UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 50549
Form SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Transnational Financial Corporation
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(Name of small business issuer)
California 6162 94-2964195
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(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
301 Junipero Serra Blvd., Suite 270, San Francisco, CA 94127
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(Address and telephone number of principal executive offices)
Joseph Kristul,301 Junipero Serra Blvd., Suite 270, San Francisco, CA 94127
(415) 334-7000
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(Name, address and telephone number of agent for service)
Copies of all communications to:
Robert A. Forrester, Esq. Norman R. Miller, Esq.
1215 Executive Dr. West Wolin, Ridley & Miller LLP
Suite 102 3100 Bank One Center
Richardson, TX 75081 1717 Main Street
(972) 437-9898 Dallas, TX 75201-4681
Fax (972) 480-8406 (214) 939-4900
Approximate date of proposed sale to public: As soon as practicable after the
effective date of the Registration Statement. /_/
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. /_/
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. /_/
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /_/
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
- ---------------------- -------------------- --------------------- --------------------- --------------------
Proposed Maximum Proposed Maximum
Title of each class Offering Price Per Aggregate Offering
of securities to be Amount to be Security(1) Price Amount of
registered Registered Registration Fee
- ---------------------- -------------------- --------------------- --------------------- --------------------
Common Stock 1,150,000 $9.00 $10,350,000 $3245
- ---------------------- -------------------- --------------------- --------------------- --------------------
- ---------------------- -------------------- --------------------- --------------------- --------------------
Representative's 100,000 $0.001 $100 $1
Warrants(2)
- ---------------------- -------------------- --------------------- --------------------- --------------------
- ---------------------- -------------------- --------------------- --------------------- --------------------
Common Stock 100,000 $10.80 $1,080,000 $590
underlying
Representative's
Warrants
- ---------------------- -------------------- --------------------- --------------------- --------------------
- ---------------------- -------------------- --------------------- --------------------- --------------------
Total $3,836
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) These shares may be issued upon exercise of the Warrants and the
Representative's Warrant. An additional indeterminate number of shares
of Common Stock are being registered hereby to cover any adjustments in
the number of shares issuable upon exercise of the Warrants and the
Representative's Warrant pursuant to antidilution provisions contained
therein.
The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
<PAGE>
Subject to Completion, Dated April 22, 1998
PROSPECTUS
1,000,000 Shares
Transnational Financial Corporation
Common Stock
Transnational Financial Corporation (the "Company") is hereby offering
1,000,000 shares of Common Stock (the "Common Stock"). See "Description of
Capital Stock." Prior to this offering, there has been no public market for the
Common Stock, and there can be no assurance that an active market will develop.
It is presently anticipated that the initial public offering price will be
between $7.00 and $9.00 per share. See "Underwriting" for information relating
to the factors considered in determining the initial public offering price. The
Company has applied to list the Common Stock on the American Stock Exchange
under the symbol "TFN". There can be no assurance that the application for
listing on the American Stock Exchange will be approved.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE SECTION ENTITLED "RISK
FACTORS" BEGINNING ON PAGE 7 HEREOF CONCERNING THE COMPANY AND THIS OFFERING.
PROSPECTIVE INVESTORS SHOULD ALSO CONSIDER THAT THEIR INVESTMENT WILL RESULT IN
IMMEDIATE SUBSTANTIAL DILUTION. SEE "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
Per Share.......
Total (2)(3)...
(1) Excludes a nonaccountable expense allowance payable by the Company to the
Representative of 2.0% of the aggregate initial public offering price of
the shares. The Company has also agreed to issue to the Representative
warrants exerciseable for four years commencing one year from the date of
this Prospectus to purchase 100,000 shares of Common Stock at 120% of the
public offering price to the public (the "Representative's Warrants"). The
Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933 , as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting estimated expenses of $600,000 payable by the Company,
including the Representative's 2.0% nonaccountable expense allowance.
(3) A certain shareholder of the Company (the "Selling Shareholder") has
granted to the Underwriters an option, exercisable within 45 days from the
date of this Prospectus, to purchase up to 150,000 shares, on the same
terms set forth above, solely for the purpose of covering over-allotments,
if any The Company will not receive any proceeds from the sale of such
shares. If the over-allotment option is exercised in full, the total Price
to Public, Underwriting Discounts and Commissions, and Proceeds to Selling
Shareholder will be $___________, $_________, and $__________ See
"Principal and Selling Shareholders" and "Underwriting."
The shares of Common Stock are being offered severally by the
Underwriters named herein subject to receipt and acceptance by them and to their
right to reject any order, in whole or in part. It is expected that delivery of
the shares of Common Stock will be made against payment therefor at the offices
of the Representative in Austin, Texas on or about _________, 1998.
Tejas Securities Group, Inc.
The date of this Prospectus is _______, 1998.
<PAGE>
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2, (including any amendments
thereto, the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act") with respect to the shares offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the shares, reference is made to the Registration
Statement and the exhibits and schedules thereto. Statements made in this
Prospectus regarding the contents of any contract or document filed as an
exhibit to the Registration Statement are not necessarily complete and, in each
instance, reference is hereby made to the copy of such contract or document so
filed. Each such statement is qualified in its entirety by such reference. The
Registration Statement and the exhibits and the schedules thereto filed with the
Commission may be inspected, without charge, at the office of the Commission at
Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549. Copies of such
materials may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, NW, Washington, D.C. 20549, at prescribed rates.
The Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the Commission at http://www.sec.gov.
As a result of this offering, the Company will become subject to the
reporting requirements of the Exchange Act, and in accordance therewith will
file periodic reports, proxy statements and other information with the
Commission. The Company will furnish its shareholders with annual reports
containing audited financial statements certified by independent public
accountants following the end of each fiscal year, proxy statements and
quarterly reports containing unaudited financial information for the first three
quarters of each fiscal year following the end of such fiscal quarter.
The Company has applied to list the Common Stock on the American Stock
Exchange. If the Company's application is accepted, then reports, proxy
statements and other information concerning the Company will be available for
inspection at the principal office of the American Stock Exchange at 86 Trinity
Place, New York, New York, 10006.
Certain persons participating in this offering may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock, including the entry of stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. For a description of these
activities , see "Underwriting."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including notes thereto) appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information herein
(i) has been adjusted to reflect the 2,468.75-for-one split of the Common Stock
effected in March 1998, (ii) the change in the Company's status from an S
corporation to a C corporation on March 31, 1998, (iii) the issuance on April 1,
1998, of 31,250 shares to certain individuals for services rendered to the
Company, and (iv) assumes the Underwriters' over-allotment option and the
Representative's Warrants are not exercised. The shares offered hereby involve a
high degree of risk. Investors should carefully consider the information set
forth under "Risk Factors."
Prospective investors should note that this Prospectus contains certain
"forward-looking statements," as such term is defined in the Private Securities
Litigation Reform Act of 1995, including without limitation, statements
containing the words "believes," "anticipates," "expects," "intends," "plans,"
"should," "seeks to," and similar words. Prospective investors are cautioned
that such forward-looking statements are not guarantees of future performance
and involve risks and uncertainties. Actual results may differ materially from
those in the forward-looking statements as a result of various factors,
including but not limited to, the risk factors set forth in this Prospectus. The
accompanying information contained in this Prospectus identifies certain
important factors that could cause such differences.
<PAGE>
The Company
The Company is a mortgage banker which originates, funds and sells mortgage
loans through retail and wholesale branch operations secured by one-to-four
family residential properties in the San Francisco Bay Area. The Company sells
all of its mortgage loans in the secondary market and all of the servicing
rights associated with those mortgage loans. Since the Company's inception in
1985, it has not been required to repurchase any mortgage loan.
Since 1985, the Company has been engaged in retail mortgage banking and
originated mortgage loans that were sold prior to funding. In 1995, the Company
began a wholesale division to close and fund mortgage loans originated by
others. The total loan production volume increased from approximately
$92,000,000 in 1995 to approximately $261,000,000 in 1996 and approximately
$463,000,000 in 1997. For the year ended December 31, 1997, 84% of the Company's
loan production volume was wholesale and 16% was retail.
The Company's marketing strategy is to provide mortgage banking
services to qualified borrowers at favorable rates on large loans. In 1997, the
average size of the mortgage loans funded by the Company was approximately
$280,000. Its underwriters are experienced employees who evaluate the financial
quality of the borrower and the mortgage loan. The Company believes that
qualified lending supported by experienced personnel permits effective,
cost-efficient operations with low fixed-expenses.
The volume of loans the Company may fund is limited by the liquid capital
of the Company. The primary purpose of this offering is to increase the
Company's liquid capital which in turn is expected to result in an increase in
its warehouse lines of credit and the total amount of loans that can be funded
by the Company. See "Use of Proceeds." One of the effects of increased capital,
management believes, will be to lower significantly the Company's cost of
borrowing. Following the completion of this offering, the Company intends to
establish new warehouse lines of credit that will achieve these goals.
The Company is licensed as a mortgage broker by the State of California and
is an approved seller for the Federal National Mortgage Association ("FNMA" or
"Fannie Mae"). Because the Company's market is not oriented to smaller loans,
the Company has not sought to originate mortgage loans insured by the Federal
Housing Authority ("FHA") or guaranteed by the Veterans Administration ("VA").
The Company is also licensed by the Department of Housing and Urban Development
("HUD").
The Company maintains warehouse lines of credit to fund mortgage loans
prior to their sale in the secondary market. Beginning in 1997, the Company
commenced hedging activities to control the risk related to interest rate
changes between the time a mortgage loan is funded and sold. The Company does
not plan, at the present time, to securitize its own loans or engage in
servicing the mortgage loans.
The Company maintains a retail office in San Francisco, a wholesale
office in San Francisco, a wholesale office in San Jose, California and a
mortgage loan processing facility in San Francisco. The Company's executive
offices are located at 301 Junipero Serra Blvd., Suite 270, San Francisco,
California 94127, and its telephone number is (415) 334-7000.
<PAGE>
The Offering
Common Stock offered........................... 1,000,000 shares
Common Stock to be outstanding
after the Offering........................... 3,500,000 shares (1)(2)
Use of Proceeds................................ Working capital and
repayment of subordinated
debt.See "Use of Proceeds."
Risk Factors................................... The shares of Common Stock
offered hereby are
speculative and involve a
high degree of risk and
should not be purchased
by investors who cannot
afford the loss of their
entire investment.
See "Risk Factors."
Proposed American Stock Exchange Symbol........ "TFN"
(1) Includes 31,250 shares issued on April 1, 1998. See "Certain Relationships
and Related Transaction."
(2) Does not include (i) 300,000 shares of Common Stock reserved for issuance
under the Company's 1998 Stock Option Plan (the "Stock Option Plan") or
(ii) an aggregate of up to 100,000 shares issuable upon exercise of the
Representative's Warrants. The Company has agreed to grant options to
certain employees under the Stock Option Plan to purchase a total of
45,000. See "Management - Stock Option Plan." and "Underwriting."
<PAGE>
Summary Financial Information
The following selected balance sheet and income statement data has been
derived from the audited statements of the Company as of December 31, 1997 and
the unaudited statements as of December 31, 1996. This summary financial data
should be read in conjunction with and are qualified by reference to the
financial statements of the Company and the related notes thereto included
elsewhere in this Prospectus. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Year Ended December 31,
1996 1997
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(Unaudited)
Operating Data:
Income:
Net gain from sale of mortgage loans $ 890,592 $2,230,309
Production Income 801,175 943,182
Other (24,489) 16,346
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Total 1,667,278 3,189,837
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Expenses:
Salaries and benefits (1) 758,354 1,262,790
General and administrative 410,728 674,962
Interest expense, net of interest income 10,997 279,093
Occupancy 85,125 125,020
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Total Expenses 1,265,204 2,341,865
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Income before income taxes 402,074 847,972
Provision for State Income Tax 6,227 13,000
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Net income $ 395,847 $ 834,972
========== ===========
Pro Forma information: (2)
Income before income taxes, as reported $ 402,074 $ 847,972
Pro forma provision for income taxes 161,400 339,200
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Pro forma net income $ 240,674 $ 508,772
========== ===========
Per Share Data:
Pro forma net income per share $0.10 $0.21
Pro forma weighted average shares outstanding 2,468,750 2,468,750
Operating Data (in thousands):
Production volume - Wholesale $206,613 $387,312
Production volume - Retail 54,686 75,427
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Total production volume $261,299 $462,739
======== ========
Average principal balance per loan,
wholesale and retail $261,823 $280,448
Balance Sheet Data:
<TABLE>
December 31,
1996 1997 1997 1997
------------------ ---------------- --------------- ---------
(Unaudited) Pro Forma(3) As Adjusted (4)
<S> <C> <C> <C> <C>
Cash and equivalents $ 751,067 $ 754,856 $ 1,754,856 $ 6,354,856
Mortgage loans held 19,529,348 50,288,714 50,288,714 50,288,714
Total assets 20,764,096 51,975,783 52,975,783 57,575,783
Warehouse notes payable 19,444,701 50,154,791 50,154,791 50,154,791
Subordinated debt - - 1,000,000 -
Shareholders equity 1,016,740 1,338,639 1,338,639 7,038,639
Shares outstanding 2,468,750 2,468,750 2,468,750 3,500,000
- --------
See notes on next page
</TABLE>
<PAGE>
(1) Not included in salary and benefits are dividend distributions of $381,197
in 1996 and $513,073 in 1997 which were distributed to the stockholders for
income and to meet tax liabilities when the Company was an S corporation.
See "Dividends" and "Management - Executive Compensation."
(2) On April 1, 1995, the Company elected to be taxed as an S corporation.
Accordingly, in lieu of payment of income taxes at the corporate level, the
stockholders individually reported their pro rata share of the Company's
income, deductions, losses and credits. Pro forma information reflects
results that would have been reported had the Company not been an S
corporation during the applicable period.
(3) Pro forma information reflects proceeds from subordinated debt borrowed
by the Company in March 1998 in the amount of $1,000,000.
(4) Adjusted to reflect the sale of the shares offered hereby at an offering
price of $7.00 per share and application of the estimated net proceeds
therefrom of $5,700,000. See "Use of Proceeds."
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FOLLOWING FACTORS IN ADDITION TO THE
OTHER INFORMATION SET FORTH IN THE PROSPECTUS BEFORE PURCHASING THE SECURITIES
OFFERED HEREBY.
General Business Risks
The Company's business is subject to various business risks, including
economic risks. Economic conditions affect the overall level of mortgage
business activity. The decisions to buy, sell or refinance residences are
affected by such economic conditions as changes in overall growth of the
economy, the level of consumer confidence, real estate values, prevailing
interest rates, and investment returns expected by the financial community.
These conditions could affect the number and size of mortgage loans of the types
originated and purchased by the Company and make these mortgage loans less
attractive to borrowers or investors. In addition, a decline in real estate
values will have an adverse effect on the loan-to-value ratios for the related
mortgage loans, weakening the collateral coverage and resulting in greater
exposure in the event of a default. This greater exposure to default could make
it more difficult for the Company to obtain interim financing for mortgage loans
it originates or purchases or decrease the availability of purchasers of such
mortgage loans or interest expected by the purchasers. See "Business" and "---
Liabilities Under Representations and Warranties."
Mortgage companies often offset the effects of an economic downturn
where the economic downturn is caused by higher interest rates by servicing
mortgages. Such servicers receive from the owners of the mortgages up to
one-half of one per cent of the outstanding mortgage loan balance per annum and
consequently have a continuing revenue stream during periods when the volume of
new originations slows. The Company sells the servicing rights of all of the
mortgage. loans it originates or purchases. Not servicing mortgage loans
subjects the Company to reliance upon the generation or purchase of mortgage
loans for revenues and, consequently, subjects the Company to changes in the
economic cycle and the general economic health in the geographic area or areas
in which it operates.
Dependence Upon Wholesale Brokers
During the year ended December 31, 1997, purchased loans from brokers
accounted for approximately 84% of the mortgage loans closed by the Company,
while the Company's retail division originated the remainder, approximately 16%
of such mortgage loans. None of these brokers are contractually obligated to do
business with the Company. Further, the Company's competitors also have
relationships with the Company's brokers and actively compete with the Company
in its efforts to expand its broker relationships. Accordingly, there can be no
assurance that the Company will be successful in maintaining its existing
relationships or expanding its broker and correspondent network. If the Company
is not successful in maintaining or expanding its broker network, its business,
results of operations and financial condition could be materially and adversely
affected. See "Business - Loan Production."
Dependence Upon Funding Sources
The Company's ability to originate and purchase mortgage loans depends
to a large extent upon its ability to fund mortgage loans upon acceptable terms
on an interim basis. The Company funds substantially all of the mortgage loans
it purchases and originates through borrowings under collateralized loan
purchase agreements with several commercial banks which provide primary credit
facilities upon which the Company relies. These agreements are generally
terminable at will by either party. The Company's borrowings are in turn repaid
with proceeds received by the Company when such mortgage loans are sold. The
Company has relied upon a few lenders to provide the primary credit facilities
for its loan originations and purchases. Accordingly, any failure to renew or
obtain adequate funding under the Company's financing facilities or other
financing arrangements, or any substantial reduction in the size of or increase
in the cost of such facilities, could have a material adverse effect on the
Company's business, results of operations and financial condition. To the extent
the Company is not successful in maintaining or replacing existing financing, it
may have to curtail its mortgage loan origination and purchase activities, which
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business - Funding of Mortgage Loans."
Dependence on Programs that Purchase Loans or Guarantee Loans
Institutional investors, which purchase all of the mortgage loans
originated by the Company, generate funds by selling mortgage-backed securities
and are largely dependent upon the continuation of programs administered by
Freddie Mac, Fannie Mae and Ginnie Mae, which provide the context and facilitate
the issuance of such securities. Although the Company is not aware of any
proposed actions, the discontinuation of, or a significant reduction in, the
operation of such programs could have a material adverse effect on the Company's
operations. In addition, the mortgage loan products eligible for such programs
may be changed from time to time by the sponsor. The profitability of specific
types of mortgage loan products may vary depending on a number of factors,
including the administrative costs to the Company of purchasing or originating
such types of mortgage loans. See "Business - Mortgage Loan Sales."
Inability to Sustain and Manage Growth
Although the Company has experienced rapid and substantial growth in
total revenues recently, there can be no assurance that the Company can sustain
these rates of growth or that it will be able to continue to recruit and retain
sufficient personnel to keep pace with a prolonged period of growth.
Competition
The Company faces strong competition in originating, purchasing and
selling mortgage loans and the related mortgage servicing rights. The Company's
competition is principally from savings and loans associations, other mortgage
companies, commercial banks and, to a lesser degree, credit unions and insurance
companies, depending upon the type of mortgage loan product offered. Many of
these institutions have greater financial and other resources than the Company
and maintain a significant number of branch offices in the area in which the
Company conducts operations. Increased competition for mortgage loans from other
lenders may result in a decrease in the volume of mortgage loans originated and
purchased by the Company If the Company is unable to compete effectively, its
business, results of operations and financial condition could be materially and
adversely affected. See "Business - Competition."
Liabilities Under Representations and Warranties
In the ordinary course of business, the Company makes representations
and warranties to the purchasers and insurers of mortgage loans and the related
mortgage servicing rights regarding compliance with laws, regulations and
program standards. The Company generally receives similar representations and
warranties from the brokers from whom it purchases mortgage loans. In the event
of a breach of these representations and warranties, the Company may be required
to repurchase these mortgage loans and/or may be liable for certain damages.
However, in its twelve years of business, the Company has not been required to
repurchase any mortgage loans. There can be no assurance that the Company will
not experience any such losses in the future. See "Business."
Interest Rate Fluctuations
Changes in interest rates can have differing effects on various aspects
of the Company's business, particularly in the areas of volume of mortgage loans
originated and purchased, discussed above (See "Risk Factors - General Business
Risks."), as well as net interest income and sales of mortgage loans. When the
Company purchases or originates a loan, it usually has a commitment from a third
party to purchase that loan. Generally, the Company funds the loan using
borrowings from its lines of credit at commercial banks known as warehouse lines
of credit. The warehouse line of credit is repaid upon the sale of the
warehoused loans. Before the Company sells the mortgage loan, it is entitled to
receive interest income on the loan from the borrower and simultaneously pays
interest expense to the institution providing the warehouse line of credit. The
interest rate the Company receives during this period and the interest rate it
pays are different. The profitability of the loan is affected by this difference
and the fluctuations in interest rates before the mortgage loan is sold.
Although the Company generally has a commitment to sell the mortgage loan before
it commits to fund the mortgage loan, there are situations in which the Company
does bear a risk in changing interest rates prior to the mortgage loan being
sold. In particular, if the interest rates increase during the time before the
Company sells the uncommitted mortgage loan but after it has funded the mortgage
loan, the Company could sell the principal of the mortgage loan for less than
the Company funded, thereby decreasing the mortgage loan's profitability or
incurring a loss on the mortgage loan's sale.
To manage the risk of interest rate fluctuation between the time the
mortgage loan is funded and sold, the Company engages in certain hedging
activity by entering forward delivery contracts to sell mortgage-backed
securities and forward delivery commitments for the sale of whole loans.
Although this hedging activity is designed to reduce or eliminate risks related
to interest rate fluctuations, there can be no assurance that such hedging
activity will be successful or that the Company will not incur significant
losses in connection therewith. See "--- Sale of Mortgage Loan Servicing."
Sale of Mortgage Loan Servicing
The prices obtained by the Company upon the sale of mortgage loan
servicing rights depend upon a number of factors, including the general supply
of and demand for mortgage servicing rights, as well as prepayment and
delinquency rates on the portfolios of mortgage servicing rights being sold.
Interest rate changes can affect the profitability of the sale of mortgage loan
servicing rights to a third party. Purchasers of mortgage loan servicing rights
analyze a variety of factors to determine the purchase price they are willing to
pay, including prepayment sensitivity of servicing rights. Because of the
increased likelihood of prepayment in periods of declining interest rates, sales
of mortgage loan servicing rights related to higher interest rate mortgage loans
may be sold for less than in times of stable or increasing interest rates, which
could adversely affect the Company's results of operations and financial
condition. See "Business - Mortgage Loan Sales."
Legislation and Regulation
Federal, state and local authorities regulate and examine the
origination, processing, underwriting, selling and servicing of mortgage loans.
The Company is an approved seller/servicer of mortgage loans for Fannie Mae. In
addition, the Company is an approved mortgagee by HUD and is qualified to
originate mortgage loans insured by FHA and VA. Among other consequences, the
failure to comply with HUD or Fannie Mae regulations could prevent the Company
from reselling its mortgage loans or prevent its ability to enter into the
servicing of mortgage loans should it choose to do so. Such failure could also
result in demands for indemnification or mortgage loan repurchase, certain
rights of rescission for mortgage loans, class action law suits and
administrative enforcement actions, any of which could have a material adverse
effect on the Company's business results of operations and financial conditions.
Federal, state and local governmental authorities also regulate the
Company's activities as a lender. The Truth in Lending Act ("TILA") and
Regulation Z promulgated thereunder contain certain requirements designed to
provide consumers with uniform, understandable information with respect to the
terms and conditions of mortgage loans and credit transactions. The Equal Credit
Opportunity Act ("ECOA") prohibits creditors from discriminating against
applicants on the basis of race, color, sex, age or marital status, among other
restrictions and requirements. In instances where the applicant is denied
credit, or the rate or charge for a mortgage loan increases as a result of
information obtained from a consumer credit agency, the Fair Credit Reporting
Act of 1970 requires the lender to supply the applicant with a name and address
of the reporting agency. The Real Estate Settlement Procedures Act and the Debt
Collection Practices Act subject the Company to filing an annual report with the
Department of Housing and Urban Development.
There can be no assurance that the Company will maintain compliance
with these requirements in the future without additional expenses, or that more
restrictive local, state or federal laws, rules and regulations will not be
adopted or that existing laws and regulations will not be interpreted in a more
restrictive manner, which would make compliance more difficult and more
expensive for the Company.
Geographic Concentration
All of the Company's mortgage loan originations and purchases for the
year ended December 31, 1997, were derived from the San Francisco Bay Area. The
Company currently does no business outside the San Francisco Bay Area and
intends to continue its loan origination and purchases activity in the San
Francisco Bay Area. The Company is, however, studying business opportunities
outside of the San Francisco Bay Area, including other areas of California or
Utah. There is no assurance that the Company will enter these or other markets
or that if the Company does expand to new markets, it will generate sufficient
revenues that exceed the costs associated with activities in such new markets or
that the business activity in those new markets will match that achieved in the
San Francisco Bay Area. Whether or not the Company enters into new geographic
markets, the Company's results of operations and financial condition will be
significantly affected by general trends in the economy of the San Francisco Bay
Area and its residential real estate market for the foreseeable future.
Year 2000 Compliance
The Company's computer systems may not comply with year 2000 issues.
Over the next few years, the Company may incur additional expenditures to modify
its software to operate correctly for the year 2000. While considered to be
immaterial by management, the Company has not yet quantified such costs, which
will be expensed as incurred. If the Company does not address this issue
successfully, the Company's business could be materially and adversely affected.
Dependence Upon Key Personnel
The Company's business is substantially dependent on the efforts of
Joseph Kristul, its Chief Executive Officer, and Maria Kristul, its President.
Joseph Kristul and Maria Kristul are husband and wife. Both have executed
employment agreements with the Company through December 31, 1999. Each may
terminate the agreement for good reason in the event the executive has a
reduction in title and/or compensation or the assignment of duties not
consistent with those of a senior executive; the material breach by the Company
of any provisions of the employment agreement; the relocation of the Company's
principal executive offices to a location more than 25 miles from its present
location; or a change in control of the Company, as defined.. The Company has
obtained key-man insurance in the face amount of $3,000,000 on the life of Mr.
Kristul. There can be no assurance that amount will be sufficient to compensate
the Company for the loss of Mr. Kristul's services. See "Management."
Absence of Prior Public Market - American Stock Exchange Listing
Prior to this offering, there has been no public market for the Common
Stock. The Company has applied to have the Common Stock listed on the American
Stock Exchange. There can be no assurance that the Company's Common Stock will
be approved for listing. Such listing, if granted, does not imply that a
meaningful, sustained market for the Common Stock will develop. There can be no
assurance that an active trading market for the Common Stock offered hereby will
develop or, if it should develop, will continue. From time to time after this
offering, there also may be significant volatility in the market price for the
Common Stock.
Arbitrary Determination of Offering Price
The public offering price for the Common Stock offered hereby was
determined by negotiation between the Company and its Representative. The
factors considered in determining the public offering price include the
Company's revenue growth since its organization, the industry in which it
operates, the Company's business potential and earning prospects and the general
condition of the securities markets at the time of the offering. Prices for the
shares of Common Stock after this offering will be determined in the market and
may be influenced by many factors, including the depth and liquidity of the
market for the Common Stock, investor perception of the Company and the mortgage
banking industry as a whole. See "Underwriting."
Immediate Substantial Dilution
The Company's current shareholders acquired their shares of Common
Stock at a cost substantially below the price at which such shares are being
offered in this offering. Consequently, investors purchasing the shares of
Common Stock offered hereby will incur an immediate and substantial dilution of
their investment. See "Dilution."
Anti-Takeover Provisions in Corporate Charter
The Restated Articles of Incorporation of the Company authorize the
issuance of 2,000,000 shares of preferred stock without shareholder approval and
subject to such terms and conditions as determined by the Board of Directors
which may have the effect of deterring a non-negotiated attempt to acquire
control of the Company. There are currently no shares of preferred stock
outstanding. A series of preferred stock could be issued in the future, for
example, to thwart a possible take-over and may, in any event, operate to the
significant disadvantage of the holders of Common Stock by including
convertibility features which are lower than the market price for the Common
Stock, which would dilute the value of existing shareholdings, including the
shares of Common Stock issued in this offering. See "Description of Capital
Stock - Preferred Stock."
<PAGE>
Payment of Dividends
Although the Company has paid dividends in the past as an S
corporation, the Company's Board of Directors presently intends to retain all of
the Company's earnings for the expansion of its business. The Company therefore
does not anticipate the distribution of cash dividends in the foreseeable
future. Any future decision of the Company's Board of Directors to pay cash
dividends will depend, among other factors, upon the Company's earnings,
financial position, and cash requirements. See "Dividend Policy."
Shares Eligible for Future Sale
Upon completion of this offering, the Company's current shareholders
will own 2,500,000 shares of Common Stock, which will represent 71.4% of the
then issued and outstanding shares of Common Stock (67.4% if the over-allotment
option is exercised in full). Of such restricted shares of Common Stock,
2,468,750 have been held for more than one year and will be eligible for resale
under Rule 144 under the Securities Act of 1933, as amended (the "Securities
Act"), subject to volume limitations, beginning 90 days after the date of this
Prospectus. All of such shares are held by an affiliate of the Company, the
Kristul Family LLC. Another 31,250 shares will be eligible for sale on April 1,
1999, and the Company plans to grant options to purchase a total of 45,000
shares effective upon the completion of this offering. All existing shareholders
of the Company have agreed not to sell, offer, contract to sell, or enter into
any swap or similar agreement that transfers, in whole or in part, the economic
risk of ownership of the Common Stock, or otherwise dispose of any of their
shares of Common Stock for a period of one year following the completion of this
offering. The Company has also agreed to grant to the Representative warrants to
acquire 100,000 shares of Common Stock. These shares have certain demand and
piggyback registration rights. Sales of significant amounts of Common Stock by
current shareholders in the public market after this offering or the perception
that such sales could occur could adversely affect the market price of the
Common Stock. See "--- Effect of Outstanding Representative's Warrants:; "Shares
Eligible for Future Sale"; "Principal and Selling Shareholders." and
"Description of Capital Stock."
Control of the Company
The Kristul Family LLC, of which Joseph and Maria Kristul are managing
members, will continue to own 70.54% of the Common Stock of the Company (66.25%
if the Underwriters' over-allotment option is exercised in full). Accordingly,
they will be in a position to elect the Company's directors and officers, to
control the policies and operations of the Company and to determine the outcome
of corporate transactions or other matters submitted for shareholder approval,
including mergers, consolidations, the sale of the Company's assets or a change
in control of the Company. See "Principal and Selling Shareholders."
Benefits to Controlling Shareholders
The Kristul Family LLC has pledged all of the stock owned by it in
connection with certain borrowings of the Company and guaranteed that debt as
well as other debt of the Company. See "Certain Relationships and Related
Transactions." This offering will benefit the Kristul Family LLC and Joseph and
Maria Kristul because the proceeds of this offering will be used to repay the
debt for which the stock is pledged resulting in the release of the related
personal guarantees and release the stock pledge. The existing warehouse lines
are also personally guaranteed by Joseph and Maria Kristul. Upon completion of
this offering the Company will seek to enter into new warehouse lines which will
result in the release of those personal guarantees. In addition, the Kristul
Family LLC will receive proceeds from the sale of the shares, if any, sold in
connection with an exercise of the Underwriters' over-allotment option.
Effect of Representative's Warrants.
Until the date five years following the date of this Prospectus, the
holders of the Representative's Warrants are given an opportunity to profit from
a rise in the market price of the Common Stock, with a resulting dilution in the
interests of the other shareholders. The shares of Common Stock underlying the
Representative's Warrants have certain registration rights. Further, the terms
on which the Company might obtain additional financing during that period may be
adversely affected by the existence of the Representative's Warrants. The
holders of the Representative's Warrants may exercise the Representative's
Warrants at a time when the Company might be able to obtain additional capital
through a new offering of securities on terms more favorable than those provided
herein. The Company has agreed that, under certain circumstances, it will
register under federal and state securities laws the Representative's Warrants
and/or the securities issuable thereunder. Exercise of these registration rights
could involve substantial expense to the Company at a time when it could not
afford such expenditures and may adversely affect the terms upon which the
Company may obtain financing. See "Description of Capital Stock" and
"Underwriting."
Representative's Influence on the Market
A significant amount of the shares of Common Stock offered hereby may
be sold to customers of the Representative. Such customers subsequently may
engage in transactions for the sale or purchase of such Common Stock through or
with the Representative. Although they have no obligation to do so, the
Representative may otherwise effect transactions in such securities. Such market
making activity may be discontinued at any time. If they participate in the
market, the Representative may exert a dominating influence on the market, if
one develops, for the Common Stock described in this Prospectus. The price and
the liquidity of the Common Stock may be significantly affected by the degree,
if any, of the Representative's participation in such market.
<PAGE>
USE OF PROCEEDS
The estimated net proceeds of this offering are $5,700,000, assuming a
public offering price of $7.00 per share and after deducting estimated
underwriting discounts and commissions and other offering expenses relating to
this offering. The Company intends to use $1,100,000 of the net proceeds to
repay the subordinated debt (including equity participation fees of $100,000)
owed to InSouth Bank. The note's interest is at prime plus two percent with
interest payable monthly and matures December 31, 1998. This debt was incurred
in March 1998 to support the Company's borrowings under its warehouse lines of
credit. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The remaining net proceeds will be used for working
capital and general corporate purposes. The primary purpose of this offering is
to increase the Company's liquidity and capital resources and, by having larger
lines of credit from its warehouse lenders, to reduce its costs of borrowing and
to enable the Company to increase the volume of its loan production. Immediately
following the completion of this offering, the Company intends to establish new
warehouse lines of credit that will achieve these goals.
Pending application of the net proceeds of this offering, the Company
may invest the net proceeds from this offering in short-term, interest-bearing
securities.
DIVIDEND POLICY
The Company does not anticipate paying dividends on the Common Stock at
any time in the foreseeable future. The Company's Board of Directors currently
plans to retain earnings for the development and expansion of the Company's
business. Any future determination as to the payment of dividends will be at the
discretion of the Board of Directors of the Company and will depend on a number
of factors including future earnings, capital requirements, financial conditions
and such other factors as the Board of Directors may deem relevant.
Until March 31, 1998, the Company was treated for federal and certain
state income tax purposes as an S corporation under the Internal Revenue Code.
As a result, earnings of the Company were subject to taxation at the stockholder
rather than the corporate level for federal and, with respect to California
stockholders, certain state income tax purposes. In past years, the Company made
S corporation distributions to provide its stockholders with funds to pay income
taxes on the allocable share of the Company's earnings. See "Management
Executive Compensation."
<PAGE>
DILUTION
As of December 31, 1997, the pro forma net tangible book value of the
Company was $1,338,639 or $0.54 per share of Common Stock. The historical net
tangible book value of the Company, giving effect to the Company's issuance of
1,000,000 shares, was $7,038,639 or $2.01 per share of Common Stock. The net
tangible book value of the Company is the aggregate amount of its tangible
assets less its total liabilities. The net tangible book value per share
represents the total tangible assets of the Company, less total liabilities of
the Company, divided by the number of shares of Common Stock outstanding. After
giving effect to the sale of 1,000,000 at an assumed offering price per share of
$7.00, and the application of the estimated net proceeds therefrom, the pro
forma net tangible book value per share would increase from $1,338,639 to
$7,038,639 or $2.01 per share. This represents an immediate increase in net
tangible book value of $1.47 per share to current shareholders and an immediate
dilution of $4.99 per share, or 71.3% to new investors, as illustrated in the
following table:
<TABLE>
<S> <C> <C>
Public offering price per share $ 7.00
Net tangible book value per share before this offering $0.54
Increase per share attributable to new investors 1.47
----
Adjusted net tangible book value per share after this offering 2.01
-----
Dilution per share to new investors $4.99
=====
Percentage dilution 71.3%
</TABLE>
The following table sets forth as of December 31, 1997, (i) the number
of shares of Common Stock purchased from the Company, the total consideration
paid to the Company and the average price per share paid by the current
shareholders, and (ii) the number of shares of Common Stock included in the
shares to be purchased from the Company and total consideration to be paid by
new investors (before deducting underwriting discounts and other estimated
expenses) at an assumed offering price of $7.00 per share.
<TABLE>
Shares Purchased Total Consideration Average Price
Number Percent Amount Percent Per Share
<S> <C> <C> <C> <C> <C>
Current shareholders 2,500,000 (1) 71.4% $1,338,639 16.1% $0.54
New investors 1,000,000 28.6% 7,000,000 83.9% $7.00
---------- ----- --------- ---------
Total 3,500,000 (2) 100.0% $8,338,639 100.0%
========= =========
</TABLE>
- --------
(1) Includes 31,250 shares of Common Stock issued on April 1, 1998.
(2) Does not include a total of 100,000 shares of Common Stock issuable upon
the exercise of the Representative's Warrants or 300,000 shares reserved
for issuance under the Company's Stock Option Plan.
<PAGE>
CAPITALIZATION
The following table sets forth the actual and pro forma debt and equity
capitalization of the Company as of December 31, 1997 and pro forma as adjusted
to give effect to the sale of 1,000,000 shares offered hereby and the
application of the estimated net proceeds therefrom, giving retroactive effect
to the Company's issuance of 1,000,000 shares. Unless otherwise indicated, the
information herein (i) has been adjusted to reflect the 2,468.75-for-one split
of the Common Stock effected in March 1998, (ii) the change in the Company's
status from an S corporation to a C corporation on March 31, 1998, (iii) the
issuance on April 1, 1998, of 31,250 shares to certain individuals for services
rendered to the Company, and (iv) assumes the Underwriters' over-allotment
option and the Representative's Warrants are not exercised. See "Use of
Proceeds."
December 31, 1997
Actual Pro Forma(1) As Adjusted
Debt:
Subordinated debt(1) $ - $ 1,000,000 $ -
Real estate mortgage 146,755 146,755 146,755
Warehouse notes payable 50,154,791 50,154,791 50,154,791
----------- ----------- -----------
Total debt 50,301,546 51,301,546 50,301,546
Shareholders' equity:
Common Stock, without par value,
10,000,000 shares authorized, 2,500,000
shares issued and outstanding,
3,500,000 as adjusted (2)(3) 1,000 1,000 5,701,000
Additional paid in capital 1,001,090 1,001,090 1,001,090
Retained earnings 336,549 336,549 336,549
--------- --------- ----------
Total shareholders' equity 1,338,639 1,338,639 7,038,639
--------- --------- ----------
Total capitalization $51,640,185 $52,640,185 $57,340,185
=========== =========== ===========
- -------
(1) In March 1998, the Company incurred subordinated debt in the amount of
$1,000,000. The purpose of this loan was to support the Company's
borrowings under its warehouse lines of credit. This loan, together with an
equity participation fee of $100,000, will be repaid from the proceeds of
this offering. See "Management's Discussion and Analysis - Liquidity and
Capital Resources."
(2) Does not include 300,000 shares of Common Stock reserved for
issuance under the Stock Option Plan. See "Management - Stock Option
Plan." and "Underwriting."
(3) Upon the Company's formation in 1985, the Common Stock had a par value of
$1.00 per share. California corporate law subsequently eliminated the par
value concept. Upon the split of the Company's shares which occurred in
March 1998, the Common Stock was designated without par value.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in connection with the Company's financial
statements, related notes and other financial information included elsewhere in
this Prospectus.
General
In May of 1995, the Company expanded its operations to include
wholesale mortgage banking in addition to its existing retail mortgage banking.
See "Business - The Wholesale Origination Division." The growth of the Company
has been driven since that time by the wholesale division. The wholesale
division's mortgage loan volume increased to approximately $206,613,000 in 1996
compared to approximately $38,328,000 in 1995. In 1995, the retail division's
mortgage loan volume was approximately $53,380,000 compared to approximately
$54,686,000 in 1996.
The effect of the establishment of the Company's wholesale division has
been to place greater demand on the Company's financial resources as well as the
requirements for additional personnel. The purpose of this offering is to
provide additional capital to facilitate the growth of the wholesale division as
well as lower the Company's overall cost of borrowing.
Year Ended December 31, 1997 compared to Year Ended December 31, 1996
The Company's pro forma net income increased in 1997 to $500,984 from
$237,509 in 1996. The increase is principally due to the Company's growth in
revenues attributable to its wholesale mortgage loan production. Revenues for
the 1997 fiscal year were $3,189,837 compared to revenues of $1,667,278 in
fiscal 1996. Wholesale mortgage loan production for 1997 was $387,311,770
compared to $206,613,000 for 1996. The average mortgage loan size for the
wholesale operations remained essentially unchanged between 1997 and 1996,
$283,537 and $278,079, respectively.
Although the dominant increase in the Company's revenues is
attributable to growing wholesale operations, the Company's retail operations
also contributed to its increase in revenues in 1997 over 1996. Retail mortgage
loan production increased to $75,427,000 in 1997 compared to $54,686,000 in
1996, an increase of approximately 38%. The number of loans originated by the
retail division increased, however, by approximately 11% reflecting, in
management's opinion, increased housing costs in the San Francisco Bay area.
While revenues grew approximately 91% from 1996 to 1997, expenses grew
approximately 85%. The Company benefited from operational efficiencies relating
to the growth of its wholesale division with salaries and benefits, general and
administrative expenses and occupancy expenses increasing 66.5%, 66.4% and
46.9%, respectively. However, the savings that arose from these efficiencies
were reduced because of increased interest costs, which increased to $279,093 in
1997 from $10,997 in 1996, attributable to the Company's larger volume of
mortgage loans.
Liquidity and Capital Resources
The Company's capital resources substantially are provided by its
warehouse lenders who fund mortgage loans pending resale of those mortgage loans
to investors. The Company presently uses two such warehouse facilities that
limit the Company's total borrowing at any one time to $18,000,000. The
Company's average cost of borrowing for the year ended December 31, 1997 was
9.09%. One of these lenders has recently committed to the Company to expand its
warehouse line until April of 1999 to $25,000,000 with temporary expansions to
$30,000,000. The interest rate for this line will be LIBOR plus 3.5%. To enable
the Company to fund mortgage loans that it closes, the Company has entered into
a repurchase agreement with a financial institution. The interest rate under
that repurchase agreement is at prime plus one quarter per cent.
The purpose of this offering is to increase the Company's liquidity and
capital resources by having larger lines of credit from its warehouse lenders
and to reduce its costs of borrowing and to enable the Company to increase the
volume of its loan production. The existing limitations have inhibited the
Company's growth, and the Company plans to replace its existing warehouse lines
of credit upon the completion of this offering.
<PAGE>
BUSINESS
General
The Company is a mortgage banker which originates, funds and sells
mortgage loans through retail and wholesale branch operations secured by
one-to-four family residential properties in the San Francisco Bay Area. Since
1985, the Company has been engaged in the retail origination of mortgage loans.
In 1995, the Company began a wholesale division to close and fund loans
originated by mortgage brokers as well as those originated through the Company's
retail division. The Company funds its originations through warehouse lines of
credit. The mortgage loans are subsequently sold together with the mortgage loan
servicing rights to secondary markets. The total loan production volume for 1997
was $463 million which was an increase of 77% compared to 1996, and 1996 was a
185% increase compared to 1995. Wholesale originations accounted for 84% of the
Company's loan production volume for 1997. The Company maintains four offices, a
retail office in San Francisco, wholesale offices in San Francisco and in San
Jose, California, and a mortgage loan processing facility also in San Francisco.
The Company originates a variety of mortgage loan products. Conforming
mortgage loans are those that qualify for inclusion in guarantee programs
sponsored by FNMA. Non-conforming mortgage loans are those that do not conform
to FNMA requirements. The principal deviation from such standards relate to the
size of the mortgage loan although some do not conform because of lower
documentation standards where there is a lower loan-to-value ratio. Those that
exceed the present FNMA guidelines for the San Francisco Bay area, (presently
mortgage loans no larger than $227,150), are called Jumbo loans, which comprised
65% of the mortgage loans originated by the Company in 1997. In times of
declining interest rates, the Company's predominant products are fixed rate
mortgages for a term of 15 or 30 years. When interest rates are rising, the
Company's predominant products are adjustable rate mortgages. While the Company
originates some home equity financing through second mortgages and some lines of
credit using the home as a security, these products constitute a small portion
of the Company's business.
From its inception, the Company's marketing niche has been borrowers
who have high credit ratings and require large mortgage loans with low loan to
value ratios. As a consequence, the average loan size originated by the Company
in 1997 was approximately $280,000. Due to the large loan size and its operating
efficiencies, the Company has sustained its efficient use of capital while
maintaining service quality combined with competitively priced loans. The
Company generates revenues through gains on the sale of mortgage loans and
servicing rights to investors, interest generated on mortgage loans held or
warehoused from the time the mortgage loan is originated until the mortgage loan
is sold, hedging activities, and, in the case of retail brokerage operations,
origination fees.
The purpose of this offering is to increase the Company's capital. The
total amount available in the Company's warehouse lines is limited to 15 to 20
times the amount of the Company's capital. By increasing the amount of capital,
the Company can increase its warehouse lines to facilitate an increase in its
mortgage loan volume. While the Company has reviewed the possibility of
expanding its operations outside of the San Francisco area, particularly in
selected counties of Southern California and Utah, its focus for the foreseeable
future is to build upon its existing business in its present location. The
Company does not have a definitive plan to open additional offices in the next
twelve months unless management believes that significant production can be
originated from these offices.
The Wholesale Origination Division
In 1997, wholesale mortgage loans constituted 84% of the Company's
mortgage loan originations. Wholesale mortgage loan origination involves the
purchase of loan applications from mortgage brokers for a purchase price less
than what the Company receives when it sells the same mortgage loan to an
investor. The mortgage loan is processed, closed and funded by the Company. To
maintain competitive rates with specific profit margins, the Company prices
mortgage loans on a daily basis.
The Company's wholesale lending division, which was established in May
1995, operates from its executive offices in San Francisco and one other office
in San Jose, California. Currently, the Company obtains mortgage loan volume
through a network of more than 600 independent mortgage brokers and other
financial intermediaries who are all screened and approved by the Company. With
the exception of the Company's retail division, in 1997 no single source of
independent brokers accounted for more than 5% of the Company's total wholesale
mortgage originations.
Mortgage brokers are qualified to participate in the Company's
wholesale program after the completion of an application process which includes
the Company checking and verifying references, resumes, licenses and financial
statements. New broker relationships are established through business
development staff. Approved mortgage brokers are monitored by the Company's
wholesale account representatives and on a yearly basis the broker's financial
statements are updated and re-verified.
Mortgage loans are processed and every mortgage loan is underwritten by
the Company's underwriters, all of whom have many years of experience. Only
those mortgage loan applications which meet the Company's underwriting criteria
are funded. The Company uses the Internal Revenue Service ("IRS") verification
of income program, a particular tool which specifies that brokers must include
in the submitted file an IRS form which the Company uses to confirm with the IRS
certain income data on the mortgage loan application. This mechanism helps
ensure the quality of mortgage loans funded. If the mortgage loan file does not
contain this IRS form, the application is automatically rejected.
Wholesale lending allows the Company to benefit from cost efficiencies
derived from not having to take a mortgage loan application, a labor intensive
function, thereby reducing mortgage loan processing time, while being able to
centralize support functions and reduce fixed operating costs. Wholesale lending
offers the Company economies of scale while building substantial loan volume.
The Retail Origination Division
The Company's retail division was established in 1985 and employs four
commissioned mortgage loan officers located in one office in San Francisco.
While the retail division advertises weekly in San Francisco newspapers, most of
the retail division's business is generated through customer referrals, and a
high percentage of mortgage loans originated by the retail division close.
Approximately 50% of the mortgage loans originated by the retail
division are sold to the Company's wholesale division. The retail division
completes and processes the mortgage loan applications and prepares and
organizes necessary mortgage loan documents. The retail division underwrites
these mortgage loans to conform to either agency guidelines or private investor
guidelines. Mortgage loans acquired by the wholesale division are underwritten
again by the wholesale division. During 1997 the mortgage loans originated by
the retail division were evenly divided between conforming and non-conforming
(Jumbo) mortgage loans, with the average mortgage loan size originated by the
retail division being $265,000 and the average loan-to-value ratio being 80%.
The Company's retail division collects origination fees and closing
costs from the borrower which make the gross revenues larger than the revenues
generated by the wholesale division. However, the additional fees must be split
with commissioned mortgage loan officers and cover the cost of processing the
mortgage loan and assume the fixed operating costs, of the retail office. The
primary financial benefit to the Company of the retail division is as a source
for loans for the wholesale division.
<PAGE>
The following table shows mortgage loan production volume by division.
(000's omitted) Twelve Months Ended
December 31,
1997 1996 1995
Retail Division
Volume $75,427 $54,686 $53,380
Percentage of Total Volume 16% 21% 58%
Wholesale Division
Volume 387,312 206,613 $38,328
Percentage of Total Volume 84% 79% 42%
Total Loan Production
Volume $462,739 $261,299 $ 91,708
Number of Loans 1,650 998 363
Average Loan Size $280,448 $261,823 $252,600
Volume Growth 77% 185%
Loan Production Administration
All mortgage loan applications must be underwritten and approved in
accordance with the Company's underwriting standards and criteria. Underwriting
standards used for conforming loans are those promulgated by FNMA.
Non-conforming (Jumbo) loans are underwritten subject to credit and appraisal
standards established by specific investors. The Company analyzes the borrower's
credit standing, financial resources and repayment ability as well as the risk
of the underlying collateral.
Emphasis is placed on credit scores, loan to value ratios, borrower
income qualifications, property appraisal, insurance coverage requirements and
specific investor requirements.
All mortgage loans must have a property appraisal provided by an
independent, third party, fee-based appraiser. Nationally recognized credit
reporting agencies provide complete reports of the borrower's credit history
including bankruptcies and delinquencies.
A given borrower may qualify for a mortgage loan through five mortgage
loan documentation programs: full documentation, limited documentation,
alternative documentation, no ratio loan documentation and no income/no asset
verification. Under the full documentation program, the borrower's assets,
income and employment are all verified by written or verbal confirmation. Under
the limited documentation program, more emphasis is placed on the ability to pay
and the property value. Under the alternative documentation program, income and
assets are confirmed by reviewing supporting documentation. Under the no ratio
loan documentation program, no income ratios are calculated. Under the no
income/no asset program, the value of the loan collateral is as critical as the
borrower's credit history. Each program places a heavy emphasis on credit scores
and differing loan to value ratios.
The Company's underwriting department consists of three underwriters
who average eighteen years of experience and who maintain the consistent quality
of mortgage loans expected by secondary market investors. The Company generally
takes five to ten days to underwrite a mortgage loan from the initial date of
the application. Upon completion of the underwriting process, the mortgage loan
is closed by a title agency chosen by the borrower.
The Company performs a pre-funding audit on all mortgage loans which
includes a verification of certain mortgage loan documentation to determine the
integrity of the data and a review for compliance with underwriting guidelines.
Post funding audits are performed to monitor and evaluate the Company's
origination policies and procedures. Ten percent of all mortgage loans closed
are randomly sampled and are subjected to a full quality control review by an
outside firm including re-underwriting the mortgage loan. Management receives a
monthly report on any deficiencies found in the randomly sampled mortgage loans.
During its twelve years in business, the Company has not had to repurchase any
mortgage loans. Management of the Company believes that its use of the IRS
Verification of Income program which the Company utilizes on all mortgage loans
prior to underwriting increases significantly the quality of its originators.
Mortgage Loan Sales
The Company originates and purchases all of its mortgage loans with the
intent to sell the mortgage loans, without retaining any interest therein, and
the related servicing rights into the secondary market. The mortgage loans are
sold without recourse primarily to institutional investors, national banks and
mortgage lenders. As part of the sale, the Company provides representations and
warranties which are customary to the industry and cover such things as
compliance with program standards, laws and regulations as well as the accuracy
of the information. In the event of a breach of these representations and
warranties, the Company may be required to repurchase these mortgage loans
and/or may be liable for certain damages. Normally, any repurchased mortgage
loan can be corrected and resold back to the original investor. During the
twelve years in business, the Company has not had to repurchase any mortgage
loans. See "Business - Loan Production Administration."
The Company holds the originated or purchased mortgage loan for sale
from the time that the mortgage loan application is submitted by the borrower
until the time the mortgage loan is sold to an investor. During that time, the
interest rate on the mortgage loan might be higher or lower than the market rate
at which price the Company can sell the mortgage loan to an investor. Therefore,
a market gain or loss results on the mortgage loan. To protect against interest
rate changes on mortgage loans that are in the warehouse (mortgage loans that
have closed but not sold) and pipeline loans(loans which are not yet closed but
on which an interest rate has been set) the Company often commits to deliver
mortgage loans at a specific price for future delivery to investors through the
use of commitments on a "best effort" basis where the Company has no obligation
to sell a mortgage loan to an investor unless and until the mortgage loan
closes.
The Company has a hedging program in place which is administered for
the Company by Tuttle & Co. using a managed account. The Company is able to take
advantage of the hedging firm's reporting services, pipeline management, market
to market, commitment and position reporting. At any one time the Company hedges
approximately 75% of the value of loans warehoused or in the pipeline.
Individual mortgage loans are grouped by note rate, loan type and length of time
in the pipeline. These are then matched based on duration with the appropriate
hedging instrument which reduces risk until the mortgage loan is closed and
delivered to the investor. Gains and losses are recorded at settlement.
Funding of Mortgage Loans
The Company needs substantial cash flow to facilitate the funding and
closing of the originated and purchased loans. These funds are provided on a
short-term basis by financial institutions that specialize in providing lines of
credit known as warehouse lines.
The amount of the warehouse line provided by a lender is based on the
Company's net worth. Typically the warehouse lender applies a leverage factor of
between fifteen and twenty. As of the date of this Prospectus, the Company has
several warehouse agreements in place which provide warehouse lines with funding
capabilities in the aggregate of $18 million with an additional bulge facility
of $44 million. The warehouse agreements have various financial and operational
covenants with which the Company must comply. In addition, the warehouse
agreements are personally guaranteed by the existing stockholders. The Company
submits the mortgage loan to the warehouse bank for funding along with the
investor commitment to purchase the loan. The warehouse bank receives $35 per
loan from the Company plus interest at LIBOR plus approximately 3.5% per annum
on the unpaid principal balance of the loan for the time the loan is in the
warehouse. Therefore, during the period between funding the loan and its sale to
investors, the Company, under existing warehouse agreements, loses as much as
two to two and one half percent on each loan it funds (the difference between
the rate charged by the warehouse bank and the note rate on the loan).
Proceeds from this offering will be used specifically to obtain
additional warehouse lines and increase the total amount available to the
Company under such lines with better pricing which are expected by management,
to have the effect of reducing the Company's cost of borrowings.
In addition, the Company will seek to eliminate the personal guarantees
of certain shareholders of the Company from the warehouse agreements. In
accordance with industry practice, the warehouse lines are renewable by the
lenders annually.
Competition
The Company faces strong competition in originating, purchasing and
selling mortgage loans and the related mortgage servicing rights. The Company's
competition is principally from savings and loans associations, other mortgage
companies, commercial banks and, to a lesser degree, credit unions and insurance
companies, depending upon the type of mortgage loan product offered. Many of
these institutions have greater financial and other resources than the Company
and maintain a significant number of branch offices in the area in which the
Company conducts operations. Increased competition for mortgage loans from other
lenders may result in a decrease in the volume of mortgage loans originated and
purchased by the Company If the Company is unable to compete effectively, its
business, results of operations and financial condition could be materially and
adversely affected.
The Company depends primarily on mortgage brokers who are not obligated
by contract to originate or deliver new mortgage loans to the Company. Mortgage
brokers compete on the basis of customer service, range of loan products offered
and pricing. Although the Company emphasizes pricing to brokers, it strives to
offer brokers a variety of competitive products and efficient mortgage loan
processing and closing.
Legislation and Regulation
Federal, state and local authorities regulate and examine the
origination, processing, underwriting, selling and servicing of mortgage loans.
The Company is an approved seller/servicer of mortgage loans for Fannie Mae. In
addition, the Company is an approved mortgagee by HUD and is qualified to
originate mortgage loans insured by FHA and VA. Among other consequences, the
failure to comply with HUD or Fannie Mae regulations could prevent the Company
from reselling its mortgage loans or prevent its ability to enter into the
servicing of mortgage loans should it choose to do so. Such failure could also
result in demands for indemnification or mortgage loan repurchase, certain
rights of rescission for mortgage loans, class action law suits and
administrative enforcement actions, any of which could have a material adverse
effect on the Company's business results of operations and financial conditions.
Federal, state and local governmental authorities also regulate the
Company's activities as a lender. The TILA and Regulation Z promulgated
thereunder contain certain requirements designed to provide consumers with
uniform, understandable information with respect to the terms and conditions of
mortgage loans and credit transactions. The ECOA prohibits creditors from
discriminating against applicants on the basis of race, color, sex, age or
marital status, among other restrictions and requirements. In instances where
the applicant is denied credit, or the rate or charge for a mortgage loan
increases as a result of information obtained from a consumer credit agency, the
Fair Credit Reporting Act of 1970 requires the lender to supply the applicant
with a name and address of the reporting agency. The Real Estate Settlement
Procedures Act and the Debt Collection Practices Act subject the Company to
filing an annual report with the Department of Housing and Urban Development.
There can be no assurance that the Company will maintain compliance
with these requirements in the future without additional expenses, or that more
restrictive local, state or federal laws, rules and regulations will not be
adopted or that existing laws and regulations will not be interpreted in a more
restrictive manner, which would make compliance more difficult and more
expensive for the Company.
Employees
As of December 31, 1997, the Company had 33 employees, most of whom
worked on a full-time basis. None of the Company's employees is represented by a
union. The Company considers its relations with its employees to be excellent.
Properties
The Company's executive and administrative offices occupy approximately
6,928 square feet of commercial office space in San Francisco with one
additional leased office in San Jose. Presently the Company's monthly rental for
office space is approximately $16,000 under four leases, the last of which ends
in November 2001. The Company anticipates leasing additional space in San
Francisco in the next 12 months.
Legal Proceedings
The Company is involved in legal proceedings arising in the ordinary
course of business. The ultimate outcome of these proceedings can not be
determined because of the uncertainties that exist. In the opinion of
management, the disposition of matters that are pending or asserted will not
have a materially adverse effect on the financial position of the Company.
<PAGE>
MANAGEMENT
The following table sets forth certain information regarding the
Company's directors and executive officers.
Name Age Position
Joseph Kristul 50 Chief Executive Officer
and Treasurer, Director
Maria Kristul 50 President, Director
Robert W. Bronson 41 Senior Vice President
Matthew Heidari 41 Chief Financial Officer
Ronald W. Kiehn 56 Director of Operations
Eugene Kristul 27 Secretary, Director
Hilary Whitley 49 Director
Joseph Kristul founded the Company in 1985 and has been responsible for
the Company's overall management since the Company's inception, emphasizing
mortgage loan pricing, funding, administration and sales. Beginning in 1995 Mr.
Kristul created the Company's wholesale division, developing the Company's base
of brokers, which deliver loan product, and implementing systems and controls on
the quality of the product delivered by brokers.
Maria Kristul founded the Company in 1985 and has been responsible for
the Company's retail division since the Company's inception. As well as
personally originating approximately 60%, in 1996, of the retail division's
production, Ms. Kristul oversees the retail division's day to day operations
including training and managing that divisions sales and loan processing staff
and its quality assurance.
Eugene Kristul has been engaged in the private practice of law since
December 1996. Prior to becoming an attorney, Eugene Kristul was a law student.
Joseph and Maria Kristul are husband and wife. Eugene Kristul is their
son.
Robert W. Bronson joined the Company effective April 1, 1998, and is
the Company's Director of Secondary Marketing. In 1997 and 1998 Mr. Bronson was
an Account Manager for Tuttle & Co., a mortgage trading firm. Prior to joining
Tuttle & Co., Mr. Bronson was Vice President of Secondary Marketing for WMC
Mortgage Corp and that firm's predecessor, Weyerhaeuser Mortgage Company where
he was responsible for that firm's trading operations, responsibilities he
assumed in 1991. Mr. Bronson joined Weyerhaeuser Mortgage Company in 1986, and
prior to assuming responsibilities for that firm's trading operations, Mr.
Bronson held a variety of positions in the corporate finance department.
Matt Heidari joined the Company in April of 1998 as Chief Financial
Officer. Prior to joining the Company, he was the Corporate Controller for
Mortgage Capital Resource, a position he assumed in 1995, where he was
responsible for enhancing and expanding accounting systems and procedures. From
1989 to 1994, Mr. Heidari was the Controller and Chief Financial Officer for CFC
Mortgage Corporation, managing that firm's accounting functions and implementing
systems designed to support operations. Mr. Heidari is also a Certified Public
Accountant.
Ronald W. Kiehn joined the Company in February of 1997 and is
responsible for administration of the Company's loan processing. For
approximately one year prior to joining the Company, Mr. Kiehn was a private
consultant to the mortgage banking industry emphasizing sales, marketing,
secondary marketing, underwriting and due diligence. From June of 1991 through
December of 1995, Mr. Kiehn was Vice President of Secondary Marketing for
Medallion Mortgage Company, and from 1986 through 1991, Mr. Kiehn held sales and
marketing positions as well as secondary marketing and loan administration
responsibilities for Mortgage Loans America.
Hilary Whitley became a director of the Company in April of 1998 and is
the founder of Financial Capital Resources, Inc., which was formed in 1988 and
specializes in client representation principally relating to financial matters
within the mortgage banking industry. Prior to founding Financial Capital
Resources, Ms. Whitley focused her career of over fifteen years on financial
management, eight of which were directly involved with mortgage banking with an
emphasis on mergers and acquisitions, business and strategic planning. Ms.
Whitley has held the position of Chief Financial Officer for several companies
and was previously in public accounting with the predecessor of KPMG Peat
Marwick LLP.
Outside Directors
The Company has agreed to appoint an additional director who is not an
officer, employee or 5% shareholder or related to an officer, employee or 5%
shareholder upon conclusion of the offering. This director will be appointed by
the Representative of the Underwriters.
Compensation of Directors
Directors who are employees of the Company will not receive any
remuneration for their service as directors. Non-employee directors will receive
$12,000 annually, and $500 per meeting attended and related travel expenses.
Committees of the Board of Directors
The Company's Board of Directors will establish an Audit Committee and
a Compensation Committee, each consisting of at least two directors, none of
whom will be an officer or employee of the Company. The duties of the Audit
Committee will be to recommend to the entire Board of Directors the selection of
independent certified public accountants to perform an audit of the financial
statements of the Company, to review the activities and report of the
independent certified public accountants, and to report the results of such
review to the entire Board of Directors. The Audit Committee will also monitor
the internal controls of the Company. The duties of the Compensation Committee
will be to provide a general review of the Company's compensation and benefit
plans to ensure that they meet corporate objectives and to administer or oversee
the Company's Stock Option Plan and other benefit plans. In addition, the
Compensation Committee will review the compensation of officers of the Company
and the recommendations of the Chief Executive Officer on (i) compensation of
all employees of the Company and (ii) adopting and changing major Company
compensation policies and practices. Except with respect to the administration
of the Stock Option Plan, the Compensation Committee will report its
recommendations to the entire Board of Directors for approval.
Indemnification and Limitation on Liability
The Company's Restated Articles of Incorporation provide that the
liability of directors of the Corporation for monetary damages will be
eliminated to the fullest extent permissible under California law.
The Bylaws of the Company provide that the Company will indemnify its
directors and officers against expenses, judgments, fines, settlements and other
amounts actually and reasonably incurred in connection with any proceeding
arising by reason of such person being or having been a director or officer
expenses incurred in defending any such proceeding to the fullest extent
permissible under California law. The Bylaws also provide that the Company may
indemnify its employees and agents for such expenses by resolution of the Board
of Directors.
If available at reasonable cost, the Company intends to maintain
insurance against any liability incurred by its officers and directors in
defense of any actions to which they are made parties by any reason of their
positions as officers and directors.
Executive Compensation
The following table sets forth the compensation paid to the Company's
Chief Executive Officer and each other executive officer who earned more than
$100,000, (the "Named Executive Officers") for services rendered to the Company
in all capacities for the fiscal years ended December 31, 1997.
Summary Compensation Table
Name and Annual Compensation All Other
Principal Position Fiscal Year Salary Bonus Compensation
Joseph Kristul (1) 1997 $12,000 $256,536
Chief Executive Officer
Maria Kristul (1) 1997 $12,000 $256,537
President
- ----------------
(1) All Other Compensation represent distributions made to Joseph and Maria
Kristul in connection with the Company's status as an S corporation.
Employment Agreements
The Company has employment agreements with five people, Joseph Kristul,
Maria Kristul, Robert W. Bronson, Matthew Heidari and Ronald W. Kiehn. Joseph
and Maria Kristul's agreements end December 31, 1999 and may be renewed for an
additional one year term. Beginning May 1, 1998, Mr. Kristul will receive a
salary of $250,000 per year with an bonus equal to 10% of the Company's pretax
profits up to a maximum bonus of $150,000. Beginning May 1, 1998, Maria Kristul
will receive an annual salary of $150,000 plus a bonus equal to 60 basis points
(0.60%) of the mortgage loans originated by her and 10 basis points (0.10%) of
the rest of the mortgage loans originated by the retail division less Ms.
Kristul's annual salary.
Mr. Bronson's agreement's term ends on March 31, 1999 and may be
renewed for an additional one year term. In addition to a signing bonus of
$5,000, Mr. Bronson's agreement calls for an annual salary of $100,000 plus a
bonus of $50,000 provided the Company's trading operations and the increase in
margins, as defined, result in an increased profit of $1,000,000.
Mr. Heidari's agreement's term ends on April 16, 1999 and may be renewed
for an additional one year term. Mr. Heidari will receive an annual salary of
$92,000 plus a travel reimbursement of $6,000 for commuting from his home in
Southern California.
Mr. Kiehn's agreement's term ends on May 1, 1999 and may be renewed for an
additional one year term. Mr. Kiehn will receive an annual salary of $92,000
plus $250 per month car expenses.
Each of the above employment agreements provide that the executive is
entitled to benefits that the Company's Board of Directors or its Compensation
Committee may determine. In defined circumstances, the agreements also provide
severance payments of up to two times the executive's annual base salary upon
termination and immediate vesting of any stock options.
Stock Option Plan
The 1998 Stock Option Plan, as amended (the "Stock Option Plan")
provides for the grant to employees, officers, directors, and consultants to the
Company or any parent, subsidiary or affiliate of the Company of up to 300,000
shares of the Company's Common Stock, subject to adjustment in the event of any
subdivision, combination, or reclassification of shares. The Stock Option Plan
will terminate in 2008. The Stock Option Plan provides for the grant of
incentive stock options ("ISO's") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, and non-qualified options at the
discretion of the Board of Directors or a committee of the Board of Directors
(the "Committee"). The exercise price of any option will not be less than the
fair market value of the shares at the time the option is granted. The options
granted are exercisable within the times or upon the events determined by the
Board or Committee set forth in the grant, but no option is exercisable beyond
ten years from the date of the grant. The Board of Directors or Committee
administering the Stock Option Plan will determine whether each option is to be
an ISO or non-qualified stock option, the number of shares, the exercise price,
the period during which the option may be exercised, and any other terms and
conditions of the option. The holder of an option may pay the option price in
(1) cash, (2) check, (3) other mature shares of the Company, (4) irrevocable
instructions to a broker to deliver to the Company the amount of sale or loan
proceeds required to pay the exercise price, (5) delivery of an irrevocable
subscription agreement for the shares which irrevocably obligates the option
holder to take and pay for shares not more than 12 months after the date of the
delivery of the subscription agreement, (6) any combination of the foregoing
methods of payment, or (7) other consideration or method of payment for the
issuance of shares as may be permitted under applicable law. The options are
nontransferable except by will or by the laws of descent and distribution. Upon
dissolution, liquidation, merger, sale of stock or sale of substantially all
assets, outstanding options, notwithstanding the terms of the grant, will become
exercisable in full at least 10 days prior to the transaction. The Stock Option
Plan is subject to amendment or termination at any time and from time to time,
subject to certain limitations.
The plan is administered by the Compensation Committee of the Board of
Directors.
In April of 1998 the Company agreed to grant options for 15,000 shares
each to Messrs. Bronson, Heidari and Kiehn that are exercisable at the initial
public offering price of this offering.
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership as of April 14, 1998, of the Common stock by (a) each
person known by the Company to be a beneficial owner of more than 5% of the
outstanding shares of Common Stock and by each Selling Shareholder, (b) each
director of the Company, (c) each Named Executive Officer, and (d) as directors
and executive officers of the Company as a group. Unless otherwise noted, each
beneficial owner named below has sole investment and voting power with respect
to the Common Stock shown below as beneficially owned by him.
Shares Owned Shares Owned
Prior to Offering After Offering
Name and Address of Number of Percent Number of Percent
Beneficial Owner Shares Owned Owned Shares Owned Owned
Kristul Family LLC(1)(2) (3) 2,468,750 98.75%0 2,468,750 70.54%
301 Junipero Serra Blvd.,
Ste. 270
San Francisco CA
Joseph Kristul(1)(2) 2,468,750 98.75 2,468,750 70.54
301 Junipero Serra Blvd.,
Ste 270
San Francisco CA
Maria Kristul(1)(3) 2,468,750 98.75 2,468,750 70.54
301 Junipero Serra Blvd.,
Ste 270
San Francisco CA
Hilary Whitley 18,750 0.75 18,750 0.54
All Executive Officers and
Directors as a group ( 8 persons) 2,487,500 99.5% 2,487,500 71.07%
- -------------------
(1) The Kristul Family LLC has granted to the Underwriters an option to
purchase 150,000 shares for a 45 day period following the commencement
of this offering at a purchase price equal to the initial price to
public in this offering. If the over-allotment option is exercised in
full, its holdings would be 2,318,750 shares or 66.25% of the total
outstanding shares of the Company's Common Stock.
(2) Joseph Kristul is a managing member of the Kristul Family LLC and the
beneficial owner of 42.5% of the shares held by the Kristul Family LLC
and is jointly with Maria Kristul the beneficiary of a trust that is a
member owning 15% of the Kristul Family LLC.
(3) Maria Kristul is a managing member of the Kristul Family LLC and the
beneficial owner of 42.5% of the shares held by the Kristul Family LLC
and is jointly with Joseph Kristul the beneficiary of a trust that is a
member owning 15% of the Kristul Family LLC.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Joseph and Maria Kristul have each personally guaranteed the Company's
warehouse lines of credit with Warehouse Lending Corporation of America ("WLA")
and PNC Mortgage Bank, National Association ("PNC") In 1998, the maximum amount
guaranteed by Joseph and Maria Kristul for obligations to WLA and PNC was
$________ and $_____________, respectively. Upon completion of this offering,
the Company plans to seek larger warehouse lines to replace these lines, and the
personal guarantees of Joseph and Maria Kristul will be released.
In 1997 and 1996, certain of the Company's certificates of deposit were
pledged to Wells Fargo Bank, N.A., for the personal indebtedness of Joseph and
Maria Kristul. In March 1998, Wells Fargo released this security interest.
In 1995, Joseph and Maria Kristul contributed to the Company a
residential property located in the San Francisco Bay Area which had a fair
market value of approximately $213,000 on the date of contribution and is
subject to a mortgage of approximately $150,000 as of December 31, 1997.
In March 1998, the Company entered into a subordinated debt agreement
with InSouth Bank under which all of the Company's stock was pledged to secure
the indebtedness of $1,000,000. Upon completion of this offering the
subordinated debt will be paid, the pledge will be released and the personal
guarantees of the Kristul's released.
The Company has agreed to indemnify Joseph and Maria Kristul for taxes
owing by the Company for which Joseph and Maria Kristul are obligated upon the
termination of the Company's status as an S corporation.
Eugene Kristul receives a monthly retainer of $2,000 for legal services
rendered to the Company.
For the year ended December 31, 1997, the Company paid to Financial
Capital Resources, Inc., an affiliate of Ms. Whitley's, $5,600 for consulting
services. In connection with consulting services to be rendered to the Company
in 1998 by Financial Capital Resources, Inc., the Company has agreed to pay Ms.
Whitley $100,000 and issued 18,750 shares of Common Stock.
Effective December 31, 1997, the Company entered into a promissory note
payable to the Company by Joseph and Maria Kristul which matured March 31, 1998
bearing interest at 6.5% per annum. This note has been repaid as of March 31,
1998.
The Board of Directors has adopted a policy that any future
transactions with affiliates of the Company will be on terms no less favorable
to the Company than are reasonably available from unrelated third parties and
shall have been approved by a majority of the Company's directors who do not
have a material interest in the transactions.
DESCRIPTION OF CAPITAL STOCK
The Company has authorized 10,000,000 shares of Common Stock without par
value and 2,000,000 shares of preferred stock without par value. As of April 1,
1998, there were 2,500,000 shares of Common Stock and no shares of Preferred
Stock issued and outstanding. There were three holders of record of Common
Stock, as of April 1, 1998.
Preferred Stock
The Board of Directors is authorized, without further notice or action
of shareholders, to issue shares of Preferred Stock in one or more series and to
determine the relative rights, preferences and privileges of the shares of any
such series. The Company has no present plans to issue any shares of Preferred
Stock.
Common Stock
The holders of outstanding Common Stock are entitled to share ratably
in any dividends paid on the Common Stock when, as and if declared by the Board
of Directors out of funds legally available. Each holder of Common Stock is
entitled to one vote for each share held of record. The Common Stock is not
entitled to cumulative voting or preemptive rights and is not subject to
redemption. Upon liquidation, dissolution or winding up of the Company, subject
to the prior rights of holders of Preferred Stock, the holders of Common Stock
are entitled to share ratably in the net assets legally available for
distribution. Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 3,500,000
shares of Common Stock outstanding. Of these shares, the 1,000,000 shares sold
in this offering will be freely tradable in the public market without
restriction under the Securities Act, except shares purchased by an "affiliate"
(as defined in the Securities Act) of the Company. The remaining 2,500,000
shares (the "Restricted Shares") will be "restricted shares" within the meaning
of the Securities Act and may be publicly sold only if registered under the
Securities Act or sold in accordance with an applicable exemption from
registration, such as those provided by Rule 144 under the Securities Act. The
holders of the Restricted Shares have agreed to not sell shares of Common Stock
for a period of one year following the completion of this offering. See
"Management - Stock Option Plan" and "Underwriting."
In general, under Rule 144, as currently in effect, a person (or
persons whose shares are aggregated) is entitled to sell Restricted Shares if at
least one year has passed since the later of the date such shares were acquired
from the Company or any affiliate of the Company. Rule 144 provides, however
that within any three-month period such person may only sell up to the greater
of 1% of the then outstanding shares of the Company's Common Stock
(approximately 35,000 shares following the completion of this offering) or the
average weekly trading volume in the Company's Common Stock during the four
calendar weeks immediately preceding the date on which the notice of the sale is
filed with the Commission. Sales pursuant to Rule 144 also are subject to
certain other requirements relating to manner of sale, notice of sale and
availability of current public information. Any person who has not been an
affiliate of the Company for a period of 90 days preceding a sale of Restricted
Shares is entitled to sell such shares under Rule 144 without regard to such
limitations if at least two years have passed since the later of the date such
shares were acquired from the Company or any affiliate of the Company. Shares
held by persons who are deemed to be affiliated with the Company are subject to
such volume limitations regardless of how long they have been owned or how they
were acquired.
Without consideration of contractual restrictions described below, an
aggregate of 2,500,000 shares of Common Stock, representing 71.4% of the
outstanding shares of the Common Stock, or shares representing 67.1% if the
over-allotment option is exercised in full will be eligible for sale in the
public market pursuant to Rule 144 after the completion of this offering. The
Company is unable to estimate the number of shares that may be sold from time to
time under Rule 144, since such number will depend upon the market price and
trading volume for the Common Stock, the personal circumstances of the sellers
and other factors.
After this offering, executive officers, directors and senior
management will own 2,487,500 shares of the Common Stock.
The Company can make no prediction as to the effect, if any, that the
offer or sale of these shares would have on the market price of the Common
Stock. Nevertheless, sales, or the perception that such sales could occur, of
significant amounts of Restricted Shares in the public markets could adversely
affect the market price of Common Stock.
The Company has reserved a total of 300,000 shares for issuance under
its Stock Option Plan. In addition the Company has granted to the Underwriters'
certain registration rights related to the Representative's Warrants.
UNDERWRITING
Pursuant to the terms and subject to the conditions contained in the
Underwriting Agreement, the Company has agreed to sell to the Underwriters named
below, and each of the Underwriters, for whom Tejas Securities Group, Inc (the
"Representative") is acting as Representative, has severally agreed to purchase
the number of shares set forth opposite its name in the following table.
Underwriters Number of Shares
Tejas Securities Group, Inc.
Total...................... 1,000,000
=========
The Representative has advised the Company that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
offering price per share set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession of not more than $____ per
share, of which $____ may be reallowed to other dealers. After the initial
public offering, the public offering price, concession and reallowance to
dealers may be reduced by the Representative.
The Selling Shareholders have granted to the Underwriters an option,
exercisable during the 45-day period after the date of this Prospectus, to
purchase up to 150,000 additional shares of Common Stock to cover
over-allotments, if any, at the same price per share as the Company will receive
for the 1,000,000 shares that the Underwriters have agreed to purchase. To the
extent that the Underwriters exercise such option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage of such
additional shares that the number of shares to be purchased by it shown in the
above table represents as a percentage of the 1,000,000 shares offered hereby.
If purchased, such additional shares will be sold by the Underwriters on the
same terms as those on which the 1,000,000 shares are being sold. All of such
shares will be sold to the Underwriters by Selling Shareholders, and the Company
will not receive any proceeds from the sale of such shares. See "Principal and
Selling Shareholders."
The Underwriting Agreement contains covenants of indemnity by the
Company to the Underwriters against certain civil liabilities, including
liabilities under the Securities Act.
The holders of 2,500,000 shares of the Common Stock (2,350,000 if the
Underwriters' over allotment option is exercised in full) after the offering
have agreed with the Representative that, until one year after the date of this
Prospectus, subject to certain limited exceptions, they will not offer, sell,
contract to sell, or otherwise dispose of any shares of Common Stock, any
options to purchase shares of Common Stock, or any securities convertible into,
exercisable for or exchangeable for shares of Common Stock, owned directly by
such holders or with respect to which they have the power of disposition, or
enter into any swap or similar agreement that transfers, in whole or in part,
the economic risk of ownership of the Common Stock, without the prior written
consent of the Representative, except for shares sold upon exercise of the
over-allotment option. Substantially all of such shares will be eligible for
immediate public sale following expiration of the lock-up periods, subject to
the provisions of Rule 144. In addition, the Company has agreed that until 365
days after the date of this Prospectus, the Company will not, without the prior
written consent of the Representative, subject to certain limited exceptions,
issue, sell, contract to sell, or otherwise dispose of, any shares of Common
Stock, any options to purchase any shares of Common Stock or any securities
convertible into, exercisable for or exchangeable for shares of Common Stock, or
enter into any swap or similar agreement that transfers, in whole or in part,
the economic risk of ownership of the Common Stock, other than the Company's
sales of shares in this offering, the issuance of Common Stock upon the exercise
of outstanding options or warrants or the issuance of options under its employee
stock option plan. See "Shares Eligible for Future Sale."
Certain persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
this offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with this
offering when shares of Common Stock sold by the syndicate member are purchased
in syndicate covering transactions. Such stabilizing, if commenced, may be
discontinued at any time.
The Representative has informed the Company that they do not expect
sales to accounts over which the Underwriters exercise discretionary authority.
The Company has agreed to pay the Representative a non-accountable
expense allowance of 2.0% of the gross amount of the shares sold at the closing
of the offering. The Underwriters' expenses in excess thereof will be paid by
the Representative. To the extent that the expenses of the underwriting are less
than that amount, such excess shall be deemed to be additional compensation to
the Underwriters.
The Company has agreed that for a period of five years from the closing
of the sale of the shares offered hereby, it will nominate for election as a
director a person designated by the Representative, and during such time as the
Representative has not exercised such right, the Representative shall have the
right to designate an observer, who shall be entitled to attend all meetings of
the Board and receive all correspondence and communications sent by the Company
to the members of the Board. The Representative have not yet identified to the
Company the person who is to be nominated for election as a director or
designated as an observer.
The Underwriting Agreement provides for indemnification among the
Company, the Selling Shareholders and the Underwriters against certain civil
liabilities, including liabilities under the Securities Act. In addition, the
Representative's Warrants provide for indemnification among the Company and the
holders of the Representative's Warrants and underlying shares against certain
civil liabilities, including liabilities under the Securities Act and the
Exchange Act.
Representative's Warrants
Upon the closing of this offering, the Company has agreed to sell to
the Underwriters for nominal consideration, the Representative's Warrants. The
Representative's Warrants are exercisable at 120% of the public offering price
for a four-year period commencing one year from the effective date of this
offering. The Representative's Warrants may not be sold, transferred, assigned
or hypothecated for a period of one year from the date of this offering except
to the officers of the Underwriters and their successors and dealers
participating in the offering and/or their partners or officers. The
Representative's Warrants will contain antidilution provisions providing for
appropriate adjustment of the number of shares subject to the Warrants under
certain circumstances. The holders of the Representative's Warrants have no
voting, dividend or other rights as shareholders of the Company with respect to
shares underlying the Representative's Warrants until the Representative's
Warrants have been exercised.
The holders of the Underwriters Warrants have certain demand and
piggyback registration rights with respect to the underlying shares of Common
Stock.
Determination of Offering Price
The initial public offering price was determined by negotiations
between the Company and the Representative. The factors considered in
determining the public offering price include the Company's revenue growth since
its organization, the industry in which it operates, the Company's business
potential and earning prospects and the general condition of the securities
markets at the time of the offering. Prices for the shares of Common Stock after
this offering will be determined in the market and may be influenced by many
factors including the depth and liquidity of the market for the Common Stock,
investor perception of the Company and the mortgage banking industry as a whole.
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance than an active market will develop.
American Stock Exchange
The Company has applied to list the Common Stock on the American Stock
Exchange under the trading symbol "TFN".
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Robert A. Forrester, Esq., Richardson, Texas. Mr.
Forrester owns 12,500 shares of Common Stock. Certain legal matters in
connection with the sale of the Common Stock offered hereby will be passed upon
for the Underwriters by Wolin, Ridley & Miller LLP, Dallas, Texas.
EXPERTS
The financial statements of the Company as of December 31, 1997,
included in this Prospectus have been audited by Moss Adams LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
auditing and accounting, in giving said report.
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE>
CONTENTS
- -------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITOR'S REPORT................................................F-1
FINANCIAL STATEMENTS
Balance sheet...........................................................F-2
Statement of income.....................................................F-3
Statement of stockholders' equity.......................................F-4
Statement of cash flows.................................................F-5
Notes to financial statements...........................................F-6
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Transnational Financial Corporation
We have audited the accompanying balance sheet of Transnational Financial
Corporation as of December 31, 1997, and the related statements of income,
stockholders' equity and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the accompanying financial statements present fairly, in all
material respects, the financial position of Transnational Financial Corporation
as of December 31, 1997, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
As described in Note 10, the Company's December 31, 1996 balance sheet has been
restated to reflect the application of accounting principles which require the
deferral of certain loan origination costs and related fee income.
San Francisco, California
March 12, 1998 /s/Moss Adams LLP
- -------------------------------------------------------------------------------
F-1
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
BALANCE SHEET
DECEMBER 31, 1997
- -------------------------------------------------------------------------------
ASSETS
Cash and equivalents $ 482,558
Certificates of deposit 272,298
Mortgage loans held for sale, pledged 50,288,714
Accrued interest 181,763
Notes receivable 135,819
Note receivable, stockholders 250,000
Real estate held for investment, net 199,944
Property and equipment, net 103,267
Other assets 61,420
------------
TOTAL ASSETS $ 51,975,783
============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Warehouse notes payable $50,154,791
Accrued interest 202,118
Real estate mortgage 146,755
Accounts payable and accrued liabilities 133,480
------------
TOTAL LIABILITIES 50,637,144
------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value; 10,000 shares authorized;
1,000 shares issued and outstanding 1,000
Additional paid-in capital 1,001,090
Retained earnings 336,549
------------
TOTAL STOCKHOLDERS' EQUITY 1,338,639
------------
TOTAL LIABILITITES AND STOCKHOLDERS' EQUITY $51,975,783
============
- -------------------------------------------------------------------------------
See accompanying notes.
F-2
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
- -------------------------------------------------------------------------------
STATEMENT OF INCOME AND RETAINED EARNINGS
INCOME
Net gain from sales of mortgage loans $ 2,230,309
Production income 943,182
Other 16,346
-------------------
3,189,837
-------------------
EXPENSES
Salaries and benefits 1,262,790
General and administrative 674,962
Interest expense, net of interest income 279,093
Occupancy 125,020
-------------------
2,341,865
-------------------
INCOME BEFORE PROVISION FOR STATE INCOME TAX 847,972
PROVISION FOR STATE INCOME TAX, current 13,000
-------------------
NET INCOME $ 834,972
===================
PRO FORMA INFORMATION (UNAUDITED)
Income before income taxes, as reported $ 847,972
Pro forma income tax provision 339,200
-------------------
Pro forma net income $ 508,772
===================
Pro forma earnings per share $ 0.21
===================
Weighted average common shares outstanding 2,468,750
===================
- -------------------------------------------------------------------------------
See accompanying notes.
F-3
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997
- -------------------------------------------------------------------------------
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
Additional Total
Shares Common Paid-In Retained Stockholders'
Outstanding Stock Capital Earnings Equity
----------- ---------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 1,000 $ 1,000 $1,065,779 $ 44,384 $ 1,111,163
Prior period adjustment - Note 10 - - (64,689) (29,734) (94,423)
Distributions to stockholders - - - (513,073) (513,073)
Net income - - - 834,972 834,972
----- --------- ----------- ---------- -------------
BALANCE, December 31, 1997 1,000 $ 1,000 $1,001,090 $ 336,549 $ 1,338,639
===== ========= ========== ========= =============
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes.
F-4
<PAGE>
- -------------------------------------------------------------------------------
TRANSNATIONAL FINANCIAL CORPORATION
- -------------------------------------------------------------------------------
TRANSNATIONAL FINANCIAL CORPORATION
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
- -------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 834,972
Adjustments to reconcile net income to net cash
used for operating activities
Depreciation 14,851
Changes in operating assets and liabilities
Origination of mortgage loans held for sale (399,235,560)
Proceeds from sales of mortgage loans 368,442,507
Increase in accrued interest receivable (152,110)
Increase in accounts payable and accrued liabilities 23,537
Increase in accrued interest payable 158,769
Decrease in other assets 2,344
-------------
Net cash used for operating activities (29,910,690)
-------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of certificates of deposit (272,298)
Proceeds from sales and maturities of
certificates of depost 379,095
Purchase of property and equipment (29,930)
-------------
Net cash provided by investing activities 76,867
-------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on warehouse notes payable 399,152,597
Payments on warehouse notes payable (368,442,507)
Distributions to stockholders (513,073)
Issuance of note receivable, stockholders (250,000)
Real estate mortgage loan payments (2,608)
------------
Net cash provided by financing activities 29,944,409
-------------
NET CHANGE IN CASH AND EQUIVALENTS 110,586
CASH AND EQUIVALENTS, December 31, 1996 371,972
------------
CASH AND EQUIVALENTS, December 31, 1997 $ 482,558
=============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ -
===========
Interest $ 1,411,720
===========
- -------------------------------------------------------------------------------
See accompanying notes.
F-5
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1 - Description of Operations and Summary of Significant Accounting
Policies
Description of Operations - Transnational Financial Corporation
conducts real estate mortgage banking activities through wholesale and
retail branch operations located in and around the San Francisco Bay
area. The Company's revenues are derived primarily from the origination
and sale of conforming and non-conforming residential real estate loans
for placement in the secondary market.
Cash and Equivalents - Cash and equivalents consist of amounts on
deposit with major regional financial institutions and certificates of
deposit with an original maturity of not greater than 90 days.
Certificates of Deposit - Certificates of deposit generally mature
within 180 days. Certificates of deposit amounting to $318,672 are
subject to restrictions at December 31, 1997, including approximately
$160,000 classified as cash equivalents. These securities are pledged
as collateral for certain obligations of the stockholders.
Mortgage Loans Held for Sale - All mortgage loans originated are
intended for sale in the secondary market and are carried at the lower
of cost or estimated market value, as determined by quoted market
prices, in aggregate. Substantially all loans are sold servicing
released. The real property of the borrower is pledged as collateral
for mortgage loans.
Loan origination fees and certain direct origination costs are
recognized when the loan is made or when the costs are incurred. Fees
representing reimbursement for the costs of specific services performed
by third parties (such as for appraisals) are recognized when the
services have been performed. Loan placement fees are recognized when
all significant services have been performed.
Gains or losses realized from mortgage loan sales are recognized at
time of settlement with investors based upon the difference between the
proceeds from sale and the carrying value of the mortgage loan sold,
net of commitment fees paid. The Company reflects the value paid for
servicing rights released in net gain from sales of mortgage loans.
Property and Equipment - Property and equipment is stated at cost and
is depreciated using accelerated depreciation methods over the
estimated useful lives of the assets, which range from five to ten
years. Accumulated depreciation at December 31, 1997 was $58,423.
Financial Statement Presentation - The Company prepares its financial
statements using an unclassified balance sheet presentation as is
customary in the mortgage banking industry. A classified balance sheet
presentation would have aggregated current assets, current liabilities
and net working capital as follows at December 31:
F-6
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1 - Description of Operations and Summary of Significant Accounting
Policies (continued)
Current assets $51,536,753
Current liabilities 50,493,589
-----------
Net working capital $ 1,043,164
===========
Production Income - Production income consists of fees paid to the
Company by borrowers for the preparation, documentation and
underwriting of loans. These fees and related lending transaction costs
are deferred until the related loan is sold. Upon sale of the loan, the
deferred fees and costs are recognized as production income, and
deferred costs are recognized in the applicable expense
classifications.
Income Taxes - The Company is a Subchapter S corporation and therefore
is not subject to Federal income tax at December 31, 1997.
Distributions are periodically made to cover the Federal and state tax
liability of the stockholders. The California Revenue and Taxation Code
also levies a corporate tax of 1.5% on taxable income for which a
provision has been provided. However, pro forma income tax results are
presented on the statement of income and discussed in Note 14.
Off-Balance-Sheet Financial Instruments - The Company is a party to
financial instruments with off-balance sheet risk in the normal course
of business to meet the real estate mortgage financing needs of its
customers and to reduce its own exposure to fluctuations in interest
rates. These financial instruments include commitments to extend
credit, commitments to sell whole loans on a mandatory basis and
forward delivery contracts to sell mortgage-backed securities. These
instruments involve, to varying degrees, elements of credit, and
interest-rate risk in excess of the amount recognized in the financial
statements. The contract or notional amounts of those instruments
reflect the extent of the Company's involvement in particular classes
of financial instruments. Such financial instruments are recorded in
the financial statements when they are funded or settled.
Commitments to Extend Credit - Commitments to extend credit are
agreements to lend to a customer as long as the borrower satisfies
the Company's underwriting standards. Commitments generally have
fixed expiration dates or other termination clauses and may
require payment of a fee. The Company's exposure to credit loss in
the event of nonperformance by the other party to the financial
instrument for commitments to extend credit is represented by the
contractual notional amount of those commitments. The Company uses
the same credit policies in making commitments to extend credit as
it does for on-balance-sheet instruments. Collateral is required
for substantially all loans, and normally consists of real
property. The Company's experience has been that substantially all
loan commitments are completed or terminated by the borrower
within three months.
F-7
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1 - Description of Operations and Summary of Significant Accounting
Policies (continued)
Financial Futures - Mortgage Backed Securities ("MBS") futures
contracts are entered into by the Company as hedges against
exposure to interest-rate risk and are not for speculation
purposes. Changes in the market value of futures contracts are
deferred while the contracts are open and subsequently recognized
in income or expense after the contract closes and the related
assets or liabilities are sold.
Forward Delivery Commitments - The Company uses mandatory sell
forward delivery commitments to sell whole loans. These
commitments are used as a hedge against locked-loan origination
commitments.
All derivative financial instruments held or issued by the Company are
held or issued for purposes other than trading.
Use of Management Estimates - The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts on the balance sheet at December 31, 1997 and the statement of
income for the period then ended.
Actual results could differ significantly from those estimates.
Adoption of New Accounting Pronouncement - On January 1, 1997, the
Company adopted Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standard No. 125 ("SFAS 125"), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities." This Statement provides guidelines for distinguishing
transfers of financial assets that are sales from transfers that are
secured borrowings. SFAS 125 supersedes SFAS 76, 77 and 122, while
amending both SFAS 65 and 115. The Statement is to be applied
prospectively, however, portions of SFAS No. 125 were deferred under
SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125" until January 1, 1998. Earlier implementation
is not permitted.
Under SFAS 125, a transfer of financial assets in which control is
surrendered is accounted for as a sale to the extent that consideration
other than beneficial interest in the transferred assets is received in
the exchange. Liabilities and derivatives incurred or obtained by the
transfer of financial assets are required to be measured at fair value,
if practicable.
SFAS 125 also requires an assessment of interest-only strips, loans,
other receivables and retained interests in securitizations. If these
assets can be contractually prepaid or otherwise settled such that the
holder would not recover substantially all of its recorded investment,
the asset will be measured like trading securities. This assessment is
required for financial assets held on or acquired after January 1,
1997.
F-8
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1 - Description of Operations and Summary of Significant Accounting
Policies (continued)
Basic Earnings Per Share - For the purpose of presenting pro forma
information, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share." In February 1998, the
Securities and Exchange Commission (SEC) staff released Staff
Accounting Bulletin (SAB) No. 98, "Computations of Earnings per Share."
SAB No. 98 revised prior SEC guidance concerning presentation of
earnings per share information for companies going public, and requires
all companies to present earnings per share for all periods for which
income statement information is presented in accordance with SFAS No.
128. Basic earnings per share were computed using the weighted average
number of common shares outstanding.
Note 2 - Mortgage Loans Held for Sale, Pledged
The cost of mortgage loans held for sale is the outstanding principal
balance of the mortgage loan decreased by fees or discounts collected
and increased by fees and discounts paid, and certain direct costs.
Fees and costs incurred net of discounts collected are deferred and
recognized as adjustments to gain or loss when the related loan is
sold.
Mortgage loans held for sale consisted of the following at December 31:
Mortgage Loans $50,154,791
Deferred costs, net of fees 133,923
-----------
$50,288,714
Note 3 - Notes Receivable
Notes receivable represent unsecured principal advances to individuals,
at fixed interest rates of 6% and 8%, due in full in 2000. The advances
were issued with an original maturity of five years. Notes receivable
include principal amounts due from employees of $35,819. Accrued
interest related to these notes totalled $41,763 at December 31, 1997.
Note 4 - Note Receivable, Stockholders
Subsequent to year end, but effective as of December 31, 1997, the
Company entered into a promissory note agreement with its stockholders.
The $250,000 note is unsecured, bearing interest at an annual rate of
6.5%, and is due on or before March 31, 1998.
F-9
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 5 - Real Estate Held for Investment
Real estate held for investment consists of a residence in Santa Rosa,
California. The real estate was contributed to the Company during 1995
by the stockholders and is subject to a mortgage assumed by the
corporation. The real estate is recorded at the property's estimated
market value at the date of contribution less accumulated depreciation
of $12,556. The property is not currently listed for sale. The mortgage
is due 2018 bearing interest at the 11th District cost of funds. Future
principal payments are due as follows:
Year Ending December 31,
------------------------
1998 $ 3,200
1999 3,500
2000 3,700
2001 4,000
2002 4,300
Thereafter 128,055
---------
$ 146,755
=========
Note 6 - Warehouse Notes Payable
The Company maintains various revolving warehouse line credit
agreements, primarily to fund mortgage loan originations. Advances are
made on the warehouse lines for specific properties which are pledged
as collateral. The stockholders personally guarantee borrowings under
the revolving line. Interest accrues monthly on the warehouse lines and
is due at settlement when the underlying loans are sold. All advances
are expected to be repaid within one year.
Warehouse lines available as of December 31 were as follows:
$11 million revolving mortgage credit facility with Warehouse Lending
Corporation of America and a temporary bulge facility of $44
million, interest on outstanding advances at LIBOR + 3.25%. The
credit facility expires March 15, 1998.
$50,154,791
$7 million revolving mortgage credit facility with PNC Mortgage Bank
N.A., interest on outstanding advances at LIBOR + 2.5%. The credit
facility expires May 31, 1998. -
F-10
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
Note 6 - Warehouse Notes Payable (continued)
$3 million revolving mortgage credit facility with Pacific Southwest
Bank, interest on outstanding advances at the Prime rate plus 1%.
The credit facility expires April 30, 1998. -
-----------
$50,154,791
===========
The Company must comply with covenants provided in its credit
agreements, including restrictions on the payment of dividends and the
maintenance of certain financial ratios and other conditions such as
maintaining minimum amounts of stockholders' equity.
The weighted average nominal interest rate on loans at December 31,
1997 is 9.09%. Interest expense amounted to $1,570,489 for the year
ended December 31, 1997.
Note 7 - Financial Instruments
The Company's mortgage banking activities consist of the origination
and sale of mortgage loans for placement in the secondary market. The
Company enters into commitments to extend credit, forward delivery
contracts to sell mortgage-backed securities and forward delivery
commitments for the sale of whole loans in the normal course of
business to manage interest rate risks. Deferred losses on open
positions of mortgage-backed securities delivered under the forward
sales contracts approximated $65,000, and offset unrealized gains in
the Company's loan commitments to borrowers.
The following disclosure of the estimated fair value of financial
instruments at December 31, 1997 is made in accordance with the
requirements of SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments." The estimated fair value amounts have been
determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is
necessary to interpret market data in the development of the estimates
of fair value. These estimates are not necessarily indicative of the
amounts the Company could realize in a current market exchange, and the
use of different market assumptions and/or estimation methodologies
could significantly affect the estimates.
F-11
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 7 - Financial Instruments (continued)
Estimated
Carrying Fair
Value Value
------------ ------------
Financial Assets
Cash and equivalents $ 482,558 $ 482,558
Certificates of deposit $ 272,298 $ 272,298
Mortgage loans held for sale, pledged $ 50,288,714 $ 50,700,000
Notes receivable $ 135,819 $ 110,000
Note receivable, stockholders $ 250,000 $ 250,000
Financial Liabilities
Warehouse notes payable $50,154,791 $50,154,791
Real estate mortgage note $ 146,755 $ 146,755
The notional amount of the Company's commitments to extend credit at
fixed interest rates were approximately $52,000,000. The Company also
made commitments to deliver $13,500,000 in loans to various investors,
all at fixed interest rates.
The fair values presented above represent the Company's best estimate
of fair value using the methodologies discussed below:
Cash and Equivalents and Certificates of Deposit - Due to the
relatively short period of time between the origination of these
instruments and their expected realization, the carrying amount is
estimated to approximate market value.
Notes Receivable - The fair value of notes receivable is estimated by
discounting the future cash flows using current interest rates at which
similar loans would be made to borrowers.
Mortgage Loans Held for Sale - Fair values for mortgage loans covered
by investor commitments are based on commitment prices. Fair values for
uncommitted loans are based on management's assessment of current
prices offered for similar loans sold in conjunction with the Company's
own secondary market transactions, adjusted for differences in loan
characteristics. Management's determination of fair value includes
consideration of commitment prices which clearly represent market
conditions at the balance sheet date and market prices and yields
sought by the Company's permanent investors, or other public market
quotations for long-term mortgage loan rates.
Financial Liabilities - The fair value of financial liabilities is
believed to approximate the carrying amount because the terms of the
debt are similar to terms currently offered by lenders, or the interest
rates are variable based on current market rates.
F-12
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 7 - Financial Instruments (continued)
Off-Balance-Sheet Instruments - The fair value of off-balance-sheet
instruments is determined by management's assessment of current prices
offered for similar loans sold in conjunction with the Company's own
secondary market transactions, adjusted for related mandatory forward
commitments and risks associated with borrowers ability to complete
their commitments. Unrecognized gains on the locked pipeline
approximated $300,000 at December 31, 1997.
Note 8 - Significant Group Concentrations of Credit Risk
Substantially all of the Company's business activity is with customers
located within the San Francisco Bay area. The loans and commitments
extended to these customers are expected to be repaid from proceeds of
the sale of these loans in the secondary market and are secured by real
estate. The Company's access and rights to this collateral vary and are
legally documented to the extent practicable. Sales agreements with
secondary market investors include recourse provisions which may
require the Company to repurchase the loans sold in the event of
certain conditions, including the default or delinquency of borrowers
under the terms of the loan agreements.
The Company has a concentration of credit risk with respect to cash
deposited with a commercial bank in excess of federally insured limits.
Note 9 - Commitments and Contingencies
Operating Leases - The Company has entered into various operating lease
agreements for the rental of office space. The following represents
aggregate future minimum lease payments under these agreements:
Year Ending December 31,
------------------------
1998 $150,765
1999 88,150
2000 74,940
2001 50,640
--------
$364,495
========
Litigation - The Company is involved in legal proceedings arising in
the ordinary course of business. The ultimate outcome of these
proceedings can not be determined because of the uncertainties that
exist. In the opinion of management, the disposition of matters that
are pending or asserted will not have a materially adverse effect on
the financial position of the Company.
F-13
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 10 - Prior Period Adjustment
Loan origination fees, net of certain direct loan origination costs,
are required to be deferred and recognized as an adjustment of yield on
the related loans, using the interest method, or recognized when the
related loan is sold. During 1997, the Company determined that loan
fees and certain direct loan origination costs from prior years were
not properly accounted for in accordance with generally accepted
accounting principles. Accordingly, the Company's financial statements
as of December 31, 1996 have been restated to reflect these
requirements. The effect of the restatement is as follows:
As Previously As
Reported Restated
------------- ---------
Retained earnings as of December 31, 1996 $ 44,384 $ 14,650
========== ==========
Additional paid-in capital as of December 31, 1996 $1,065,779 $1,001,090
========== ==========
Net income for the year ended December 31,
1996 (unaudited) $ 409,918 $ 395,847
========== ==========
Note 11 - New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting comprehensive income and its components
(revenues, expenses, gains and losses) in financial statements. SFAS
No. 130 requires classification of other comprehensive income in a
financial statement, and the display of the accumulated balance of
other comprehensive income separately from retained earnings and
additional paid-in capital. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. The Company believes this
pronouncement will not have a material effect on its financial
statements.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which established
standards for reporting information about operating segments in annual
financial statements and requires that enterprises report selected
information about operating segments in interim financial reports to
stockholders. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas and major
customers. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997, although earlier application is encouraged. The
Company believes this pronouncement will not have a material effect on
its financial statements.
F-14
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 12 - Year 2000
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Accordingly, over
the next few years, management may incur additional expenditures to
modify its software to operate correctly for the year 2000. While
considered to be immaterial by management, the Company has not yet
quantified such costs, which will be expensed as incurred. If the
Company or other entities not affiliated with the Company do not
address this issue successfully, the Company's business could be
materially affected.
Note 13 - Subsequent Events
Subordinated Debt - In order to obtain additional capital, the Company
has obtained a $1,000,000 letter of commitment from a bank to provide
debt, subordinated to warehouse lenders. The note will bear interest at
the Prime Rate plus 2%, and is due in full on the earlier of December
31, 1998 or the closing of an initial public offering of Company stock.
The note will be collateralized by a first priority security interest
in all of the stock owned by the stockholders.
The note is to be guaranteed by the stockholders and secured by Company
accounts, equipment and general intangibles as defined in the
agreement. An equity participation fee of $100,000 is due when the loan
matures.
The loan agreement requires the Company to comply with certain
covenants, the most restrictive of which include minimum required
amounts of capital and the maintenance of certain financial ratios and
other conditions.
Employment Agreements - Subsequent to year end, the Company entered
into employment agreements with two senior executives of the Company
who are the sole stockholders. The agreements commence on the closing
of an initial public offering of Company stock, and extend through
December 31, 1999. Compensation for the senior executives shall be
$250,000 and $150,000 annually. The agreements include bonus provisions
for additional payments to the executives based on 10% of pretax income
up to $150,000 per year for the Chief Executive Officer and 60% of
gross retail production revenue in excess of $150,000 for the
President.
In defined circumstances, the agreements also provide severance
payments of up to two times the executive's annual base salary upon
termination and immediate vesting of any stock options outstanding.
F-15
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 14 - Pro Forma Information (Unaudited)
Income Taxes - As discussed in Note 1, the Company is an S corporation
for federal and California tax purposes. Accordingly, the accompanying
financial statements do not include a provision for income taxes, with
the exception of the 1.5% California tax on S corporations. Upon
closing of the initial public offering, the Company will terminate its
S status and become a C corporation for tax purposes. The Company will
be subject to federal and state income taxes and will recognize
deferred taxes in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109
requires companies subject to income taxes to adjust their deferred tax
assets and liabilities based on temporary differences between financial
statement and tax basis of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to
reverse. For informational purposes, the statement of income includes
an unaudited pro forma income tax provision on income before income
taxes for financial reporting purposes using federal and state rates
that would have resulted if the Company had filed corporate tax returns
during the period presented.
Earnings Per Share - Pro forma earnings per share is computed by
dividing pro forma net income by the pro forma number of shares of
common stock outstanding during the respective period. The pro forma
number of shares of common stock outstanding represents the number of
shares of common stock outstanding after giving retroactive effect to
the stock split discussed below.
Stock Split - Subsequent to December 31, 1997, the Company split
its 1,000 shares of issued and outstanding common stock, 2,468.75
shares for one. The resulting number is 2,468,750 shares of common
stock.
F-16
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1996
F-18
<PAGE>
CONTENTS
FINANCIAL STATEMENTS
PAGE
Balance sheet....................................................F-20
Statement of income..............................................F-21
Statement of stockholders' equity................................F-22
Statement of cash flows..........................................F-23
F-19
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
BALANCE SHEET
DECEMBER 31, 1996.
ASSETS
Cash and Cash Equivalents $ 371,972
Certificates of Deposit 379,095
Mortgage Loans Held for sale, pledged 19,529,348
Accrued Interest 19,953
Notes Receivable 145,519
Real Estate held for investment, net 204,580
Property and equipment, net 83,552
Other Assets 30,077
------------
TOTAL ASSETS $20,764,096
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Warehouse notes payable $ 19,444,701
Accrued interest 43,349
Real Estate Mortgage 149,363
Accounts payable and accrued liabilities 109,943
------------
TOTAL LIABILITIES 19,747,356
STOCKHOLDERS' EQUITY
Common Stock, $1 par value; 10,000 shares authorized;
1,000 shares issued and outstanding 1,000
Additional paid-in-capital 1,001,090
Retained earnings 14,650
------------
TOTAL STOCKHOLDERS' EQUITY 1,016,740
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $20,764,096
===========
F-20
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
STATEMENT OF INCOME
DECEMBER 31, 1996
INCOME
Net gain from sale of mortgage loans $890,592
Production Income 801,175
Other (24,489)
-----------
1,667,278
EXPENSES
Salaries and benefits 758,354
General and administrative 410,728
Interest expense, net of interest income 10,997
Occupancy 85,125
----------
1,265,204
INCOME BEFORE PROVISION FOR STATE INCOME TAX 402,074
----------
PROVISION FOR STATE INCOME TAXES, current 6,227
----------
NET INCOME $ 395,847
==========
F-21
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
DECEMBER 31, 1996
<TABLE>
Additional Total
Shares Common Paid-In Retained Stockholders'
Outstanding Stock Capital Earnings Equity
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 1,000 $1,000 $922,779 $16,663 $940,442
Prior period adjustments (64,689) (16,663) (81,352)
Stockholder Contribution 143,000 143,000
Distributions to Stockholders (381,197) (381,197)
Net Income 395,847 395,847
- -------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 1,000 $1,000 $1,001,090 $14,650 $1,016,740
===== ====== ========== ======= ==========
</TABLE>
F-22
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
STATEMENT OF CASH FLOWS
DECEMBER 31, 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 395,847
Adjustment to reconcile net income to net
cash used for operating activities
Depreciation 26,355
Changes in operating assets and liabilities
Increase in Mortgage Loans Held for Sale (18,093,960)
Increase in accrued interest receivable (19,953)
Increase in accounts payable and accrued liabilities 50,651
Increase in accrued interest payable 43,349
Decrease in notes receivable 8,672
Decrease in accounts receivable 42,775
Increase in other assets (26,577)
-------------
Net cash used for operating activities $ (17,572,841)
-------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (78,646)
Net cash used for investing activities (78,646)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on warehouse notes payable 18,009,313
Distributions to stockholders (381,197)
Real estate mortgage payable (213,606)
Cash and Property contribution, stockholders 143,000
Proceeds from sale of real estate 274,908
------------
Net cash provided by financing activities $ 17,832,418
------------
NET CHANGE IN CASH AND EQUIVALENTS $ 180,931
CASH AND EQUIVALENTS, December 31,1995 570,136
-----------
CASH AND EQUIVALENTS, December 31,1996 $ 751,067
=============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
Income taxes $ 0
=============
Interest $ 354,344
=============
F-23
<PAGE>
No dealer, sales person, or other person has been authorized to give any
information or to make any representations not contained in this Prospectus in
connection with the offer contained herein, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or any Underwriters. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy the shares of Common Stock offered
hereby by anyone in any jurisdiction in which such offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful to make such
solicitation or offer. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.
TABLE OF CONTENTS
Additional Information...................... 2
Prospectus Summary.......................... 3
Risk Factors................................ 7
Use of Proceeds............................. 13
Dividend Policy............................. 13
Dilution.................................... 14
Capitalization.............................. 15
Management's Discussion and Analysis
of Financial Condition and Results of
Operations................................ 16
Business.................................... 17
Management.................................. 23
Principal and Selling Shareholders.......... 26
Certain Relationships and
Related Transaction....................... 26
Description of Capital Stock................ 27
Shares Eligible for Future Sale............. 27
Underwriting................................ 28
Legal Matters............................... 30
Experts..................................... 30
Index to Financial Statements............... F-1
Until ______, 1998 (25 days after the date of this Prospectus), all dealers
effecting transactions in the Common Stock, whether or not participating in this
distribution,may be required to deliver a Prospectus. This is in addition to the
obligation of delaers to deliver a Prospectus when acting as Underwriters and
with respect to their unsold allotments or subscriptions.
1,000,000 SHARES
TRANSNATIONAL FINANCIAL CORPORATION
COMMON STOCK
PROSPECTUS
TEJAS SECURITIES GROUP, INC.
____________ __, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Officers and Directors
Section 204 (a) (10) (A) of the General Corporation Law of the State of
California ("GCL") allows a corporation to eliminate the personal liability of a
director for monetary damages in an action brought by or in the right of the
corporation for breach of a director's duties to the corporation and its
stockholders, except that such provision may not eliminate or limit the
liability of directors for (i) acts or omissions that involve intentional
misconduct or a knowing and culpable violation of law, (ii) acts or omissions
that a director believes to be contrary to the best interests of the corporation
or its stockholders or that involve the absence of good faith on the part of the
director, (iii) any transaction from which a director derived an improper
personal benefit, (iv) acts or omissions that show a reckless disregard for the
director's duty to the corporation or its stockholders in circumstances in which
the director was aware, or should have been aware, in the ordinary course of
performing a director's duties, of a risk of serious injury to the corporation
or its stockholders, (v) acts or omissions that constitute an unexcused pattern
of inattention that amounts to an abdication of the director's duty to the
corporation or its stockholders, (vi) certain liabilities arising from contracts
with the corporation in which the director has a material financial interest,
(vii) the making of any distributions to stockholders contrary to the law,
(viii) the distribution of assets to shareholders after dissolution proceedings
without paying or adequately providing for all known liabilities of the
corporation within certain time limits, and (ix) the making of any loan or
guaranty contrary to law. The Registrant's Articles of Incorporation contains a
provision which eliminates directors' personal liability as set forth above,
except, as required by Section 204 (a) (10) (B) and (C) of the GCL, any
liability of a director for any act or omission occurring prior to the date of
the provision's effectiveness, or any liability for an officer's acts or
omissions, notwithstanding that the officer is also a director or that the
officer's actions, if negligent or improper, have been ratified by the
directors.
Section 317 of the GCL ("Section 317") empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
proceeding (other than an action by or in the right of the corporation to
procure a judgment in its favor) by reason of the fact that he or she is or was
a director, officer, employee or agent of the corporation, against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
in connection with the proceeding if that person acted in good faith and in a
manner the person reasonably believed to be in the best interests of the
corporation and, in the case of a criminal proceeding, had no reasonable cause
to believe the conduct of the person was unlawful. The termination of any
proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendre or its equivalent does not, of itself, create a presumption that the
person did not act in good faith and in a manner which the person reasonably
believed to be in the best interests of the corporation or that the person had
reasonable cause to believe that the person's conduct was unlawful. Section 317
empowers the corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action by
or in the right of the corporation to procure a judgment in its favor by reason
of the fact that the person is or was a director, officer, employee or agent of
the corporation, against expenses actually and reasonably incurred by that
person in connection with the defense or settlement of the action if the person
acted in good faith, in a manner the person believed to be in the best interests
of the corporation and its stockholders, provided that (i) the person is
successful on the merits or (ii) such amounts are paid with court approval.
Section 317 also provides that, unless a person is successful on the merits in
defense of any proceeding referred to above, indemnification may be made only if
authorized in the specific case, upon a determination that indemnification is
proper in the circumstances because the indemnified person met the applicable
standard of conduct described above by one of the following: (1) a majority vote
of a quorum consisting of directors who are not parties to such proceedings; (2)
if such quorum is not obtainable, by independent legal counsel in a written
opinion; (3) by approval of stockholders with such indemnified person's shares
not being entitled to vote thereon; or (4) by the court in which the proceeding
is or was pending upon application by or on behalf of the person. Such
indemnification may be advanced to the indemnified person upon the receipt of
the corporation of an undertaking by or on behalf of the indemnified person to
repay such amount in the event it shall be ultimately determined that such
indemnified person is not entitled to indemnification. Section 317 also allows
the corporation, by express provision in its articles, to authorize additional
rights for indemnification pursuant to Section 204 (a) (ii).
The Bylaws of the Registrant provide that the Registrant shall indemnify its
directors and officers against expenses, judgments, fines, settlements and other
amounts actually and reasonably incurred in connection with any proceeding
arising by reason of such person being or having been a director or officer
expenses incurred in defending any such proceeding to the fullest extent
permissible under California law. The Bylaws also provide that the Registrant
may indemnify its employees and agents for such expenses by resolution of the
Board of Directors.
Reference is also made to the Form of Underwriting Agreement filed as Exhibit
1.1 to this Registration Statement for provisions relating to the
indemnification of directors, officers and controlling persons against certain
liabilities including liabilities under the Securities Act of 1933, as amended.
Item 25. Other Expenses of Issuance and Distribution
Estimated expenses in connection with the public offering by the Company of the
securities offered hereunder are as follows:
Securities and Exchange Commission Filing Fee $ 3,836
NASD Filing Fee 1,535
Blue Sky Fees and expenses 4,000
American Stock Exchange Application and Listing Fee* 35,000
Accounting Fees and Expenses 230,000
Legal Fees and Expenses 95,000
Printing* 85,000
Fees of Transfer Agents and Registrar* 5,000
Underwriters' Non-Accountable Expense Allowance 140,000
Miscellaneous* 629
------------
Total $600,000
- ------------
*Estimated
Item 26. Recent Sales of Unregistered Securities
The following is a summary of the only transaction by the Registrant during the
last three years involving the sale of securities which were not registered
under the Securities Act: In March of 1998 the Company agreed to issue, upon
termination of the Company's status as an S corporation, to its counsel 12,500
shares of Common Stock in consideration of legal services rendered to the
Company and to issue 18,750 shares of Common Stock, upon the same conditions, to
a financial advisor to the Company. These transactions were exempt from
registration under the Securities Act pursuant to Section 4(2) thereunder as
transactions not involving a public offering.
Item 27. Exhibits
Exhibit No. Item
Exhibit 1.1 Form of Underwriting Agreement.(2)
Exhibit 1.2 Form of Underwriters' Warrant Agreement(2)
Exhibit 3.1 Restated Articles of Incorporation(1)
Exhibit 3.2 Bylaws(2)
Exhibit 5.1 Opinion of Robert A. Forrester(2)
Exhibit 10.1 Employment Agreement of Joseph Kristul(2)
Exhibit 10.2 Employment Agreement of Maria Kristul(2)
Exhibit 10.3 Employment Agreement of Robert W. Bronson(2)
Exhibit 10.4 Employment Agreement of Matt Heidari(2)
Exhibit 10.5 Employment of Ronald W. Kiehn(2)
Exhibit 10.6 1998 Stock Option Plan(2)
Exhibit 10.7 Agreement between the Registrant and Warehouse
Lending Corporation of America(2)
Exhibit 10.8 Agreement betweent the Registrant and PNC Mortgage
Bank, National Association(2)
Exhibit 23.1 Consent of Moss Adams LLP(1)
Exhibit 23.2 Consent of Robert A. Forrester is contained in his
opinion filed as Exhibit 5.1 to this
registration statement. (2)
Exhibit 27.1 Financial Data Schedule(1)
- ------------
(1) Filed herewith
(2) To be filed by amendment
Item 28. Undertakings
The undersigned registrant hereby undertakes as follows;
(1) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit
prompt delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons
controlling the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director,
officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
shares of the securities being registered, the small business issuer
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
(3) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the small business issuer under Rule
424(b)(1) or (4) or 497(h) under the Securities Act as part of this
Registration Statement as of the time the Commission declared it
effective.
(4) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Francisco, California on April 21, 1998.
Transnational Financial Corporation
By: /s/ Joseph Kristul
Joseph Kristul, Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL. MEN BY THESE PRESENTS, that the person whose signature
appears below constitutes and appoints Maria Kristul and Joseph Kristul, and
each for them, his true and lawful attorney's-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities (until revoked in writing), to sign any and all
further amendments to this Registration Statement (including post-effective
amendments or registration statements filed pursuant to Rule 462(b) relating to
this Registration Statement), and to file same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person thereby ratifying and
confirming all that said attorneys-in-fact and agents, and each of them, or
their substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Joseph Kristul Director, Chief Executive Officer April 21,1998
Joseph Kristul Principal Accounting and
Financial Officer
/s/ Maria Kristul Director, President April 21, 1998
Maria Kristul
/s/ Eugene Kristul Director, Secretary April 21, 1998
Eugene Kristul
- ---------------- Director -------------
Hilary Whitley
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
TRANSNATIONAL FINANCIAL CORPORATION
The undersigned incorporator, for the purpose of forming a corporation
under the General Corporation Law of the State of California, hereby certifies:
ONE. The name of the corporation is
TRANSNATIONAL FINANCIAL CORPORATION.
TWO. The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporated by the California
Corporations Code.
THREE. (a) The liability of directors of the Corporation for
monetary damages shall be eliminated to the fullest extent permissible under
California law.
(b) The Corporation is authorized to provide
indemnification of agents (as defined in Section 317 of the California
Corporations Code) through Bylaw provisions, agreements and agents, vote of
shareholders or disinterested directors, or otherwise, to the fullest extent
permissible under California law.
(c) Any amendment, repeal or modification of
any provision of this Article THREE shall not adversely affect any right or
protection of an agent of this Corporation existing at the time of such
amendment, repeal or modification.
FOUR. (a) The Corporation is authorized to issue two classes of shares
designated "Preferred Stock" and "Common Stock," respectively. The number of
shares of Preferred Stock authorized to be issued is two million (2,000,000) and
the number of shares of Common Stock authorized to be issued is ten million
(10,000,000). Upon amendment of this article to read as herein set forth, each
outstanding share of Common Stock is split and converted into 2,468.75 (two
thousand four hundred sixty eight and three fourths) shares of Common Stock for
an aggregate of 2,468,750 (two million, four hundred sixty eight thousand, seven
hundred fifty) shares of Common Stock.
(b) The Preferred Stock may be divided into
such number of series as the Board ofDirectors may determine. The Board of
Directors is authorized to determine and alter the rights, preferences,
privileges and restrictions granted to and imposed upon any wholly unissued
series of Preferred Stock, and to fix the number of shares of any series of
Preferred Stock and the designation of any such series of Preferred Stock.
The Board of Directors, within the limits and restrictions stated in
any resolution or resolutions of the Board of Directors originally fixing the
number of shares constituting any series, may increase or decrease (but not
below the number of shares of such series then outstanding) the number of shares
of any series subsequent to the issue of shares of that series.
EXHIBIT 23.1
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- -------------------------------------------------------------------------------
We consent to the use of our reported dated March 12, 1998, on our audit of the
financial statements of Transnational Financial Corporation included in the
registration statement on Form SB-2 in connection with the offering of common
stock of Transnational Financial Corporation. We also consent to the reference
to our Firm under the caption "Experts."
/s/ Moss Adams LLP
San Francisco, California
April 17, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 482558
<SECURITIES> 272298
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 51117660
<PP&E> 161696
<DEPRECIATION> 58423
<TOTAL-ASSETS> 51975783
<CURRENT-LIABILITIES> 50493589
<BONDS> 0
0
0
<COMMON> 1002090
<OTHER-SE> 336549
<TOTAL-LIABILITY-AND-EQUITY> 51975783
<SALES> 3189837
<TOTAL-REVENUES> 3189837
<CGS> 0
<TOTAL-COSTS> 2062772
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 279093
<INCOME-PRETAX> 847972
<INCOME-TAX> 13000
<INCOME-CONTINUING> 834972
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 834972
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
