U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________________ to ______________
Commission file number: 1-14219
Transnational Financial Corporation
(Exact name of small business issuer as specified in its charter)
California 94-2964195
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
401 Taraval Street, San Francisco, CA 94116
(Address of principal executive offices) (Zip Code)
(415) 334-7000
(Registrant's telephone number)
301 Junipero Serra Blvd, Ste 270, San Francisco, CA 94127
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No ____
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 3,700,000
<PAGE>
PART I - FINANCIAL INFORMATION
TRANSNATIONAL FINANCIAL CORPORATION
JUNE 30, 1998
UNAUDITED
TABLE OF CONTENTS PAGE NUMBER
PART 1 ITEM 1 FINANCIAL INFORMATION
Balance Sheet as of June 30, 1998
And December 31, 1997 2
Statement of Income
For the Three and Six Months
Ended June 30, 1998 and 1997 3
Statement of Cash Flows for the
Six Months Ended June 30th 1998 and 1997 4
Statement of Changes in
Stockholders Equity for the Six Months
Ended June 30, 1998 5
Notes to Financial Statements 6
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II 10
1
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
Unaudited
ASSETS
<S> <C> <C>
Cash and equivalents $ 8,325,799 $ 482,558
Certificates of Deposit 270,524 272,298
Mortgage loans held for sale, pledged 30,840,202 50,288,714
Accrued Interest 140,267 181,763
Notes Receivable 135,819 135,819
Notes Receivable, stockholders 0 250,000
Real Estate held for investment, net 197,623 199,944
Property and Equipment, net 124,170 103,267
Other Assets 67,255 61,420
-------------- ----------------
TOTAL ASSETS $ 40,101,659 $ 51,975,783
============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Warehouse Notes Payable $ 30,404,072 $ 50,154,791
Accrued interest 114,000 202,118
Real Estate Mortgage 145,410 146,755
Accounts payable and accrued liabilities 347,743 133,480
Income Taxes payable 55,015 0
-------------- ---------------
TOTAL LIABILITIES 31,066,240 50,637,144
============== ===============
STOCKHOLDERS' EQUITY
Preferred Stock, no par value: 2,000,000 shares
authorized, no shares issued or outstanding 0 0
Common stock, no par value: 10,000,000 shares
authorized: 3,700,000 and 2,500,000 shares
issued and outstanding, respectively 1,000 1,000
Additional paid-in capital 8,619,426 1,001,090
Retained Earnings 414,993 336,549
-------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 9,035,419 1,338,639
============== ===============
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 40,101,659 $ 51,975,783
============== ===============
</TABLE>
2
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
STATEMENT OF INCOME FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
---------------------------- ----------------------------
INCOME 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net gain from sales of mortgage loans $ 1,581,713 $ 277,347 $ 2,551,496 $ 706,018
Production Income 351,900 189,560 657,597 418,592
Other 3,946 20,695 14,730 24,370
------------- -------------- ------------- --------------
1,937,559 487,602 3,223,823 1,148,980
------------- -------------- ------------- --------------
EXPENSES
Salaries and benefits 775,234 217,557 1,288,707 461,998
General and Administrative 417,222 108,689 731,880 273,135
Interest expense, net of interest income 312,318 17,262 464,749 49,461
Office Occupancy 48,212 34,941 87,253 55,740
------------- -------------- ------------- --------------
1,552,986 378,449 2,572,589 840,334
------------- -------------- ------------- --------------
INCOME BEFORE PROVISION FOR INCOME TAX 384,573 109,153 651,234 308,646
PROVISION FOR INCOME TAX, current
Federal 55,015 0 55,015 0
State 20,595 1,630 24,595 4,630
------------- -------------- ------------- --------------
NET INCOME $ 308,963 $ 107,523 $ 571,624 $ 304,016
============= ============== ============= ==============
PRO FORMA INFORMATION
Income before taxes, as reported $ 384,573 $ 109,153 $ 651,234 $ 308,646
Pro forma income tax provision 153,829 43,661 260,494 123,458
------------- -------------- ------------- --------------
Pro forma net income $ 230,744 $ 65,492 $ 390,740 $ 185,188
============= ============== ============= ==============
Pro forma basic and diluted earnings per
share $ 0.09 $ 0.03 $ 0.15 $ 0.07
============= ============== ============= ==============
Pro forma weighted average common
shares outstanding 2,592,308 2,500,000 2,546,409 2,500,000
============= ============== ============= ==============
</TABLE>
3
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
STATEMENT OF CASH FLOWS FOR THE SIX MONTH PERIOD
ENDED JUNE 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
For the Six
Months Ended
June 30,
1998 1997
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 571,624 $ 304,016
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation $ 16,391 $ 8,259
Origination of mortgage loans held for sale (403,943,868) (167,266,092)
Proceeds from sales of mortgage loans 423,392,380 178,256,858
(Increase) decrease in accrued interest receivable 41,496 (1,876)
Increase (decrease) in accounts payable and accrued liabilities 214,263 (24,742)
Increase (decrease) in accrued interest payable (88,118) (24,569)
Increase in provision for Corporate Income Tax 55,015 0
(Increase) decrease in other assets (5,835) 45,049
--------------- ----------------
Net cash provided (used) from operating activities 20,253,348 11,296,903
--------------- ----------------
Cash flows from investing activities:
Proceeds from sales and maturities of certificates of deposit 1,774 0
Purchase of property and equipment (34,973) 0
--------------- ----------------
Net cash provided (used) from investing activities (33,199) 0
--------------- ----------------
Net cash flows from financing activities:
Borrowings on warehouse notes payable 407,983,307 167,101,783
Payments on warehouse notes payable (427,734,026) (178,336,894)
Net proceeds from issuance of common stock 7,618,336 0
Distribution to stockholders (493,180) (213,965)
Payment of note receivable, stockholders 250,000 0
Real estate mortgage loan payments (1,345) (1,280)
Borrowings on note payable, subordinated 1,000,000 0
Payment of note payable, subordinated (1,000,000) 0
--------------- ----------------
Net cash provided (used) from financing activities (12,376,908) (11,450,356)
--------------- ----------------
NET CHANGE IN CASH AND EQUIVALENTS 7,843,241 (153,453)
=============== ================
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 482,558 371,972
=============== ================
CASH AND EQUIVALENTS, END OF PERIOD $ 8,325,799 $ 218,519
=============== ================
</TABLE>
4
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Shares Common Additional Retained Total
Outstanding Stock Paid-In Earnings Stockholder's
Capital Equity
-------------- ------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 1,000 $ 1,000 $ 1,001,090 $ 336,549 $ 1,338,639
Stock split on March 18, 1998 2,467,750 0 0
Issuance of Common Stock on May 31, 1998 31,250 0 0
Issuance of Common Stock on June 24, 1998
as a result of a public offering less
expenses of the offering of $1,381,664
of the offering of $1,381,664 1,200,000 7,618,336 7,618,336
Distribution of Stockholders (493,180) (493,180)
Net income for the six months
ended June 30, 1998 571,624 571,624
-------------- ------------- -------------- ------------ ---------------
Balance at June 30, 1998 3,700,000 $ 1,000 $ 8,619,426 $ 414,993 $ 9,035,419
============== ============= ============== ============ ===============
</TABLE>
5
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
(Unaudited)
NOTE 1
The accompanying financial statements are unaudited and have been
prepared without audit pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and
financial disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules
and regulations. These statements include all adjustments
consisting only of normal recurring accruals, which are, in the
opinion of management, considered necessary for a fair
presentation of financial position and results of operations.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ
from those estimates.
NOTE 2 The results of operations of Transnational Financial Corporation
("the Company") for the six and three month periods ended June 30,
1998 and 1997 are not necessarily indicative of the results to be
expected for the full year.
NOTE 3 On June 24, 1998, the Company completed an initial public offering
of it's common stock which became listed on the American Stock
Exchange under the symbol TFN.
NOTE 4 On April 30, 1998, the Company changed its corporate charter from
an "S" Corporation to that of a "C" Corporation for taxation
purposes.
During the first four months of 1998, the Company distributed
Subchapter "S" earnings in the form of dividends to its existing
stockholders of $493,180 in the form of cash. On April 30, 1998,
the termination date of the subchapter "S" election, the Company's
stockholders equity contained dividends of $146,367 to which
shareholders, as of that date, were entitled to the distribution.
As of June 30, 1998, these dividends were not distributed.
6
<PAGE>
NOTE 5 Pro Forma Information
Income Taxes - Through April 30, 1998, the Company was 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. Effective April 30, 1998, the Company terminated
its S status and became 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
information 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 be the pro forma number of shares of
common stock outstanding during the respective period.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANAYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion and analysis should be read in
conjunction with the financial statements and the Notes thereto
included as Item 1 of this Report. The discussion of results and
trends does not necessarily imply that these results and trends
will continue.
Forward-Looking Information
The Management's Discussion and Analysis of Financial Condition
and Results of Operations and other sections of the Form 10-QSB
contain forward-looking information. The forward-looking
information involves risks and uncertainties that are based on
current expectations, estimates and projections about the
Company's business, management's beliefs and assumptions made by
management. Words such as "expects", "anticipates", "intends",
"plans", "believes", "seeks", "estimates", and variations of such
words and similar expressions are intended to identify such
forward-looking information. Therefore, actual outcomes and
results may differ materially from what is expressed or forecasted
in such forward-looking information due to numerous factors,
including, but not limited to, availability of financing for
operations, successful performance of internal operations, impact
of competition, changes in distributor relationships or
performance and other risks detailed below as well as those
discussed elsewhere in this Form 10-QSB and from time to time in
the Company's Securities and Exchange Commission filings and
reports. In addition, such statements could be affected by general
economic and market conditions and growth rates.
GENERAL
Transnational Financial Corporation ("TFN" or the "Company") is a
wholesale and retail mortgage banker which originates, funds and
sells mortgage loans 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 May,
1995 the Company's growth has been focused and driven by the
wholesale loan division. The wholesale division's mortgage loan
volume increased to approximately $346,903,218 for the first six
months of 1998 compared to $135,565,000 for the same six month
period of 1997. The retail division's volume increased to
approximately $57,040,650 for the first six months of 1998,
compared to volume of $28,570,000 for the first six months of
1997. Overall, the Company's loan volume grew by 146 percent for
the first six months of 1998 compared to the first six months of
1997.
LIQUIDITY AND CAPITAL RESOURCES
On June 24, 1998 the Company successfully completed an Initial
Public Offering adding net proceeds of $7,618,336 to its
stockholders' equity to provide the capital infusion necessary to
facilitate additional growth of the wholesale division as well as
to lower the Company's overall cost of borrowing.
As a result of the public offering and subsequent to the end of
the second quarter, the Company has been able to negotiate, a
warehouse line of credit with the execution of a facility
syndicated with several banks providing up to $90 million and
agented by Guaranty Federal Bank of Dallas. In addition, the
Company has been able to secure a Whole Loan Purchase and Sales
Agreement ("Gestation Repo Line") with Greenwich Capital. The
Company anticipates that these new credit facilities will begin to
reduce the Company's interest expense during the third quarter
because its borrowings will be based on Libor plus 1.50% for the
warehouse line and Libor plus 1% on the Gestation Repo line, both
of which will significantly reduce interest expense in the future.
8
<PAGE>
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
The Company's pro forma pre-tax income increased during the second
quarter of 1998 to $384,573 from $109,153 in the second quarter of
1997. Gross revenues grew as mortgage loan production for both
wholesale and retail divisions grew by 82% during the second
quarter of 1998 as compared to the second quarter of 1997. Gross
revenues for the second quarter for 1998 were $1,937,559 compared
to the second quarter of 1997 of $487,602 or an increase of 296%.
With the exception of interest and occupancy expense, expenses
generally increased proportionately to increases in revenues.
Salaries and employee benefits as well as general and
administrative expenses increased by 256% and 282%, respectively,
decreasing as a percentage of revenue because of larger loan
production. The Company hired additional senior management, began
paying salaries to the President and the Chief Executive Officer,
who prior to April 30, 1998, were compensated through stockholder
draws.
Occupancy costs increased approximately 40% from the second
quarter of 1997 compared to the second quarter of 1998, but
declined as a percentage of revenues from 7.2% in the earlier
period compared to 2.5% in the 1997 period.
Interest expenses, however, increased significantly and was 16.0%
of revenue in the later period compared to 3.5% in the 1997
period. The principal reason for the rate of increase exceeding
that of revenue was because of a $100,000 equity participation fee
paid to InSouth Bank for subordinated debt of $1,000,000 entered
into by the Company in March of 1998. The Company paid this fee
when it closed the public offering and paid off the subordinated
debt. Other factors, however, also increased interest expense in
the later period. Mortgage loan activity across the nation
increased, resulting in delays by investors in purchasing
mortgages from the Company's inventory and lengthening the average
number of days between the time the Company funded a mortgage loan
and when the mortgage loan was sold. In addition, the Company had
increased borrowing expenses outside of its warehouse lines of
credit because the Company's loan volume often exceeded the limits
under the warehouse lines of credit.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
The Company's pro forma pre-tax income for the first six months of
1998 increased by 111% to $651,234 from $308,646 for the first six
months of 1997. The increase is principally due to the Company's
growth in revenues due to its wholesale mortgage loan production.
Gross revenues for the first six months of 1998 were $3,223,823
compared to revenues of $1,148,980 for the first six months of
1997. An increase of 180%. Wholesale mortgage loan production for
the first six months of 1998 was $346,903,000 compared to
$135,565,000 for the first six months of 1997, for an increase of
156%.
Retail mortgage loan production also increased from $57,040,650
for the first six months of 1998 compared to $28,570,000 for the
first six months of 1997, an increase of 100%.
While gross revenues grew approximately 180% from 1997 to 1998,
expenses grew by 206%. Salaries and employee benefits accounted
for 179% of the increase, while interest expense grew 832% for the
reasons described above.
9
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Since the effective date of the Company's initial public offering on June 24,
1998, the Company has not filed a report on Form 8-K.
10
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Transnational Financial Corporation
August 12, 1998
Joseph Kristul, Chief Executive Officer
and Principal Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,596,323
<SECURITIES> 30,840,202
<RECEIVABLES> 276,806
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 124,170
<DEPRECIATION> 0
<TOTAL-ASSETS> 40,101,659
<CURRENT-LIABILITIES> 0
<BONDS> 30,404,072
0
0
<COMMON> 1,000
<OTHER-SE> 8,619,426
<TOTAL-LIABILITY-AND-EQUITY> 41,101,659
<SALES> 2,551,496
<TOTAL-REVENUES> 3,223,823
<CGS> 0
<TOTAL-COSTS> 2,107,840
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 464,749
<INCOME-PRETAX> 651,234
<INCOME-TAX> 260,494
<INCOME-CONTINUING> 390,740
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 390,740
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
