U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB/A
Amendment NO. 1
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 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)
- --------------------------------------------------------------------------------
(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>
TRANSNATIONAL FINANCIAL CORPORATION
SEPTEMBER 30, 1998
UNAUDITED
TABLE OF CONTENTS PAGE NUMBER
PART 1 ITEM 1 FINANCIAL INFORMATION
Balance Sheet as of September 30, 1998
And December 31, 1997 2
Statement of Income
For the Three and Nine Months
Ended September 30, 1998 and 1997 3
Statement of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997 4
Notes to Financial Statements 5
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II OTHER INFORMATION 10
1
<PAGE>
PART I - FINANCIAL INFORMATION
TRANSNATIONAL FINANCIAL CORPORATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 729,992 $ 482,558
Certificates of deposit 169,335 272,298
Mortgage loans held for sale, pledged 50,276,402 50,288,714
Accrued interest receivable 51,520 181,763
Notes receivable 135,819 135,819
Notes receivable, stockholders 0 250,000
Real estate held for investment, net 196,462 199,944
Property and equipment, net 164,303 103,267
Other assets 82,764 61,420
----------------- ----------------
TOTAL ASSETS $ 51,806,597 $ 51,975,783
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Warehouse notes payable $ 41,513,980 $ 50,154,791
Accrued interest payable 283,000 202,118
Real estate mortgage 144,716 146,755
Accounts payable and accrued liabilities 688,525 133,480
Distributions payable to "S" corporation stockholders 274,024 0
----------------- ----------------
TOTAL LIABILITIES $ 42,904,245 $ 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 8,453,059 1,002,090
Retained earnings 449,293 336,549
----------------- ----------------
TOTAL STOCKHOLDERS' EQUITY $ 8,902,352 $ 1,338,639
================= ================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 51,806,597 $ 51,975,783
================= ================
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
CONDENSED STATEMENTS OF INCOME
SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
---------------------------- ----------------------------
INCOME 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net gain from sales of mortgage loans $ 1,674,790 $ 414,303 $ 4,226,287 $ 1,120,321
Production income 307,478 233,391 965,075 651,983
Interest income 913,608 278,342 2,373,924 574,617
Other 5,565 3,398 15,037 27,768
------------- -------------- ------------- --------------
$ 2,901,441 $ 929,434 $ 7,580,323 $ 2,374,689
------------- -------------- ------------- --------------
EXPENSES
Salaries and benefits $ 1,009,407 $ 290,130 $ 2,298,114 $ 752,128
General and administrative 389,795 102,341 1,120,101 375,476
Office occupancy 45,236 34,951 132,489 90,691
Interest expense 903,540 358,371 2,824,922 704,107
------------- -------------- ------------- --------------
$ 2,347,978 $ 785,793 $ 6,375,626 $1,922,402
------------- -------------- ------------- --------------
INCOME BEFORE PROVISION FOR INCOME TAX $ 553,463 $ 143,641 $ 1,204,697 $ 452,287
PROVISION FOR INCOME TAX 233,140 2,160 312,750 6,790
------------- -------------- ------------- --------------
NET INCOME $ 320,323 $ 141,481 $ 891,947 $ 445,497
============= ============== ============= ==============
EARNINGS PER SHARE:
Basic $ 0.09
Diluted $ 0.09
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 3,700,000
Diluted 3,700,000
PRO FORMA
Historical income before taxes on income $ 143,641 $ 1,204,697 $ 452,287
Pro forma provision for income taxes 60,329 505,972 189,960
-------------- ------------- --------------
PRO FORMA NET INCOME $ 83,312 $ 698,725 $ 262,327
============== ============= ==============
PRO FORMA EARNINGS PER SHARE
Basic $ 0.24
Diluted $ 0.24
PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 2,930,769
Diluted 2,930,769
</TABLE>
See accompanying notes to condensed financial statements
3
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30,
1998 1997
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 891,947 $ 445,497
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation $ 26,602 $ 14,397
Origination of mortgage loans held for sale (639,559,774) (268,802,545)
Proceeds from sales of mortgage loans 639,572,086 270,366,814
(Increase) decrease in accrued interest receivable 130,242 (3,950)
(Increase) decrease in other assets (21,343) 45,049
Increase (decrease) in accounts payable and accrued liabilities 555,045 (46,558)
Increase (decrease) in accrued interest payable 80,882 (3,801)
Increase in distributions payable to "S" corporation stockholders 274,024 0
--------------- ----------------
Net cash provided by operating activities $ 1,949,711 $ 2,014,903
--------------- ----------------
Cash flows from investing activities:
Proceeds from sales and maturities of certificates of deposit $ 102,963 $ 0
Purchase of property and equipment (84,156) 0
--------------- ----------------
Net cash provided by investing activities $ 18,807 $ 0
--------------- ----------------
Net cash flows from financing activities:
Borrowings on warehouse notes payable $ 644,613,625 $ 268,533,742
Payments on warehouse notes payable (653,254,436) (270,326,936)
Net proceeds from issuance of common stock 7,450,969 0
Distribution to "S" corporation stockholders (779,203) (376,470)
Receipt of note receivable, stockholders 250,000 0
Real estate mortgage loan payments (2,039) (1,945)
Borrowings on note payable, subordinated 1,000,000 0
Payment of note payable, subordinated (1,000,000) 0
--------------- ----------------
Net cash used by financing activities $ (1,721,084) $ (2,171,609)
--------------- ----------------
NET CHANGE IN CASH AND EQUIVALENTS $ 247,434 $ (156,706)
=============== ================
CASH AND EQUIVALENTS, BEGINNING OF PERIOD $ 482,558 $ 371,972
=============== ================
CASH AND EQUIVALENTS, END OF PERIOD $ 729,992 $ 215,266
=============== ================
</TABLE>
See accompanying notes to condensed financial statements
4
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 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. Certain prior
period amounts have been reclassified to conform with current
presentations.
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 nine and three month periods ended
September 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 its 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 cash dividends to its
existing stockholders of $493,180. On April 30, 1998, the
termination date of the subchapter "S" election, the Company's
stockholders equity contained dividends of $286,028 to which
existing shareholders, as of April 30, were entitled to the
distribution. These dividends have been offset against a
stockholder receivable of $12,004. As a consequence, as of
September 30, 1998, the amount of Subchapter "S"
earnings/dividends still to be distributed to shareholders remains
at $274,024.
5
<PAGE>
NOTE 5 Pro Forma Information
Income Taxes - Effective April 30, 1998, the Company terminated
its "S" status and became a "C" corporation for tax purposes. The
Company is now subject to federal and state income taxes and
recognizes 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 statements 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 "C"
corporation tax returns during the period in which the Company was
an "S" corporation.
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.
NOTE 6 Recently issued accounting pronouncements
In June 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 131,
"Disclosures about Segments of an Enterprise and Related
Information", which establishes annual and interim reporting
standards for an enterprises operating segments and related
disclosures about its products, services, geographic areas, and
major customers. Adoption of this statement will not impact the
Company's consolidated financial position, results of operations
or cash flows, and any effect will be limited to the form and
content of its disclosures. This Statement is effective for fiscal
years beginning after December 15, 1997, with earlier application
permitted. The Company expects to adopt SFAS No. 131 at December
31, 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". The Statement will
require the Company to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair
value of the derivatives will either be offset against the change
in the fair value of the hedged assets, liabilities or firm
commitments through earnings or recognized in other comprehensive
income until the hedged item is recognized in earnings. The
ineffective portion of the derivative's change in fair value will
be immediately recognized in earnings. This Statement is effective
for fiscal years beginning after June 15, 1999, with earlier
application encouraged. The Company expects to adopt SFAS No. 133
as of January 1, 2000. The Company is in the process of
determining the impact of SFAS No. 133 on the Company's financial
statements.
6
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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 and Southern California.
The Company sells all of its mortgage loans and the related
servicing rights in the secondary market. 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 $550,894,124 for the first nine months of 1998 compared to
$219,022,250 for the same nine month period of 1997. The retail
division's volume increased to approximately $88,565,650 for the
first nine months of 1998, compared to volume of $49,780,295 for
the first nine months of 1997. Overall, the Company's loan volume
grew by 138 percent for the first nine months of 1998 compared to
the first nine months of 1997.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
The Company's pre-tax income increased during the third quarter of
1998 to $553,463 from pro forma pre tax income of $143,641 in the
third quarter of 1997, an increase of 285%. Gross revenues grew as
mortgage loan production for the company grew 126% during the
third quarter of 1998 as compared to the third quarter of 1997.
Gross revenues for the third quarter for 1998 were $2,901,441
compared to the third quarter of 1997 of $929,434 or an increase
of 212%. With the exception of interest expense, expenses
7
<PAGE>
generally increased proportionately to increases in revenues.
Salaries and employee benefits as well as general and
administrative expenses increased by 248% and 281%. During April
and May 1998, the Company hired additional senior management and
began paying salaries to the President and the Chief Executive
Officer, who prior to April 30, 1998, were compensated through
stockholder draws. These additional expenses are also part of the
incremental expenses for the third quarter of 1998.
For the first time, the Company realized an excess of interest
income over interest expense. Interest expense as a percentage of
gross revenues was 31% for the third quarter of 1998 as compared
to 39% for the third quarter of 1997. The Company pays interest to
its warehouse lender from the time that the mortgage loan is
closed until the mortgage loan is sold to an investor. During the
same time period, the Company receives interest income on the
funded mortgage loan. During the third quarter of 1998, the
Company had a net interest income because the interest rate
changed on its warehouse line of credit and was less than the note
rate on the mortgage to which the Company is entitled to receive
interest on from the time the loan is funded until sold to an
investor.
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 by utilizing its gestation line to fund loans until the
new warehouse lines of credit were being used at the beginning of
September.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
The Company's pre-tax income for the first nine months of 1998
increased by 166% to $1,204,697 from $452,287 for the first nine
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 nine months of 1998 were $7,580,323
compared to revenues of $2,374,689 for the first nine months of
1997 an increase of 219%. Wholesale mortgage loan production for
the first nine months of 1998 was $550,894,124 compared to
$219,022,250 for the first nine months of 1997, an increase of
152%.
Retail mortgage loan production also increased to $88,665,650 for
the first nine months of 1998 compared to $49,780,295 for the
first nine months of 1997, an increase of 78%. While gross
revenues grew approximately 219% from 1997 to 1998, expenses grew
by 232%. Salaries and employee benefits accounted for the majority
of the increase for the reasons described above.
LIQUIDITY AND CAPITAL RESOURCES
On June 24, 1998 the Company successfully completed an Initial
Public Offering adding net proceeds of $7,450,969 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
8
<PAGE>
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 for $20 million. These new credit
facilities have begun to reduce the Company's interest expense
beginning in the third month of the third quarter due to its
borrowings now being based on Libor plus 1.50% for the warehouse
line and Libor plus1% on the Gestation Repo line, both of which
the company expects will reduce interest expense in the future.
Subsequent to the third quarter, the Company's credit lines have
been further increased to $105 million from the syndicated banks,
and $30 million from Greenwich Capital.
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.
The Company depends upon the effective operations of the financial
institutions with which the Company deals as well as the United
States financial system as administered by the United States
Federal Reserve Board. To the extent that these institutions fail
to have software that effectively deals with the Year 2000 issue,
the Company's business could be materially affected.
9
<PAGE>
PART 11 - OTHER INFORMATION
Item 6. Exhibition and Reports on Form 8-K
On September 16, 1998, the Company filed a form 8-K relating to a
change in the Company's accountants.
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
November 16, 1998 /s/ Joseph Kristul
---------------------------------------
Joseph Kristul, Chief Executive Officer
and Principal Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 899,327
<SECURITIES> 50,276,402
<RECEIVABLES> 135,819
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 164,303
<DEPRECIATION> 0
<TOTAL-ASSETS> 51,806,597
<CURRENT-LIABILITIES> 0
<BONDS> 41,513,980
<COMMON> 8,453,059
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 51,806,597
<SALES> 4,226,287
<TOTAL-REVENUES> 7,580,323
<CGS> 0
<TOTAL-COSTS> 3,550,704
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,824,922
<INCOME-PRETAX> 10,204,697
<INCOME-TAX> 312,750
<INCOME-CONTINUING> 891,947
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 891,947
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
</TABLE>
