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 March 31, 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 Corporation
(Exact name of small business issuer as specified in its charter)
California 94-2964195
(State or other jurisdiction (IRS Employer
of 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: 3,700,000
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
MARCH 31, 1999
UNAUDITED
TABLE OF CONTENTS PAGE NUMBER
PART 1 ITEM 1 FINANCIAL INFORMATION
Condensed Balance Sheets as of March 31, 1999
And December 31, 1998 3
Condensed Statements of Income
For the Three Months Ended March 31, 1999
And 1998 4
Condensed Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998 5
Notes to Condensed Financial Statements 6
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II OTHER INFORMATION 12
2
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1 ,183,983 $ 990,115
Mortgage loans held for sale, pledged (net of allowance for
loan losses: March 31, 1999, $7,500; December 31, 1998, $0) 29,766,868 62,540,846
Accrued interest receivable 45,379 45,524
Notes receivable 135,819 135,819
Real estate held for investment, net 194,149 195,308
Property and equipment, net 400,337 271,441
Other assets 311,124 287,342
----------------- ----------------
TOTAL ASSETS $ 32,037,659 $ 64,466,395
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Warehouse notes payable $ 21,524,243 $ 53,587,740
Accrued interest payable 260,023 462,487
Real estate mortgage 142,906 143,975
Accounts payable and accrued liabilities 638,452 1,026,378
Distributions payable to "S" corporation stockholders 0 65,742
----------------- ----------------
TOTAL LIABILITIES $ 22,565,624 $ 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:
3,700,000 and 2,500,000 shares issued and outstanding as of
March 31, 1999 and December 31, 1998,respectively 8,453,059 8,453,059
Retained earnings 1,018,976 727,014
----------------- ----------------
TOTAL STOCKHOLDERS' EQUITY $ 9,472,035 $ 9,180,073
================= ================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 32,037,659 $ 64,466,395
================= ================
</TABLE>
See accompanying notes to condensed financial
statements.
3
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
CONDENSED STATEMENTS OF INCOME
MARCH 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
For the Three
Months Ended
March 31,
----------------------------------
INCOME 1999 1998
---- ----
<S> <C> <C>
Net gain from sales of mortgage loans $ 1,717,427 $ 753,013
Interest income 1,029,531 636,758
Production income 692,296 522,468
Other 9,855 5,526
----------------- ----------------
$ 3,449,109 $ 1,917,765
----------------- ----------------
EXPENSES
Interest expense $ 1,000,158 $ 785,506
Salaries and benefits 1,431,075 513,473
General and administrative 422,893 313,084
Office occupancy 91,601 39,041
----------------- ----------------
$ 2,945,727 $ 1,651,104
----------------- ----------------
INCOME BEFORE INCOME TAXES $ 503,382 $ 266,661
INCOME TAXES 211,420 4,000
----------------- ----------------
NET INCOME $ 291,962 $ 262,661
================= ================
EARNINGS PER SHARE
Basic $ .08
Diluted $ .08
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 3,700,000
Diluted 3,700,000
PRO FORMA
Historical income before income taxes $ 266,661
Pro forma income taxes 105,064
----------------
PRO FORMA NET INCOME $ 161,597
================
PRO FORMA EARNINGS PER SHARE
Basic $ .06
Diluted $ .06
PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 2,468,750
Diluted 2,468,750
</TABLE>
See accompanying notes to condensed financial statements
4
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
ENDED MARCH 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
For the Three
Months Ended
March 31,
1999 1998
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 291,962 $ 262,661
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sale mortgage loans (1,727,402) (753,013)
Provision for loan losses (7,500) 0
Depreciation and amortization 25,678 8,180
Mortgage loans originated for sale (269,810,903) (166,206,276)
Proceeds from sales of mortgage loans 304,202,129 180,267,068
Net effect of changes in:
Net deferred loan fees 117,654 (34,077)
Accrued interest receivable 145 13,663
Other assets (23,782) (115,430)
Accounts payable and accrued liabilities (387,926) 46,688
Accrued interest payable (202,464) (50,618)
--------------- ----------------
Net cash provided by operating activities 32,477,591 13,438,846
--------------- ----------------
Cash flows from investing activities:
Proceeds from sales and maturities of certificates of deposit 0 5,589
Purchases of property and equipment (153,415) (13,804)
--------------- ----------------
Net cash used by investing activities (153,415) (8,215)
--------------- ----------------
Net cash flows from financing activities:
Borrowings on warehouse notes payable 265,273,574 162,882,150
Payments on warehouse notes payable (297,337,071) (176,255,263)
Payments on distributions payable to S corporation stockholders (65,742) (139,661)
Borrowings on note payable, subordinated 0 1,000,000
Receipt of note receivable, stockholders 0 250,000
Payments on real estate mortgage (1,069) (663)
--------------- ----------------
Net cash used by financing activities (32,130,308) (12,263,437)
--------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 193,868 1,167,194
--------------- ----------------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 990,115 482,558
--------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,183,983 $ 1,649,752
=============== ================
Cash paid During the Period for:
Interest paid $ 1,202,602 $ 834,541
=============== ================
Income taxes paid $ 340,746 $ 0
=============== ================
</TABLE>
See accompanying notes to condensed financial statements
5
<PAGE>
TRANSNATIONAL FINANCIAL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
NOTE 1 The accompanying financial statements of
Transnational Financial Corporation (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.
NOTE 2 The results of operations of the Company for the
three month periods ended March 31, 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 to the distribution. These dividends
were distributed during the remainder of 1998,
except for $65,742 which was distributed in 1999.
6
<PAGE>
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 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 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.
7
<PAGE>
NOTE 6 Net Income Per Share
Basic net income per share is computed by dividing
net income by the weighted average common shares
outstanding during the period. Diluted net income
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 per
share for the three months ended March 31, 1999 and
1998. For the three months ended March 31, 1999 and
1998, the effect of including outstanding options
in the calculation of diluted earnings 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
Months Ended
March 31,
1999 1998
(pro forma)
<S> <C> <C>
Calculation of Basic Net Income Per Share:
Numerator - net income $ 291,962 $ 161,597
Denominator - weighted average common
shares outstanding 3,700,000 2,500,000
---------- ----------
Basic net income per share $0.08 $0.06
===== =====
Calculation of Diluted Net Income Per Share:
Numerator - net income $ 291,262 $ 161,597
Denominator:
Weighted average common shares outstanding 3,700,000 2,500,000
Dilutive effect of outstanding options - -
---------- ----------
3,700,000 2,500,000
Diluted net income per share $0.08 $0.06
===== =====
</TABLE>
NOTE 7 Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The
Statement establishes accounting and reporting
standards for derivative instruments and hedging
activities. The Statement is effective for fiscal
quarters of fiscal years beginning after June 15,
1999. The Company is in the process of determining
the impact of SFAS No. 133 on the Company's
financial statements.
8
<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 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 $269,810,903 for the first three months
of 1999 compared to $166,206,276 for the same three month period
of 1998. The retail division's volume was approximately
$27,053,889 for the first three months of 1999, compared to
volume of $28,328,830 for the first three months of 1998.
Overall, the Company's loan volume grew by 53% for the first
three months of 1999 compared to the first three months of 1998.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
The Company's pretax income increased during the first quarter
of 1999 to $503,382 from pretax income of $266,661 in the first
quarter of 1998, an increase of 89%. Gross revenues grew as
mortgage loan production for the company grew 53% during the
first quarter of 1999 as compared to the first quarter of 1998.
Gross revenues for the first quarter for 1999 were $3,449,109
compared to the first quarter of 1998 of $1,917,765 or an
increase of 80%.
9
<PAGE>
Expenses in the first quarter of 1999 were 85% of revenues and
were 86% of revenues in the first quarter of 1998. As a result
of better interest rates on warehouse lines of credit, during
the quarter ended March 1999, the Company realized an excess of
interest income over interest expense of $29,373. During the
quarter ended March 1998, interest expense exceeded interest
income by $121,748. Interest expense as a percentage of gross
revenues was 29% for the first quarter of 1999 compared to 41%
for the first quarter of 1998. 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 first quarter of 1999, the Company had
a net interest income because the interest rate charged on its
warehouse line of credit was less than the note rate on the
mortgage to which the Company is entitled to receive from the
time the loan is funded until sold to an investor.
While gross revenues increased 80% in the first quarter of 1999
compared to the first quarter of 1998, salaries and employee
benefits increased by 179% and office occupancy expenses grew by
135%. Much of these increases are due to the Company's expansion
by the hiring of additional senior management. However, the
Company's Chief Executive Officer and President were compensated
through S corporation stockholder draws in the earlier period
and were paid salaries in the 1999 quarter, and the increase
would have been 147% without the compensation of the Chief
Executive Officer and President. The Company also occupied new
space in the fall of 1998 resulting in an increase of 135% in
the period ended March 1999 when compared to the period ended
March 1998. In September 1998 the Company occupied new office
space for additional staff to handle the increase in loan
volume. General and administrative expenses grew 35% because of
obligations of being a publicly held entity as well as some
increased marketing expenses.
It is the belief of management of the Company, the results of
operations for the quarter ending June 30, 1999 will fall short
of expectations set forth by the analyst following the Company.
Management believes that the entire industry is experiencing a
slowdown in loan applications. In addition, the Company will
incur costs setting up offices in Phoenix and Houston and
operating expenses associated with the development of new
E-Commerce technology, all of which will adversely impact the
Company's financial performance by reducing gross margins,
increasing operating expenses and resulting in a decrease in net
income for the quarter ended June 30, 1999.
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 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, during the third quarter of
1998, the Company began the use of new warehouse lines of credit
with the execution of a facility syndicated with several banks
providing up to $105 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 $30 million and as additional
Whole Loan Purchases and Sales Agreement ("Gestation Repo Line")
with Gateway Bank for $50 million. These new credit facilities
have begun to reduce 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 1.50% for the warehouse
line and LIBOR plus 1% on the Gestation Repo Lines, both of
which have reduced interest expense.
10
<PAGE>
YEAR 2000
The Company recognizes the need to ensure its operations will
not be adversely impacted by 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
operations will not be adversely affected by Year 200 software
failures.
The Company depends upon the effective operations of the
financial institutions with which the Company deals as well as
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 lose
materially and be adversely affected. 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 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.
11
<PAGE>
PART 11 - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Index
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K: None
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 Corporation
May 12, 1999 /s/ Joseph Kristul
---------------------------------------
Joseph Kristul, Chief Executive Officer
and Principal Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-03-1999
<CASH> 1,183,983
<SECURITIES> 29,766,868
<RECEIVABLES> 181,198
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 400,337
<DEPRECIATION> 0
<TOTAL-ASSETS> 32,037,659
<CURRENT-LIABILITIES> 0
<BONDS> 21,524,243
0
0
<COMMON> 9,472,035
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 32,037,659
<SALES> 3,449,109
<TOTAL-REVENUES> 3,449,109
<CGS> 0
<TOTAL-COSTS> 2,945,727
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 291,962
<INCOME-TAX> 211,420
<INCOME-CONTINUING> 291,962
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 291,962
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
