and business
environment, and are subject to changes based on various important factors. The
Company wishes to take advantage of the "safe harbor" provisions of the PSLRA 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 Lending to "sub-prime" borrowers who have higher incidents of default
could adversely affect the Company's projections.
o Loss of funding sources necessary to originate mortgage loans at
profitable margins.
o Diminished ability to sell loans could cause the Company to require
additional funding sources.
o Profitability may be directly affected by the level and fluctuation in
interest rates which affect the Company's ability to earn a spread
between interest received on its loans and the costs of its borrowings.
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The profitability of the Company is likely to be adversely affected
during any period of unexpected or rapid changes in interest rates.
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 the development of new product
programs.
o Rapid or unforeseen escalation of the cost of regulatory 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.
The Company believes that it has the product offerings, facilities,
personnel and competitive and financial resources for continued business
success. However, future revenue, costs, margins and profits are all influenced
by a number of factors, as discussed above.
ITEM 7. FINANCIAL STATEMENTS
Reference is made to the financial statements, the reports thereon and
notes thereto, commencing on page F-1 to this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
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Directors and Executive Officers:
Name
Age Title
Vincent C. Castoro (1).............64 Chairman and Director
Vincent J. Castoro (1).............33 Director
Stephen E. Williams ..............59 President, CEO, Director
Christopher C. Castoro (1).........35 Vice President, Director
Rodger W. Stubbs...................36 Secretary, Treasurer, Director
Greg Cutuli ..................49 Director
Paul Garrigues (2).................42 Chief Financial Officer
(1) Vincent C. Castoro is the father of Vincent J. Castoro and Christopher C
Castoro.
(2) Resigned from the Company as Chief Financial Officer in January 1999
Stephen E. Williams, President and CEO has had over 20 years in the
mortgage and banking industries in all levels of executive management. At CFI
Mortgage, Inc., he has instituted a complete product focus and financial
turnaround. Prior to joining CFI, Mr. Williams was President and CEO of Systems
Communication (NASDAQ: SCMI). As a major stockholder, he guided the strategic
direction of the Company in the areas of telecommunication and medical cost
containment.
From 1991 until the Company was acquired by Primark, Inc. in 1994, Mr.
Williams was COO of Televoice, focusing on researching real estate applications
of relational data base integration with telephony technology. From 1976 until
1990, Mr. Williams career centered on residential and commercial, national and
international, real estate development. As owner, major shareholder or a member
of senior management of these corporations, he was a driving force behind
implementing global growth strategies to increase shareholder value.
Throughout his illustrious career, Mr. Williams has gained extensive
experience in turnarounds, mergers, acquisitions, start-ups and divestitures, as
well as solid experience with the varied requirements of the capital markets.
Mr. Williams attended Indiana University and has a B. S. degree in Business
Administration. He also attended the New York Institute of Finance and received
NYSE certification.
Vincent C. Castoro founded the Company's operating subsidiary (Bankers
Direct Mortgage Corporation) in April 1989 and has been a director of the
Company since its inception date. Mr. Castoro has served as the Chief Executive
Officer of the Company since March 1991 and devotes his full business time to
the affairs of the Company. Prior to founding the Company,
24
<PAGE>
Mr. Castoro was involved it the heating oil distribution business in the New
York metropolitan region.
Vincent J Castoro had been the President of the Company's operating
subsidiary (Bankers Direct Mortgage Corporation) from June 1993 until June of
1997. From June of 1997 he has served as a director and Vice President of the
Company.
Christopher C. Castoro has been the Chief Executive Officer and
Director of the Company since June 1997. From June of 1993 until June of 1997,
Mr. Castoro served as Executive Vice President of the Company. From April 1989
to June 1993, Mr. Castoro served as the Secretary and Treasurer of the Company.
Mr. Castoro is a member of the Mortgage Bankers Association of America, and has
served on that organizations Secondary Marketing Committee since 1994. Mr.
Castoro also serves as a member of the Advisory Board of the Chase Manhattan
Mortgage Corporation.
Greg Cutuli has been the Senior Vice President in charge of Secondary
Marketing for First Colony Financial Group in Brentwood, CA, for 1 year prior to
joining the Company in March of 1998. In addition, Mr. Cutuli was the Chief
Credit Officer and Senior Vice President of Secondary Marketing for Admiral Home
Loans, Inc., a Pasadena-based wholesale mortgage company, from September of 1993
through April of 1997. Mr. Cutuli also has a background in Appraisals and Real
Estate Development.
Rodger W. Stubbs has been the Executive Vice President and Managing
Director for sub-prime mortgage Subsidiary in addition to serving as Secretary /
Treasurer for the Company since 1997. Mr. Stubbs has over 15 years of senior
management experience within the finance and public company industries having
owned and operated his own businesses. Mr. Stubbs was the President and Chief
Executive officer of Mizner Mortgage Corporation from 1989 through 1997.
Paul R. Garrigues had been the Chief Financial Officer of the Company since
April 1998. From March 1992 through April 1998, Mr. Garrigues served as the
Chief Financial Officer of Monument Mortgage, Inc., a Walnut Creek, CA.,
mortgage banking company and wholly owned subsidiary of Finet Holdings Inc
(NASDAQ:FNHC).
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth the cash compensation of the Company's Chief
Executive Officer for the three fiscal years ended December 31, 1999. The
remuneration described in the table does not include the cost to the Company of
benefits furnished to the Executive Officer, including premiums for health
insurance and other benefits provided in connection with the conduct of the
Company's business. The value of such benefits did not exceed 10% of the
Executive Officer's cash compensation.
25
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Name and Principle Position Annual Compensation
- -------------------------------------------------------------------------------------------------------------------
Year Salary Rec'd Accrual* Total Compensation Other **
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Steve Williams 1999 $30,000 $56,875 $86,875 (1) (2)
- -------------------------------------------------------------------------------------------------------------------
Chief Executive Officer
- -------------------------------------------------------------------------------------------------------------------
Christopher Castoro 1999 $52,500 $48,732 $101,232 (1)
- -------------------------------------------------------------------------------------------------------------------
Director 1998 $91,666 N/A $91,666
- -------------------------------------------------------------------------------------------------------------------
1997 $87,500 N/A $87,500
- -------------------------------------------------------------------------------------------------------------------
Rodger Stubbs 1999 $52,500 $93,204 $145,705 (1)
- -------------------------------------------------------------------------------------------------------------------
Secretary / Treasurer, Vice 1998 $73,070 N/A $73,070
President, Director
- -------------------------------------------------------------------------------------------------------------------
1997 $17,158 N/A $17,158
- -------------------------------------------------------------------------------------------------------------------
Gregory Cutuli 1999 $52,500 $68,321 $102,821 (1)
- -------------------------------------------------------------------------------------------------------------------
Vice President, Director 1998 $104,500 N/A $104,500
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* Accruals are for compensation not yet received.
(1) ** Does not include value of compensation award in stock equal to 5% of
the outstanding shares due, not yet paid, of CFI Common stock per
employment agreement that was approved as part of the Bankruptcy
Reorganization Plan.
(2) **Does not include the value of 300,000 shares of CFI Common Stock
awarded as a signing bonus as part of employment agreement.
No options or other form of long-term compensation were granted to, or
exercised or held by, the named executive officers during the year ended
December 31, 1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of March 10, 2000 (i) by each person known by
the Company to own beneficially five percent or more of the outstanding Common
Stock, (ii) each of the Company's directors; and (iii) all directors and
executive officers of the Company as a group. The address of each person listed
below is 631 U.S. Highway One, Suite 309, North Palm Beach, Florida 33408,
unless otherwise indicated.
Name of Beneficial Owner Number of Shares Percentage Owned
Vincent C. Castoro.............. 0 0%
Vincent J. Castoro.............. 600,000 3.83%
- --------------------------------------------------------------------------------
26
<PAGE>
Christopher C. Castoro (3)...... 1,138,822 7.26%
Rodger W. Stubbs (3)............ 983,822 6.28%
Stephen Williams (3) (4)........ 1,083,822 6.91%
Gregory Cutuli (3).............. 783,822 5.00%
All directors and executive
officersas a group (four
persons)........................ 3,990,288 25.45%
(3) Includes compensation award of 5% of the outstanding shares due, (783,822)
not yet delivered, of CFI Common stock per employment agreements that were
approved as part of the Bankruptcy Reorganization Plan.
(4) Includes 300,000 shares of CFI Common Stock awarded as a signing bonus as
part of employment agreement.
ITEM 12. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS.
In May of 1997, Vincent C. Castoro, the Company's Chairman, loaned $200,000 to
Bankers Direct Mortgage Corporation (prior to the name change from CFI Mortgage
Corporation to Bankers Direct Mortgage Corporation), a wholly owned subsidiary
of the Company. In May of 1997, BDMC repaid $100,000 of the $200,000 owed to
Vincent Castoro. Bankers Direct Mortgage Corporation then repaid Vincent Castoro
the balance of $100,000 debt, plus interest of $14,000, in July of 1998. Vincent
Castoro then loaned an additional $100,000 in July 1998 to the Company, which
remains unpaid. Vincent Castoro has made a claim in the bankruptcy court for the
amount.
In addition on September 10, 1999 an affiliated Company loaned CFI Mortgage,
Inc., $130,000. The note bears interest at 9% and is payable upon demand.
ITEM 13. EXHIBITS AND FILINGS ON FORM 8K
(a) Exhibits - None
(b) Filings on Form 8K - None
<PAGE>
CFI MORTGAGE INC. AND SUBSIDIARIES
CONSOIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
I N D E X
---------
Page No.
--------
Report of Independent Accountants' Report ...................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheet as of December 31, 1999 ........ F-3
Consolidated Statements of Operations
For the Years Ended December 31, 1999 and 1998 .......... F-4
Consolidated Statements of Changes in
Stockholders' Capital Deficiency
For the Years Ended December 31, 1999 and 1998 .......... F-5 - F-6
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999 and 1998........... F-7 - F-8
Notes to Consolidated Financial Statements ................ F-9 - F-20
F-1
<PAGE>
[LETTERHEAD OF WEINICK SANDERS LEVENTHAL & CO., LLP]
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders
CFI Mortgage Inc.
We have audited the accompanying consolidated balance sheet of CFI Mortgage Inc.
and Subsidiary as of December 31, 1999, and the statements of operations,
stockholders' capital deficiency and cash flows for the years ended December 31,
1999 and 1998 of the Company and its subsidiaries. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of CFI
Mortgage Inc. and Subsidiaries as of December 31, 1999, and the results of their
operations and their cash flows for the years ended December 31, 1999 and 1998
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. At December 31, 1999, the Company's
liabilities exceeded its assets by $7,683,320 and had a net loss of $18,592 for
the year ended December 31, 1999. As described in Notes 1 and 2, on March 10,
1999, the Company filed a voluntary petition for reorganization under Chapter 11
of the Federal Bankruptcy Code and was authorized to continue managing and
operating going concern. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
New York, N. Y.
April 12, 2000
F-2
<PAGE>
CFI MORTGAGE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
A S S E T S
-----------
Current assets:
Cash $ 7,574
Due from related parties 90,726
------------
Total current assets $ 98,300
Property and equipment, at cost, less
accumulated depreciation of $94,059 55,418
Note receivable 25,000
-----------
$ 178,718
===========
LIABILITIES AND STOCKHOLDERS' CAPITAL DEFICIENCY
------------------------------------------------
Current liabilities:
Due to affiliated company $ 139,735
Accrued expenses and other current liabilities 2,401,423
------------
Total current liabilities $ 2,541,158
Liabilities not subject to compromise:
Accounts payable of subsidiary 1,237,552
Liabilities under plan of reorganization:
Due to banks and sundry creditors 4,083,328
-----------
Total liabilities 7,862,038
Commitments and contingencies -
Stockholders' capital deficiency:
Common stock, $.01 par value
Authorized 35,000,000 shares
Issued and outstanding - 15,676,451 shares 156,764
Preferred stock, $.01 par value
Authorized 10,000,000 shares
None issued and outstanding -
Additional paid-in capital 12,434,602
Accumulated deficit (20,274,686)
------------
Total stockholders' capital deficiency (7,683,320)
-----------
$ 178,718
===========
See accompanying notes to financial statements.
F-3
<PAGE>
CFI MORTGAGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
December 31,
---------------------------
1999 1998
------------ ------------
Revenues:
Commissions and fees $ 21,228 $ 9,267,178
Interest -- 4,897,733
------------ ------------
Total revenues 21,228 14,164,911
------------ ------------
Expenses:
Selling -- 6,820,835
General and administrative 3,627,427 11,325,638
Interest 58,764 4,580,049
Provision for doubtful accounts and loan losses -- 7,135,304
Loss on abandonment of property and equipment -- 478,878
------------ ------------
Total expenses 3,686,191 30,340,704
------------ ------------
Loss from continuing operations (3,664,963) (16,175,793)
Gain on sale of subsidiary -- 536,664
------------ ------------
Loss before provision for income
taxes and extraordinary gain (3,664,963) (15,639,129)
------------ ------------
Provision (credit) for income taxes:
Current -- (75,988)
Deferred -- 331,525
------------ ------------
Total provision for income taxes -- 255,537
------------ ------------
Loss before extraordinary gain (3,664,963) (15,894,666)
Extraordinary gain - forgiveness of debt 3,646,371 1,908,913
------------ ------------
Net loss ($ 18,592) ($13,985,753)
============ ============
Basic earnings per common share:
Loss before extraordinary gain ($ 3,664,963) ($15,894,666)
Less: Preferred stock dividends (197,576) (222,241)
Preferred stock discount -- (300,000)
------------ ------------
Loss available to common stockholders (3,862,539) (16,416,907)
Extraordinary gain 3,646,371 1,908,913
------------ ------------
Net loss available to common stockholders ($ 216,168) ($14,507,994)
============ ============
Weighted average shares 4,953,376 2,563,007
============ ============
Earnings per share - basic:
Loss per share from continuing operations
before extraordinary gain ($ .78) ($ 6.40)
Extraordinary gain .74 .74
------- --------
Net loss ($ .04) ($ 5.66)
======= ========
See accompanying notes to financial statements.
F-4
<PAGE>
CFI MORTGAGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' CAPITAL DEFICIENCY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Common Stock Preferred Stock
---------------------- ---------------------
Shares Amount Shares Amount
--------- ------- ------ ------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 2,200,000 $22,000 2,060 $21
Conversion of preferred stock on March 3, 1998 103,427 1,034 ( 500) ( 5)
Prefered dividends paid in stock on March 3, 1998 2,040 21 - -
Issuance of preferred stock on June 30, 1998 - - 1,000 10
Accretion of preferred stock discount - - - -
Conversion of preferred stock on July 31, 1998 100,000 1,000 ( 600) ( 6)
Preferred dividends paid in stock on July 31, 1998 679 7 - -
Conversion of preferred stock on August 10, 1998 214,254 2,142 ( 560) ( 6)
Preferred dividends paid in stock on August 10, 1998 10,482 105 - -
Conversion of debt on August 19, 1998 - - 1,700 17
Conversion of preferred stock on September 18, 1998 71,301 713 ( 100) ( 1)
Preferred dividends paid in stock on September 18, 1998 4,516 45 - -
Conversion of preferred stock on September 24, 1998 74,106 741 ( 100) ( 1)
Preferred dividends paid in stock on September 24, 1998 4,793 48 - -
Conversion of preferred stock on October 2, 1998 118,110 1,181 ( 150) ( 1)
Preferred dividends paid in stock on October 2, 1998 7,868 79 - -
Issuance of common stock on October 16, 1998
for underwriting fees 150,000 1,500 - -
Conversion of preferred stock on November 3, 1998 224,098 2,241 ( 300) ( 3)
Preferred dividends paid in stock on November 3, 1998 15,717 157 - -
Preferred stock dividends - - - -
Net loss for the year ended December 31, 1998 - - - -
--------- ------- ------ ---
Balance at December 31, 1998 3,301,391 33,014 2,450 25
--------- ------- ------ ---
<CAPTION>
Retained
Additional Earnings
Paid-In (Accumulated
Capital Deficit) Total
------------ ------------- ------------
<S> <C> <C> <C>
Balance at January 1, 1998 $ 6,992,430 ($ 5,550,524) $ 1,463,927
Conversion of preferred stock on March 3, 1998 ( 1,029) - -
Prefered dividends paid in stock on March 3, 1998 9,842 - 9,863
Issuance of preferred stock on June 30, 1998 999,990 - 1,000,000
Accretion of preferred stock discount 300,000 ( 300,000) -
Conversion of preferred stock on July 31, 1998 ( 994) - -
Preferred dividends paid in stock on July 31, 1998 3,390 - 3,397
Conversion of preferred stock on August 10, 1998 ( 2,136) - -
Preferred dividends paid in stock on August 10, 1998 27,292 - 27,397
Conversion of debt on August 19, 1998 1,536,358 - 1,536,375
Conversion of preferred stock on September 18, 1998 ( 712) - -
Preferred dividends paid in stock on September 18, 1998 6,289 - 6,334
Conversion of preferred stock on September 24, 1998 ( 740) - -
Preferred dividends paid in stock on September 24, 1998 6,418 - 6,466
Conversion of preferred stock on October 2, 1998 ( 1,180) - -
Preferred dividends paid in stock on October 2, 1998 9,882 - 9,961
Issuance of common stock on October 16, 1998
for underwriting fees 250,500 - 252,000
Conversion of preferred stock on November 3, 1998 ( 2,238) - -
Preferred dividends paid in stock on November 3, 1998 20,884 - 21,041
Preferred stock dividends - ( 222,241) ( 222,241)
Net loss for the year ended December 31, 1998 - ( 13,985,753) ( 13,985,753)
------------ ------------- -------------
Balance at December 31, 1998 10,154,246 ( 20,058,518) ( 9,871,233)
------------ ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
CFI MORTGAGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' CAPITAL DEFICIENCY
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Common Stock Preferred Stock
------------------------ --------------------
Shares Amount Shares Amount
---------- ------- ------ ------
<S> <C> <C> <C> <C>
Balance at January 1, 1999 (brought forward) 3,301,391 $33,014 2,450 $25
Conversion of preferred stock on January 26, 1999 259,585 2,596 ( 50) -
Conversion of preferred stock on February 26, 1999 265,936 2,659 ( 25) -
Issuance of common stock on November 17, 1999 2,000,000 20,000 - -
Conversion of preferred stock on November l7, 1999 4,500,000 45,000 (2,375) ( 25)
Issuance of common stock on November 29, 1999
to class 2 creditors of bankruptcy petition 2,157,116 21,571 - -
Conversion of 15% convertible debentures into
common stock on November 29, 1999 2,004,986 20,050 - -
Issuance of common stock on November 29, 1999
for services 100,000 1,000 - -
Issuance of common stock on December 6, 1999
for services 19,933 199 - -
Shares to be issued for payment of bank debt 326,796 3,268 - -
Shares to be issued for payment of prior period liability 440,708 4,407 - -
Shares to be issued for employee compensation bonus 300,000 3,000 - -
Preferred stock dividends - - - -
Net loss for the year ended December 31, 1999 - - - -
---------- ------- ------ ----
Balance at December 31, 1999 15,676,451 $156,764 - $ -
========== ======== ====== ====
<CAPTION>
Retained
Additional Earnings
Paid-In (Accumulated
Capital Deficit) Total
------------ ------------- -------------
<S> <C> <C> <C>
Balance at January 1, 1999 (brought forward) $10,154,246 ($20,058,518) ($ 9,871,233)
Conversion of preferred stock on January 26, 1999 ( 2,596) - -
Conversion of preferred stock on February 26, 1999 ( 2,659) - -
Issuance of common stock on November 17, 1999 280,000 - 300,000
Conversion of preferred stock on November l7, 1999 ( 44,975) - -
Issuance of common stock on November 29, 1999
to class 2 creditors of bankruptcy petition 1,131,900 - 1,153,471
Conversion of 15% convertible debentures into
common stock on November 29, 1999 462,363 - 482,413
Issuance of common stock on November 29, 1999
for services 46,951 - 47,951
Issuance of common stock on December 6, 1999
for services 19,734 - 19,933
Shares to be issued for payment of bank debt 119,280 - 122,548
Shares to be issued for payment of prior period liability 160,858 - 165,265
Shares to be issued for employee compensation bonus 109,500 - 112,500
Preferred stock dividends - ( 197,576) ( 197,576)
Net loss for the year ended December 31, 1999 - ( 18,592) ( 18,592)
------------ ------------- -------------
Balance at December 31, 1999 $12,434,602 ($20,274,686) ($ 7,683,320)
============ ============= =============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
CFI MORTGAGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations ($ 18,592) ($13,985,753)
------------ ------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Forgiveness of debt (3,646,371) (433,818)
Abandonment of property and equipment -- 478,878
Depreciation and amortization 6,157 370,350
Common stock issued for underwriting
fee, salary and other expenses 474,141 252,000
Compensatory equivalent of such bonues to officer 1,775,750
Interest accrued on related party loans 10,646 2,750
Provision for doubtful accounts and loans losses -- 7,135,304
(Provision) credit for deferred tax credit -- 331,525
(Increase) decrease in assets and liabilities:
Increase receivable -- 212,783
Mortgage loans held for sale -- (10,180,189)
Other current assets -- 72,635
Miscellaneous receivables 76,621 (76,621)
Prepaid expenses 53,658 220,553
Deposits -- (14,341)
Accounts payable, accrued expenses
and other current liabilities 562,773 1,306,881
------------ ------------
Total adjustments (686,625) (321,310)
------------ ------------
Net cash used in operating activities (705,217) (14,307,063)
------------ ------------
Cash flows from investing activities:
Expenditures for property and equipment -- (295,405)
Increase (decrease) in related party receivables (4,689) 18,390
Note receivable (25,000) --
------------ ------------
Net cash used in investing activities (29,689) (277,015)
------------ ------------
Cash flows from financing activities:
Proceeds from conversion of debentures 311,020 --
Warehouse borrowings -- 10,387,292
Proceeds from issuance of common stock 300,000 --
Proceeds from issuance of preferred stock -- 1,000,000
Advances from related party 129,089 --
Proceeds from long-term debt -- 1,961,156
Payments of long-term debt -- (403,590)
Loan from stockholder -- 100,000
Conversion of debt into preferred stock -- (163,625)
------------ ------------
Net cash provided by financing activities 740,109 12,881,233
------------ ------------
Net increase (decrease) in cash 5,203 (1,702,845)
Cash at beginning of year 2,371 1,705,216
------------ ------------
Cash at end of year $ 7,574 $ 2,371
============ ============
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
CFI MORTGAGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------
1999 1998
--------- -----------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year:
Income taxes $ - $ -
========= ===========
Interest $ 10,000 $ 5,380,239
========= ===========
Supplemental Schedules of Noncash Investing
and Financing Activities:
Accrued dividends on preferred stock $ 197,576 $ 242,892
========= ===========
Common stock issued for underwriting
fees, salary and other expenses $ 474,141 $ 252,000
========= ===========
Conversion of 15% debentures into common stock $ 482,413 $ -
========= ===========
Shares to be issued for bank debt and other liabilities $ 287,813 $ -
========= ===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
CFI MORTGAGE INC. AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
Note 1 - REORGANIZATION UNDER BANKRUPTCY PROVISIONS.
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 (the "Court").
On July 6, 1999, the Court confirmed a plan of reorganization
effective August 2, 1999 (the "Plan"), whereby creditors' claims
which were approved by the Court were satisfied by the issuance of
one share of the Company's common stock in exchange for each dollar
of debt of the approved claim. As a result, the Company issued a
total of 2,924,620 shares of its common stock to creditors in
satisfaction of its pre-petition liabilities. Pursuant to the Court's
order, all shares issued under the plan of reorganization were free
trading shares without restriction
Included in the Plan were two financial institutions with
disputed claims. The Court has approved the issuance of up to
1,000,000 to one and 3,000,000 million shares of the Company's common
stock to the other in settlement of these claims. As of the date of
these financial statements, these claims have not been liquidated and
CFI's management is involved in ongoing negotiations with these
creditors under the supervision of a Trustee appointed by the Court.
As part of the Plan, the holders of the Company's Series A,
B and C convertible preferred stock agreed to convert all of their
outstanding preferred shares into 4.5 million shares of the Company's
common stock as of the petition date. The conversion was approved as
part of the Plan.
The Company's subsidiary, Direct Mortgage Partners, Inc.
("DMP") was not a party to the petition for relief under Chapter 11.
The unsecured creditors of DMP were specifically excluded from the
settlement by the court. Only creditors of DMP whose obligations had
been guaranteed by CFI were permitted to participate in the
settlement. At December 31, 1999, DMP had no tangible assets but
there was $1,237,552 of unsecured non-priority liabilities of DMP
which are without recourse to CFI. The Company plans to liquidate DMP
through the State Court in a process known as an assignment for the
benefit of creditors in fiscal 2000.
F-9
<PAGE>
Note 2 - SIGNIFICANT ACCOUNTING POLICIES.
(a) Going Concern:
The accompanying financial statements have been prepared
based on the assumption that the Company will continue as a going
concern. Although the Company is in negotiations with two pre-
petition creditors management considers its plan of reorganization as
successfully completed and has been able to raise additional capital
subsequent to the petition date. As discussed in detail later in
these notes, the Company has completed one acquisition and has a
second acquisition pending which management believes will give the
Company the ability to generate sufficient revenues to sustain
operations during the subsequent year. The Company may also seek to
raise additional capital through the sale of some of its authorized
but unissued capital stock.
However, there are no assurances that the completed and
planned acquisitions will generate sufficient revenue to sustain
operations for the next fiscal year. Additionally, there are no
assurances that the Company could raise sufficient capital on terms
favorable to the Company, which would enable it to sustain operations
during the subsequent fiscal year.
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.
(b) Organization:
CFI Mortgage Inc. ("CFI") was incorporated in Delaware on
March 18, 1997. Immediately prior to its initial public offering, CFI
acquired all of the outstanding stock of CFI Mortgage Corporation (a
predecessor company) in exchange for 1,200,000 shares of its common
stock. Through its two wholly owned subsidiaries, Bankers Direct
Mortgage Corporation ("BDMC"), which was sold on September 11, 1998,
and Direct Mortgage Partners Inc. ("DMP"), which ceased operations in
the fourth quarter of 1998, CFI was engaged in originating,
purchasing and selling loans secured primarily by first mortgages on
residential properties as well as purchasing and selling servicing
rights associated with such loans. The loans were both conventional
conforming and sub-prime nonconforming loans.
On December 15, 1999, the Company entered into a purchase
agreement to acquire PMC Mortgage Co. a privately held direct
mortgage operation that specializes in the origination of sub-prime
mortgage loans. The agreement was subject to numerous financial
covenants that could be verified by the performance of significant
due diligence on the acquiree's books and records , which resulted in
several misrepresentations in breach of the agreement's
representations and warranties. The Company terminated the agreement
on March 31, 2000. Accordingly, the accompanying financial statements
do not reflect any of the operations of PMC Mortgage Co.
Note 2 - SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(b) Organization: (Continued)
F-10
<PAGE>
On January 14, 2000, the Company completed the acquisition
of a controlling interest (65%) of Inventek, Inc., a developer of
advanced software and management solutions for the transportation
industry.
All intercompany accounts and transactions have been
eliminated in consolidation.
(c) Applicable Accounting Pronouncements:
The gain or loss on the sale of mortgage loans to financial
institutions is recognized upon the purchase of the loan by the
institution. The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS No.125"), which provides accounting and reporting
standards for transfers and servicing of financial assets and
extinguishments of liabilities. The statement also provides standards
for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The adoption of SFAS No. 125
by the Company did not have a material effect on the Company's
financial statements.
Origination fee income is accounted for in conformity with
Statement of Financial Accounting Standards No. 91. This statement
requires that origination fees be offset by their direct loan costs
and the net deferred income be recognized over the life of the loan.
The Company has previously adopted the guidance under SFAS No. 91.
(d) Use of Estimates.
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 as of the date of the financial statements, and the
reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.
(e) Property and Equipment:
Property and equipment are stated at cost less accumulated
depreciation. The Company's policy is to provide for depreciation
over the estimated useful lives of the assets ranging from three to
seven years. Expenditures for leasehold improvements are capitalized
and amortized over their estimated useful lives or the life of the
lease, whichever is shorter in duration. Expenditures for betterments
are capitalized and depreciated as described above.
Note 2 - SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(e) Property and Equipment: (Continued)
Expenditures for repairs, maintenance and minor renewals are
charged to operations as incurred. Upon retirement or abandonment of
the property and equipment, the carrying value and related
accumulated depreciation and amortization are removed from the
accounts.
F-11
<PAGE>
(f) Income Taxes:
The Company complies with Statement of Financial Accounting
Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes",
which requires an asset and liability approach to financial
accounting and reporting for income taxes. Deferred income tax assets
and liabilities 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 in the periods in which differences are expected to effect
taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount to be realized.
(g) Loss Per Common Share:
Loss per common share is based on the weighted average
number of common shares outstanding. Statement of Financial
Accounting Standard No. 128, "Earnings Per Share", requires dual
presentation of basic and diluted earnings per share on the face of
the statements of operations. Basic earnings (loss) per share
excludes any dilutive common stock equivalents and is computed by
dividing net income or loss, less any accretion for preferred stock
discounts and dividends, which totaled $197,576 and $522,241 in 1999
and 1998, respectively, by the weighted average number of shares
outstanding for the period. Diluted earnings per share reflect the
potential dilution to common stockholders as if all common stock
equivalents were converted into equivalent shares of common stock,
thereby diluting the net income available to holders of the common
stock.
Diluted loss per share has not been presented in the
financial statements herein, as the effect of including the common
stock equivalents would be antidilutive for all periods presented.
Note 3 - RELATED PARTY TRANSACTIONS.
(a) Due From Related Parties:
The Company made advances to three individuals, two of whom
are officers of the Company. The balance was $90,726 at December 31,
1999. The advances are due on demand and there has been no interest
charged on the outstanding balances.
F-12
<PAGE>
Note 3 - RELATED PARTY TRANSACTIONS. (Continued)
(b) Note Receivable - Affiliate:
On October 4, 1999, the Company advanced $25,000 to
Inventek, Inc., in exchange for a promissory note in anticipation of
the acquisition of a controlling interest in Inventek that was
consummated on January 14, 2000. The terms of the note called for
interest to be charged at a rate of 7% per annum with the interest
and principal to be repaid within sixty days of demand therefore. The
terms of the note also indicated that the note would be considered
paid in full upon the execution of the acquisition agreement between
the Company and Inventek, Inc. On January 14, 2000, the Company
completed the acquisition of 65% of the outstanding stock of
Inventek, Inc. The note and all unpaid interest thereon were
contributed to Inventek, Inc.'s stockholders' equity.
(c) Due To Affiliated Company:
The Company has a revolving line of credit with an
affiliate, whereby it can borrow up to $150,000, with interest
charged at 9% per annum. The loan is due on demand. At December 31,
1999, the Company's liability under this credit facility amounted to
$139,735, which included accrued interest of $3,449.
As an inducement to make the loan, the affiliate was granted
warrants to purchase 150,000 shares of the Company's common stock at
an exercise price of $.25 per share, which represented 105% of the
closing bid price of the Company's common stock on the date of the
agreement.
(d) 15% Demand Convertible Debentures:
As part of the plan of reorganization, the court approved an
interim financing Plan with Ronco Funding, Inc. The details of the
transaction are described more fully in Note 10 (b). The President of
Ronco Funding, Inc. subsequently entered into an employment agreement
with the Company and is presently its President & CEO.
(e) Leases:
The Company presently leases its office facilities from an
officer on a month to month basis. Rent charged to operations under
this lease was $50,209 in 1999 and $35,400 in 1998.
F-13
<PAGE>
Note 3 - RELATED PARTY TRANSACTIONS. (Continued)
(f) Common Stock Issued To Officers, Directors and Related
Parties:
In July 1998, the Chairman of the Board of Directors loaned
the Company $100,000, evidenced by a promissory note, with interest
payable at 6% per annum. As part of the Plan, this individual was
given 102,750 shares of the Company's common stock in satisfaction of
this obligation and accrued interest of $2,750.
Included in the list of unsecured non-priority creditors
were several individuals who were officers and directors of the
Company. As part of the approved settlement, the Company issued to
these individuals a total of 163,779 shares of the Company's common
stock in satisfaction of unpaid compensation for services rendered to
the Company prior to the Bankruptcy Proceedings.
Also included in the aforementioned list of unsecured
creditors were four individuals who are relatives of an officer of
the Company. As part of the Plan, these four individuals were issued
a total of 60,590 shares of the Company's common stock in
satisfaction of their claim for unpaid compensation for services
rendered to the Company prior to the bankruptcy proceedings.
Note 4 - LIABILITIES NOT SUBJECT TO COMPROMISE.
Included in the balance sheet at December 31, 1999 is
$1,237,552 of pre-petition liabilities, which were not subject to
compromise under the Company's confirmed Plan of reorganization.
These are liabilities are directly attributable to the Company's
wholly owned subsidiary, DMP. Under the terms of the Plan, these
creditors were excluded from the Bankruptcy Proceedings and any
assignment for the benefit of the creditors of CFI. The Plan calls
for the Company to liquidate DMP, which has no tangible assets. The
Company intends to complete this liquidation through the applicable
state court(s) by completing the aforementioned assignment for the
benefit of creditors.
Note 5 - LIABILITIES UNDER PLAN OF REORGANIZATION.
Included in the Plan are claims from two financial
institutions that are in dispute as to the amount of the debt owed by
the Company. The Company has argued that the claims submitted by
these banks are overstated. The Court approved a tentative settlement
figure, but allowed the claimants the opportunity to substantiate
their arguments. The Court approved the issuance of up to 1,000,000
to one and 3,000,000 shares to the other of these lenders in
satisfaction of their claims.
There are an additional 83,328 shares in the Plan due to be
issued to present and former employees for non-priority claims for
unpaid compensation up to the petition date. Although these shares
have not been issued as of December 31, 1999, the accompanying
financial statements reflect them as issued and outstanding as of the
Plan's confirmation date.
F-14
<PAGE>
Note 6 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES.
Accrued expenses and other current liabilities at December
31, 1999 are comprised of the following:
Professional fees $ 241,300
Accrued compensation of employees 127,000
Accrued compensation of officers 2,002,731
General and administrative expenses 30,392
----------
$2,401,423
==========
Included in accrued compensation of officers is $1,775,750,
which represents the compensatory element of stock bonuses to be
issued pursuant to employment agreements entered into subsequent to
the effective date of the Plan. The accrued compensation to officers
also includes $119,000 due to officers of the Company as part of the
administrative expenses approved by the court under the Plan.
Note 7 - COMMITMENTS AND CONTINGENCIES.
(a) Leases:
Under the Plan, all operating leases for office facilities
and equipment were disavowed. The Company presently subleases office
space from an officer of the Company on a month to month basis at
$5,100 per month. Rent expense for the years ended December 31, 1999
and 1998 amounted to $50,209 and $1,004,707, respectively.
(b) Employee Contracts:
Under the Plan, all pre-petition employment contracts were
disavowed and the Company was authorized to enter into new employment
contracts with certain key executives subsequent to the effective
date of the Plan. The Company has entered into new employment
contracts with four officers for a term of three years, commencing
August 3, 1999. The Company for cause may terminate the contracts, as
that term is defined in the agreements, or for death or disability.
The employees may terminate the agreement at any time upon thirty
days written notice of intent to do so.
Three of the agreements call for a base annual salary of
$120,000 with guaranteed minimum annual increases of 10% of the prior
year's base. The Board of Directors may, at its discretion, authorize
greater annual increases. The fourth contract calls for a base salary
of $180,000 per annum, with the same incremental salary provisions as
those described above.
Note 7 - COMMITMENTS AND CONTINGENCIES. (Continued)
(b) Employee Contracts:
In addition to the base salaries set forth above, each of
the officers is entitled to an additional salary of $30,000 per annum
for each year of service under the contract. The additional salary
accrues ratably throughout the year and is payable at
F-15
<PAGE>
the end of each fiscal year included in the term of the contract. The
officers have the option to take the additional salary in equivalent
shares of the Company's common stock, with the share values
discounted at a rate of 50% of the average closing bid price of the
stock for the five trading days after the close of the fiscal year.
The contracts also grant the four officers a stock bonus in the first
year, equal to five percent of the outstanding common stock of the
Company, after giving effect for the bonus. The stock bonus in
subsequent years would be that necessary to incrementally adjust the
shares issued to such officer so that the total shares issued equal
five percent of the total issued common stock of the Company.
The agreements also provide for a discretionary bonus, in an
amount to be determined by the Board of Directors, up to the amount
of the base salary and additional salary as described in the first
two paragraphs above. The bonus is to be based on the Company's
performance for the fiscal year. The officer may elect to take this
bonus, or any portion thereof, in equivalent shares of the Company's
common stock, based on 125% of the average closing bid price of the
Company's common stock for the first five trading days of the
subsequent fiscal year.
Concurrent with entering into this employment agreement, the
Company's President & CEO was given an incentive bonus of 300,000
shares of the Company's common stock. At December 31, 1999, the
shares had not been issued to this individual. The Company has
reflected the compensatory element of and the increase in outstanding
common shares as if the shares had been issued prior to December 31,
1999.
(c) Contingent Liabilities of The Company:
Certain officers and stockholders of the Company were
guarantors of liabilities incurred by CFI and/or its wholly owned
subsidiaries. Many of the guarantees were made prior to CFI's
acquisition of these entities. The Company has indemnified these
individuals against any liability arising as a result of these
guarantees.
Some of these creditors have made claims against the
individuals, including creditors who were specifically excluded under
the Plan. The Company has been working in conjunction with the
Trustee to attempt to reach settlements of these claims. The
settlement proposals include the potential additional issuance of CFI
common stock in satisfaction of these claims.
Note 7 - COMMITMENTS AND CONTINGENCIES. (Continued)
(c) Contingent Liabilities of The Company: (Continued)
In the event that these settlements, as approved by the
Trustee, require the issuance of CFI's common shares, it would result
in a further dilution in the pro rata interest of all other
shareholders except for the Company's four executive officers who
would be entitled, under the provisions of their respective
employment contracts, to receive on the next following January 1
sufficient additional shares of the Company's common stock so that
the total common shares issued to each of these
F-16
<PAGE>
officers equal 5% of the issued and outstanding common stock of the
Company as of the last day of the preceding fiscal year. The Company
can not quantify the effect of these possible settlements on the
interests of existing shareholders due to their contingent nature.
Note 8 - INCOME TAXES.
The Company and its subsidiaries file a consolidated federal
income tax return. As of December 31, 1999, the Company and its
subsidiaries had a net operating loss carryforward of approximately
$19,000,000 available to reduce future taxable income, through the
year 2019. The Company's ability to utilize its net operating loss
carryforward could be limited following a change in ownership in
excess of fifty percentage points effectuated by the common stock
issued in connection with the reorganization and recapitalization.
The Company has fully reserved its deferred tax asset due
the uncertainty about its ability to utilize it in future periods.
Additionally, a deferred tax asset of $331,525 was written off to
income tax expense for the year ended December 31, 1999.
Note 9 - FORGIVENESS OF DEBT.
The Company recorded forgiveness of debt amounting to
$3,646,371 and $1,908,913 for the years ended December 31, 1999 and
1998, respectively.
Note 10 - STOCKHOLDERS' EQUITY.
(a) Preferred Stock:
During fiscal 1997 and 1998 the Company issued shares of
Series "A", "B" and "C" convertible preferred stock in various
private placements. As part of the Company's plan of reorganization,
all remaining outstanding shares of convertible preferred stock were
converted into 4,500,000 shares of the Company's common stock.
Note 10 - STOCKHOLDERS' EQUITY.(Continued)
(b) Common Stock:
Pursuant to the Plan, the Company issued a total of
2,924,620 shares of its common stock in satisfaction of the
corresponding pre petition liabilities. Included in this total are
767,504 shares that have not been issued as of December 31, 1999.
On November 17, 1999, the Company sold 2,000,000 shares of
its common stock and warrants to acquire an additional 150,000 common
shares at $0.25 per share for $300,000 in a private placement.
F-17
<PAGE>
During 1999, the Company issued to consultants a total of
119,933 shares of its common stock whose fair market at the date of
issuances was $67,644 as full payment for professional services
rendered.
In conjunction with the signing of an employment contract on
August 3, 1999 as approved by the Court, the Company's President &
CEO was granted 300,000 shares of the Company's common stock. The
fair market value of these shares aggregating $112,500 was charged to
operations as compensation.
Commencing in April 1999 through October 1999, Ronco
Funding, Inc. purchased with the Court's approval 15% demand
convertible debentures and warrants to acquire the Company's common
stock through a private securities subscription agreement. The
proceeds of the securities sale of $417,920 before expenses of
$106,900 equaled the face value of the notes. The notes along with
accrued interest are convertible into and the warrants are
exercisable into the Company's common stock at per share prices
ranging from $0.08 to $0.25. The per share conversion and exercise
prices were equal to 100% of the fair value of the underlying common
shares at the dates of issuance. In November 1999, the debenture
holders converted the outstanding debt and accrued interest of
$64,493 into 2,004,986 common shares.
(c) Warrants:
In connection with the sale of the 15% Demand Convertible
Debentures and as an inducement to the lenders, the Company issued a
total of 428,500 common stock purchase warrants, exercisable for a
two year period expiring from April through September, 2001. The
warrants are exercisable at prices ranging from $.08 to $.25 per
share.
In conjunction with a revolving credit facility obtained
during the Bankruptcy Proceedings through an affiliate of the
Company, the Company issued 150,000 common stock purchase warrants at
an exercise price of $.25 per share. The warrants expire September 8,
2002.
Note 10 - STOCKHOLDERS' EQUITY.(Continued)
(c) Warrants: (Continued)
In conjunction with a loan obtained during the Bankruptcy
Proceedings in the amount of $100,000, the Company issued 110,000
common stock purchase warrants at an exercise price of $.20 per
share. The warrants expire on September 8, 2002.
As part of the Plan, the Court approved the issuance of
warrants to acquire 750,000 shares of the Company's common stock to
nine employees, one of which is the brother of an executive officer.
The exercise price of the warrants, which expire on August 3, 2002,
was $0.39 per share, which was 104% of the common stock's fair market
value at the date of issuance.
F-18
<PAGE>
The Company assigned no value to the warrants issued in the
preceding four paragraphs because at the time of issuance neither
management of the Company nor the recipient had any assurance that
the Company would be in existence for the warrants to be exercised.
In conjunction with a private placement, the Company sold
2,000,000 shares of its common stock and warrants to acquire an
additional 150,000 common shares at an exercise price of $.25 per
share for $300,000. The warrants expire on November 8, 2002.
As a result of the reorganization under the confirmed plan,
all outstanding warrants issued prior to the petition date were
cancelled.
Note 11 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS.
The Financial Accounting Standards Board periodically issues
new accounting standards in a continuing effort to improve the
quality of financial information and to promote uniformity in its
presentation. Management has reviewed all such pronouncements made in
the last fiscal year and concluded that none have a material impact
on the Company's presentation of its financial position, results of
operations and cash flows.
Note 12 - SUBSEQUENT EVENTS.
On January 14, 2000, the Company acquired a 65% interest in
Inventek, Inc. (DBA Surfside Software Systems of Clearwater, Fl.).
The purchase price, payable in preferred stock of the Company was
$1,000,000 adjusted by the net worth of Inventek Inc. as defined in
the purchase agreement. The purchase price will be paid by the
issuance of preferred stock with a par value of $700,000 plus common
stock purchase warrants ("warrants") for the remaining balance of the
purchase price. Each warrant entitles the holder to purchase one
share of the Company's common stock at an exercise price of $.15 for
a period of five years from the issue date. In addition, the Company
agreed to contribute $250,000 as additional paid-in capital, at
various dates through June 1, 2000, which includes the note
receivable of $25,000.
In addition, the agreement calls for an adjustment to the
purchase price, based on the achievement of certain earnings criteria
during the following two years. The maximum increase in the purchase
price is up to an additional $4,000,000.
F-19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
year-end financial statements of CFI Mortgage Inc. and Subsidiaries as at and
for the year ended December 31, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 7,574
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 98,300
<PP&E> 149,477
<DEPRECIATION> 94,059
<TOTAL-ASSETS> 178,718
<CURRENT-LIABILITIES> 2,541,158
<BONDS> 0
0
0
<COMMON> 156,764
<OTHER-SE> (7,840,084)
<TOTAL-LIABILITY-AND-EQUITY> 178,718
<SALES> 0
<TOTAL-REVENUES> 21,228
<CGS> 0
<TOTAL-COSTS> 3,627,427
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,764
<INCOME-PRETAX> (3,664,963)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,664,963)
<DISCONTINUED> 0
<EXTRAORDINARY> 3,646,371
<CHANGES> 0
<NET-INCOME> (18,592)
<EPS-BASIC> (0.78)
<EPS-DILUTED> (0.74)
</TABLE>
