U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(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, 1999
[ ] 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 Network, Inc
(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) 242-7800
(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: 4,279,310
<PAGE>
TRANSNATIONAL FINANCIAL NETWORK, INC.
JUNE 30, 1999
UNAUDITED
TABLE OF CONTENTS
PART 1 ITEM 1 TABLE OF CONTENTS PAGE NUMBER
Condensed Consolidated Balances Sheet as of
September 30, 1999 and December 31, 1998 2
Condensed Consolidated Statement of Operations
for the Three and Nine Months
Ended September 30, 1999 and 1998 3
Statement of Condensed Consolidated Cash Flows for the
Three Months Ended September 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5 - 7
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 11
PART II Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 15
1
<PAGE>
PART I - FINANCIAL INFORMATION
TRANSNATIONAL FINANCIAL NETWORK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- -------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,162,041 $ 990,115
Mortgage loans held for sale, pledged (net of allowance for loan
losses: September 30, 1999, $32,500; December 31l, 1998,$0) 23,174,926 62,540,846
Accrued interest receivable 51,770 45,524
Notes receivable 135,819 135,819
Real estate held for investment 191,830 195,308
Property and equipment, net 673,040 271,441
Goodwill 3,779,026 0
Other assets 888,031 287,342
--------------- -------------
TOTAL ASSETS $ 30,056,483 $ 64,466,395
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Warehouse notes payable $ 18,924,984 $ 53,587,740
Accrued interest payable 143,345 462,487
Real estate mortgage 141,409 143,975
Accounts payable and accrued liabilities 686,839 1,026,378
Distributions payable to S Corporation stockholders 0 65,742
--------------- -------------
TOTAL LIABILITIES $ 19,896,577 $ 55,286,322
--------------- -------------
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:
4,279,310 shares and 3,700,000 shares issued and outstanding
as of September 30, 1999 and December 31, 1998, respectively 10,535,559 8,453,059
Retained (deficit) earnings (375,653) 727,014
--------------- -------------
TOTAL STOCKHOLDERS' EQUITY $ 10,159,906 $ 9,180,073
---------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 30,056,483 $ 64,466,395
================ =============
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
2
<PAGE>
TRANSANTIONAL FINANCIAL NETWORK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SEPTEMBER 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30
------------------------------ ----------------------------
1999 1998 1999 1998
------------ ------------- ------------- -----------
<S> <C> <C> <C> <C>
INCOME
Net gain from sales of mortgage loans $ 1,086,182 $ 1,280,128 $ 3,817,180 $ 3,159,985
Interest income 592,127 913,608 2,104,874 2,373,924
Production income 1,303,816 712,140 2,411,926 2,055,378
Other 19,255 5,565 26,965 15,037
------------ ------------- ------------- -----------
Total Income $ 3,001,380 $ 2,911,441 $ 8,360,945 $ 7,604,324
------------ ------------- ------------- -----------
EXPENSES
Interest expense $ 497,938 $ 903,540 $ 1,847,169 $ 2,824,922
Salaries and benefits 2,590,345 1,009,407 5,399,528 2,298,114
General and administrative 866,888 399,795 1,845,587 1,144,101
Office occupancy 185,300 45,236 371,328 132,489
------------ ------------- ------------- ------------
Total Expenses $ 4,140,471 $ 2,357,978 $ 9,463,612 $ 6,399,626
------------- ------------- ------------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES $(1,139,091) $ 553,463 $ (1,102,667) $ 1,204,698
PROVISION (BENEFIT) FOR INCOME TAXES (14,987) 233,140 0 312,750
------------ ------------- ------------- ------------
NET INCOME (LOSS) $(1,124,104) $ 320,323 $ (1,102,667) $ 891,948
============ ============= ============= ============
EARNINGS (LOSS) PER SHARE
Basic $ (0.27) $ 0.09 $ (0.29) $ 0.30
Diluted $ (0.27) $ 0.09 $ (0.29) $ 0.30
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 4,090,405 3,700,000 3,831,565 2,930,769
Diluted 4,090,405 3,700,000 3,831,565 2,930,769
PRO FORMA
Historical income before taxes on income $ 553,463 $ 1,204,698
Pro forma provision for income taxes 221,385 481,879
------------- ------------
PRO FORMA NET INCOME $ 332,078 $ 722,819
============= ============
PRO FORMA EARNINGS PER SHARE
Basic $ 0.09 0.25
Diluted $ 0.09 0.25
PRO FORMA WEIGHTED AVERAGE SHARES
OUTSTANDING
Basic 3,700,000 2,930,769
Diluted 3,700,000 2,930,769
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
TRANSNATIONAL FINANCIAL NETWORK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SEPTEMBER 30, 1999 AND 19989
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,102,667) $ 891,948
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Gain on sale mortgage loans (3,817,179) (3,159,985)
Provision for loan losses 39,975 15,000
Depreciation and amortization 171,938 26,602
Mortgage loans originated for sale (599,163,141) (639,559,774)
Proceeds from sales of mortgage loans 654,277,048 642,717,070
Net effect of changes in:
Accrued interest receivable (6,246) 130,242
Other assets (400,236) (21,343)
Accounts payable and accrued liabilities (718,932) 555,045
Accrues interest payable (365,398) 80,882
Distributions payable to "S" corporation stockholders 0 274,024
----------------- ----------------
Net cash provided by operating activities 48,915,162 1,949,711
----------------- ----------------
Cash flows from investing activities:
Proceeds from sales and maturities of certificates of deposit 0 102,963
Purchases of property and equipment (333,824) (84,156)
Purchase of LRS, Inc. (1,806,930) 0
----------------- ----------------
Net cash (used) provided by investing activities (2,140,754) 18,807
----------------- ----------------
Net cash flows from financing activities:
Borrowings on warehouse notes payable 786,591,762 644,613,625
Payments on warehouse notes payable (833,125,936) (653,254,436)
Net proceeds from issuance of common stock 7,450,969
Payments on distribution payable to "S" corporation stockholders (65,742) (779,203)
Borrowings on notes payable, subordinated 0 1,000,000
Receipts of note receivable, stockholder 0 250,000
Payments on real estate mortgage (2,566) (2,039)
Payment of note payable, subordinated 0 (1,000,000
----------------- ----------------
Net cash used by financing activities $ (46,602,482) $ (1,721,084)
----------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 171,926 247,434
----------------- ----------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 990,115 482,558
----------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,162,041 $ 729,992
================= ================
CASH PAID DURING THE PERIOD FOR:
Interest paid $ 1,917,484 $ 2,744,040
================= ================
Income taxes paid $ 515,016 $ 99,788
================= ================
NONCASH FINANCING ACTIVITY
Common stock issued for acquisition of LRS, Inc, net $ 2,100,000 $ 0
================= ================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
TRANSNATIONAL FINANCIAL NETWORK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
NOTE 1 The accompanying financial statements of
Transnational Financial Network, Inc. (the
"Company") 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.
Accordingly, these unaudited condensed financial
statements should be read in conjunction with the
audited financial statements included in the
Company's Form 10-KSB for the year ended December
31, 1998. 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.
Certain reclassifications to the 1998 financial
statements were made to conform to the 1999
presentation.
NOTE 2 The results of operations of the Company for the
nine month periods ended September 30, 1999 and
1998 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. 1,200,000 shares were sold for net
proceeds of $7,419,719
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. These dividends were paid
during the remainder of 1998, except for $65,742
which was paid in 1999.
NOTE 5 Pro Forma Information
Income Taxes - Effective April 30, 1998, the
Company terminated its S corporation 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 condensed
statements of operations include 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 corporation tax returns
during the period in which the Company was an S
corporation.
5
<PAGE>
Net Income 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 Net Income (Loss) Per Share
Basic net income (loss) per share is computed by
dividing net income (loss) by the weighted average
common shares outstanding during the period.
Diluted net income (loss) per share is computed
based on the weighted average number of common
shares outstanding adjusted for the common stock
equivalents, which include stock options. The
following table presents a reconciliation of basic
and diluted net income (loss) per share for the
nine months ended September 30, 1999 and 1998. For
the nine months ended September 30, 1999 and 1998,
the effect of including outstanding options in the
calculation of diluted income (loss) per share
would be antidilutive. As a result, the effect of
those outstanding options has not been included in
the calculations.
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1999 1998 1999 1998
(pro forma) (pro forma)
------------ ----------- --------- -----------
<S> <C> <C> <C> <C>
Calculation of Basic Net Income (Loss) Per Share:
Numerator - net income (loss) $(1,124,104) $ 332,078 $(1,102,667) $ 722,819
Denominator - net income (loss)
Weighted average common shares outstanding 4,090,405 3,700,000 3,831,565 2,930,769
----------- ----------- --------- -----------
Basic net income (loss) per share $(0.27) $0.09 $(0.29) $0.25
====== ===== ====== =====
Calculation of Diluted Net Income (Loss) Per Share:
Numerator - net income (loss) $(1,124,104) $ 332,078 $(1,102,667) $ 722,819
Denominator - net income (loss)
Weighted average common shares outstanding 4,090,405 3,700,000 3,831,565 2,930,769
----------- ----------- --------- -----------
Diluted net income (loss) per share $(0.27) $0.09 $(0.29) $0.25
======= ===== ====== =====
</TABLE>
NOTE 7 Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The
statement establishes accounting and reporting
standards for derivative instruments and hedging
activities. In June 1999 FASB issued SFAS No. 137,
Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of
FASB Statement No. 133, which amended SFAS No. 133
to be effective for fiscal quarters of fiscal
years beginning after June 15, 2000. The Company
is in the process of determining the impact of
SFAS No. 133 on the Company's consolidated
financial statements.
6
<PAGE>
NOTE 8 Acquistion
On July 30, 1999, the Company acquired all of the
issued and outstanding stock of LRS, Inc., a
Silicon Valley based mortgage banking Company.
Under the terms of the agreement, the Company paid
$1.5 million in cash and issued 579,310 shares of
Common Stock at a closing share price of $3.625
per share as of July 30, 1999. In addition, the
Company may pay the former stockholders of LRS,
Inc. up to a total of $3.2 million over the four
year earnout period beginning August 1, 1999 and
ending July 31, 2003.
The following Unaudited Pro Forma Combined Summary
of Operations presents a pro forma combined
summary of operations of the Company and LRS, Inc.
for the three and nine-month periods ended
September 30, 1999 and 1998 and it is presented as
if the acquisition had been effective on January
1, 1998. This pro forma combined historical
summary of operations was adjusted for the
amortization of purchase accounting adjustments.
The Unaudited Pro Forma Combined summary of
Operations data is intended for informational
purposes only and is not necessarily indicative of
the future results of operations of the company,
or the results of operations that would have
actually occurred had the merger been in effect
for the periods presented.
Unaudited Pro Forma Combined summary of Operations (TFN and LRS, Inc.)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30
------------------------------ ----------------------------
1999 1998 1999 1998
------------ ------------- ------------- -----------
<S> <C> <C> <C> <C>
GROSS REVENUE $ 3,770,568 $ 6,055,091 $ 14,999,478 $ 18,916,213
------------ ------------- ------------- ------------
NET INCOME (LOSS) $ (1,321,641) $ 783,021 $ (772,093) $ 2,797,319
------------ ------------- ------------- ------------
NET INCOME (LOSS) PER SHARE
Basic $ (0.31) $ 0.22 $ (0.18) $ 0.80
Diluted $ (0.31) $ 0.22 $ (0.18) $ 0.80
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 4,279,310 3,510,079 4,279,310 3,510,079
Diluted 4,279,310 3,510,079 4,279,310 3,510,079
</TABLE>
NOTE 9 On August 6, 1999 the Board of Directors voted to
invest $500,000 in a wholly owned subsidiary
4ADream LoanLink, L.L.C., a Texas Limited
Liability Company. 4ADream L.L.C., a Texas limited
liability company that is wholly owned by 4Adream
LoanLink, L.L.C., entered into a purchase
agreement with, a company based in Seattle,
Washington specializing in internet marketing of
mortgages and subprime lending. As a result of the
investment, the financial statements of 4ADream
are consolidated with the financial statements of
Transnational Financial Network, Inc. In
conjunction with the purchase agreement, $500,000
of cash has been placed in escrow pending closing
of the purchase agreement. The $500,000 is
included in cash and cash equivalents at September
30, 1999
7
<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
condensed consolidated 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 Network, Inc. ("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. During the second quarter of 1999, the Company
opened additional loan production offices in Houston, Texas and Phoenix,
Arizona.
Similar to the mortgage banking industry's experience, TFN's loan production and
profit performance are largely affected by mortgage interest rates. Mortgage
rates run parallel with the direction of yields on 30-year United States
Treasury Bonds ("Treasuries"). Throughout 1998 interest rates on Treasuries
declined and have increased thus far throughout 1999. In January, 1998, interest
rates on Treasuries declined and have increased thus far throughout 1999. In
January, 1998, interest rates on Treasuries were approximately 5.85% and at the
end of 1998 were approximately 5.1% after reaching a low of approximately 4.7%
in October 1998. From approximately 5.1% in January 1999, interest rates on
Treasuries increased to approximately 6.0% at the end of June 1999. During the
third quarter of 1999, Treasuries yielded from 6.206% to 6.328%.
Higher interest rates increase the cost of home ownership resulting in
diminished demand for mortgage loans whether the purpose of the mortgage loan
was for the purchase of a home, refinancing of a home to obtain a lower rate or
longer term, home improvement, debt consolidation, or obtaining cash. Thus, the
Company saw its volume of mortgage loans generally increase throughout 1998,
reaching its peak in February 1999 and start to decline in the second quarter of
1999. The following tables set forth the wholesale and retail production for the
indicated periods.
8
<PAGE>
<TABLE>
<CAPTION>
Mortgage Loan Volume
for Nine Months ended
September 30, 1999
- ----------------------------------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter TOTAL
<S> <C> <C> <C> <C>
Wholesale $269,810,903 $185,189,710 $165,426,612 $620,427,225
Retail 27,053,889 21,097,932 75,457,636 123,609,457
------------- ------------- ------------- -------------
TOTAL $296,864,792 $206,287,642 $240,884,248 $744,036,682
</TABLE>
<TABLE>
<CAPTION>
Mortgage Loan Volume
for Nine Months Ended
September 30, 1998
- ----------------------------------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter TOTAL
<S> <C> <C> <C> <C>
Wholesale $166,206,275 $217,989,563 $224,641,555 $608,837,393
Retail 28,328,830 28,711,820 31,625,000 88,665,650
------------- ------------- ------------- -------------
TOTAL $194,535,105 $246,701,383 $256,266,555 $697,503,043
</TABLE>
During the second quarter of 1999 the Company opened additional loan production
offices in Houston, Phoenix and Reno. In July, 1999, the Company acquired LRS,
Inc, the holding company for a wholesale and retail mortgage company based in
Silicon Valley. LRS contributed $25,333,745 of wholesale loan production and
$55,853,546 of retail loan production during the third quarter 1999 which is
included in the table above. The new offices and the acquisition of LRS, Inc.
were meant to expand the production base in California and other states.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
For the nine-month period ended September 30, 1999, the Company incurred a net
loss of $1,102,667 compared to net income of $891,948 for the same period in
1998. Revenues increased to $8,360,945 in 1999 from $7,604,324 in 1998 with
expenses increasing to $9,463,612 from $6,399,626.
Revenues primarily relate to wholesale and retail production. Wholesale
production increased to $620,427,225 in 1999 from $608,837,393 for the same
period in 1998. The increase in wholesale production masks the declining trend
in wholesale production that has occurred throughout 1999 as interest rates rose
and the accelerating trend of wholesale production in 1998 as interest rates
declined. Since February of 1999, wholesale production has steadily declined
while in 1998 it steadily increased. Retail production shows similar trends,
although not as dramatic.
A variety of cross trends affect the comparison of revenues and expenses between
the periods. Interest income and interest expense, that is, the interest expense
paid on the Company's warehouse line of credit and the interest income the
Company receives while owning mortgage loans prior to the mortgage loan's sale,
changed favorably in 1999. The Company's interest expense exceeded its interest
income by $450,998 for the nine months ended September 30, 1998. In the same
period in 1999, the Company's interest income exceeded its interest expense by
$257,705. This change is attributable to the more favorable borrowing rates the
Company enjoys with its warehouse line of credit discussed below.
Similarly, with the acquisition of LRS, Inc. in the third quarter of 1999, the
Company began to derive a much larger portion of its revenue from retail
mortgage lending which generates higher revenues than wholesale mortgage
banking. Production revenues, which are derived from the Company's wholesale and
retail mortgage operations, increased to $2,411,926 in the nine months ended
September 30, 1999, from $2,055,378, for the same period in 1998. Retail
mortgage lending also increased expenses, which is categorized under salaries
and benefits due to commissions paid to retail loan originators. Accordingly,
the acquisition of LRS affected the increase in salaries and benefits.
9
<PAGE>
The Company's expansion into Tustin, Phoenix, Houston and Reno also contributed
to the increase in salary and benefits Salaries and benefits increased to
$5,399,528 in the 1999 period compared to $2,298,114 in the earlier period, an
increase of 135%.
The expansion also affected general and administrative expenses, and office
occupancy expenses. In addition, during the fall of 1998, the Company expanded
the amount of office space it leased in San Francisco.
The cost of being a publicly held company contributed to the increase to general
and administrative expenses.
The increase in revenues for the later period did not offset expenses incurred
by the Company during the start-up period of the Company's new offices.
Similarly, production from these offices did not offset the decline in wholesale
revenues experienced as a result of increasing interest rates.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Most of the changes discussed above occurred in the third quarter of 1999. The
Company acquired LRS, Inc. at the end of July 1999. Accordingly, the increase in
production revenues and related increase in salaries and benefits occurred in
the third quarter of 1999. The Company's expansion into Phoenix, Houston and
Reno began in the latter part of the second quarter of 1999 and the full effect
of the expenses of those offices did not occur until the third quarter.
Accordingly, revenues for the third quarter of 1999 were $3,001,380 compared to
$2,911,441, a modest increase largely attributable to production income
offsetting a decline in the net gain from sales of mortgage loans.
The effects on expenses of the expansion discussed above also began
predominantly in the third quarter of 1999. Expenses increased to $4,140,471 in
the 1999 quarter from $2,357,978 in 1998, an increase of 76%.
The Company also incurred approximately $71,000 of expense in the third quarter
of 1999 amortizing goodwill accrued for the acquisition of LRS, Inc. and
incurred approximately $47,000 in expenses relating to the Company's investment
in 4ADream, the wholly owned internet subsidiary.
Beginning in the third quarter of 1999 the Company began to aggressively reduce
expenses to mitigate its current losses.
LIQUIDITY AND CAPITAL RESOURCES
On June 24, 1998 the Company successfully completed an Initial Public Offering
adding net proceeds of $7,419,719 to its stockholders' equity. The additional
capital provided the capability to access additional and less expensive lines of
credit.
Starting with the third quarter of 1998, the Company began the use of new
warehouse lines of credit syndicated with several banks with Guaranty Federal
Bank of Dallas as the lead bank. In addition, the Company secured a Whole Loan
Purchase and Sales Agreement ("Gestation Repo Line") with Greenwich Capital for
$30 million and as additional Whole Loan Purchases and Sales Agreement
("Gestation Repo Line") with Gateway Bank for $50 million. These new credit
facilities reduced the Company's interest expense beginning in the third month
of the third quarter of 1998 due to its borrowings now being based on Libor plus
1.5% for the warehouse line and Libor plus 1% on the Gestation Repo lines, both
of which have reduced interest expense.
The credit agreement covering the warehouse line includes restrictive covenants,
including requirements to maintain certain financial ratios. As of September 30,
1999, the Company was not in compliance with two of these financial covenants,
specifically, the minimum tangible net worth requirement and a covenant allowing
a maximum amount to be advanced to a subsidiary.
The acquisition of LRS, Inc. increased capital stock to $10,535,559 as of
September 30, 1999, representing an increase of some $2,082,500 in the Company's
capital and leveraged borrowing capacity. At July 30, 1999, the Company recorded
goodwill of $3,849,823 which is solely attributable to the Company's acquisition
of LRS, Inc. Such goodwill will be amortized over a ten year period.
10
<PAGE>
YEAR 2000
The Company recognizes the need to ensure its operations will not be adversely
impacted by internal Year 2000 software failures. 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. Accordingly, the Company
has completed a review of its internal computer systems and believes that its
internal operations will not be adversely affected by year 2000 software
failures.
The Company depends upon the effective operations of the financial institutions
with which the Company deals as well as that of 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 sustain a material adverse effect.
Similarly, the Company has extensive dealings with mortgage brokers that submit
mortgage loans to the Company. The Company is in the process of determining
whether financial institutions, mortgage brokers or others will be adversely
affected by computer software that fails to execute correctly on or after
January 1, 2000, and the consequences of those possible failures on the Company.
The Company does not believe that the cost to complete this inquiry and rectify
any problems uncovered will exceed $5,000.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(b) Reports on Form 8-K.
Form 8-K dated August 13, 1999, indicating the acquisition of LRS, Inc.
12
<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 Network, Inc.
November 12, 1999 /s/ Joseph Kristul
---------------------------------------
Joseph Kristul, Chief Executive Officer
and Principal Financial Officer
13
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