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, 2000
[ ] 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 (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 May 22, 2000: 4,279,310
<PAGE>
TRANSNATIONAL FINANCIAL NETWORK, INC.
March 31, 2000
UNAUDITED
TABLE OF CONTENTS PAGE NUMBER
PART 1 ITEM 1 FINANCIAL INFORMATION
Condensed Balance Sheets as of March 31, 2000
And December 31, 1999 2
Condensed Statements of Operations
For the Three Months
Ended March 31, 2000 and 1999 3
Condensed Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999 4
Notes to Condensed Financial Statements 5
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES-
<PAGE>
PART I - FINANCIAL INFORMATION
TRANSNATIONAL FINANCIAL NETWORK, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------------- -----------------
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 1,737,542 $ 862,257
Mortgage loans held for sale 20,683,823 2,009,092
Accrued interest receivable 29,978 40,126
Investment in Loan Link, LLC 0 300,000
Receivable from Loan Link, LLC 300,000 200,000
Notes receivable 100,000 135,819
Investment in real estate 189,512 190,671
Goodwill 3,661,040 3,758,827
Property and equipment, net 523,982 577,079
Other assets 709,209 988,930
------------------- -----------------
TOTAL ASSETS $ 27,935,086 $ 9,062,801
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Warehouse notes payable $ 20,358,746 $ 0
Accrued interest payable 95,829 164,278
Real estate mortgage 139,574 140,283
Due to shareholders 22,043 22,043
Accounts payable and accrued expenses 9,588 80,392
------------------- -----------------
Total liabilities 20,625,780 406,996
SHAREHOLDERS' 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 issued and outstanding
as of March 31, 2000 and December 31, 1999 10,558,709 10,558,709
Accumulated deficit (3,249,403) (1,902,904)
------------------- -----------------
Total shareholders' equity 7,309,306 8,655,805
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 27,935,086 $ 9,062,801
================ ===============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
TRANSNATIONAL FINANCIAL NETWORK, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
2000 1999
------------------- -----------------
<S> <C> <C>
INCOME
Net gain on sale of mortgage loans $ 397,164 $ 1,473,451
Production income 1,302,488 936,272
Interest income 474,757 1,029,531
Other 28,925 9,855
------------------- -----------------
2,203,334 3,449,109
EXPENSES
Interest expense 493,807 1,000,158
Salaries and benefits 2,085,717 1,431,075
General and administrative 790,797 422,893
Occupancy 179,512 91,601
------------------- -----------------
3,549,833 2,945,727
INCOME(LOSS) BEFORE INCOME TAXES (1,346,499) 503,382
INCOME TAX EXPENSE 0 211,420
NET INCOME (LOSS) $ (1,346,499) $ 291,962
====================== ===================
NET (LOSS) INCOME PER SHARE
Basic and diluted $ (0.31) $ 0.08
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 4,279,310 3,700,000
Diluted 4,279,310 3,700,000
</TABLE>
See accompanying notes to condensed financial statements
<PAGE>
TRANSNATIONAL FINANCIAL NETWORK, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31
2000 1999
------------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) Income $ (1,346,499) $ 291,962
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Gain on sale of mortgage loans (368,412) (1,727,402)
Provision for loan losses 28,752 (7,500)
Depreciation and amortization 155,010 25,678
Mortgage loans originated for sale (152,070,208) (269,693,249)
Proceeds from sales of mortgage loans 133,735,137 304,202,129
Changes in assets and liabilities:
Accrued interest receivable 10,148 145
Notes receivable 35,819 -
Other assets 279,721 (23,782)
Accrued interest payable (68,449) (202,464)
Accounts payable and accrued liabilities (70,804) (387,926)
Net cash provided by (used in) operating activities (19,679,785) 32,477,591
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,967) (153,415)
Repayment of advances by Loan Link, LLC 200,000 -
Net cash provided by (used in) investing activities 197,033 (153,415)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on warehouse notes payable 188,108,591 265,273,574
Payments on warehouse notes payable (167,749,845) (297,337,071)
Payments on real estate mortgage (709) (1,069)
Payments on distributions payable to "S" corporation stockholders - (65,742)
Net cash provided by (used in) financing activities 20,358,037 (32,130,308)
INCREASE IN CASH AND CASH EQUIVALENTS 875,285 193,868
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 862,257 990,115
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,737,542 $ 1,183,983
================= ===================
CASH PAID DURING THE PERIOD FOR:
Interest $ 562,255 $ 1,202,602
Taxes $ - $ 340,746
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
TRANSNATIONAL FINANCIAL NETWORK, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 2000
(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, 1999. 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.
Reclassifications - Certain amounts in the March 31, 1999
financial statements have been reclassified to conform to the
March 31, 2000 presentation.
NOTE 2 The results of operations of the Company for the three-month
periods ended March 31, 2000 and 1999 are not necessarily
indicative of the results to be expected for the full year.
<PAGE>
NOTE 3 Net Income (Loss) Per Share
Basic net (loss) income 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, if dilutive. For
the three months ended March 31, 2000 and 1999, 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.
NOTE 4 Acquisition
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 must pay
certain earn-out amounts based on pretax income, as defined,
to the former stockholders of LRS, Inc. up to a total of $3.2
million over a four-year period beginning August 1, 1999 and
ending July 31, 2003. In connection with the acquisition,
goodwill of $3,944,425 was recorded and is being amortized
using the straight-line method over 10 years.
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-month
period ended March 31, 1999, and it is presented as if the
acquisition had been effective on January 1, 1999. 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 (the Company and LRS, Inc.)
for the three month period ending March 31, 1999
GROSS REVENUE $ 6,819,609
---------------
NET INCOME (LOSS) $ 683,698
---------------
NET INCOME (LOSS) PER SHARE
Basic $ 0.16
Diluted $ 0.16
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 4,279,310
Diluted 4,279,310
NOTE 5
During the first quarter of 2000, Transnational Financial
Network, Inc. entered into an agreement with 4ADREAM LOAN
LINK LLC to convert its $300,000 cash investment to a
receivable to be repaid in three years. The Company will
continue to maintain a 19.9% ownership interest. The $200,000
receivable at December 31, 1999 was repaid in February 2000.
NOTE 6
In February 2000, the Company's Board of Directors approved
the 2000 Stock Incentive Plan ("2000 plan") effective March
1, 2000. All options presently issued and outstanding under
the 1998 Stock Compensation Plan ("1998 plan") will continue
to be honored but no more options may be issued under the
1998 Plan.
Under the 2000 Plan, the maximum number of shares that can be
granted in any one year to any single individual either
directly or via option grants will be 150,000. Among other
features of the plan is an initial outside directors' option
grant of 15,000 shares to each director at the date the plan
was adopted or upon the director first becoming such. Each
outside director also receives an option for 5,000 shares
upon election at the annual meeting of stockholders provided
the director has served at least six months. The option price
is the market price of the stock on the date of grant. The
2000 Plan also contains an incentive stock option plan which
allows options to be granted to eligible employees. The 2000
Plan also permits directors and certain employees to receive
options in lieu of compensation as well as directly granting
stock to certain employees as a bonus. As of May 12, 2000,
there have been no options granted under the 2000 Plan other
than automatic grants to outside directors.
<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 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,
general economic and market conditions and growth rates could
affect such statements.
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 primarily in California
and Arizona. During the second quarter of 1999, the Company
opened additional loan production offices in Houston, Texas
and Phoenix, Arizona and in Reno, Nevada. Both the Texas and
Reno offices were subsequently closed.
Similar to industry experience, the Company's loan production
and profit performance are strongly affected by mortgage
interest rates. FHLMC's 30-year fixed rates for home
mortgages have been increasing throughout 1999 and have
continued to rise thus far in 2000. In January 1999, these
rates were 6.74%, reaching 7.55% at the end of the second
quarter and 7.91%% at year-end. During the first three months
of 2000, FHLMC 30-year fixed mortgage rates rose further
reaching 8.24% by the end of the quarter.
Increasing interest rates increase the cost of home ownership
resulting in diminished demand for mortgage loans. Thus, the
Company saw its volume of mortgage loans drop beginning in
the second quarter of 1999 and continuing through the first
quarter of 2000. The following table sets forth the wholesale
and retail production for the periods indicated.
Mortgage Loan Volume
For 1999 Through First Quarter 2000
<TABLE>
<CAPTION>
1st Qtr.-99 2nd Qtr. -99 3rd Qtr. -99 4th Qtr. -99 1st Qtr. -00
<S> <C> <C> <C> <C> <C>
Wholesale $269,810,903 $185,189,710 $165,426,612 $159,819,500 $144,043,724
Retail 27,053,889 21,097,932 75,457,636 69,371,902 77,405,856
------------- ------------- ------------- ------------- -------------
TOTAL $296,864,792 $206,287,642 $240,884,248 $229,191,402 $221,449,580
============ ============ ============ ============ ============
</TABLE>
The Company's mortgage loan volume declined by $75,415,212 or 25.4% for
the first three months of 2000 when compared to the first three months
of 1999 with wholesale mortgage loan production dropping by
$125,767,179 or 46.6% while retail mortgage loan production more than
doubled and increased by $50,351,967 or 186.1%. Wholesale loan
production followed the overall slowdown in the mortgage banking
industry as a result of increasing mortgage interest rates. Wholesale
loan production of the office in Arizona and of the wholesale division
of the acquired LRS, Inc. added to the volume but not enough to offset
the decline in production of the other offices. On the other hand,
retail production increased because of the large retail operations of
the acquired LRS, Inc..
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
For the first three months of 2000 the Company incurred a net
loss of $1,346,499 compared to net income after tax of
$291,962 during the same period in 1999. Gross revenue
declined by $1,245,771 or $ 36.1% attributable to reduced
wholesale loan originations while expenses went up by
$604,112 or 20.5% because of the acquisition of LRS, Inc. on
July 31, 1999 and the establishment of new branches in
Houston, Texas, Reno, Nevada, and Phoenix, Arizona midyear
1999. The Company closed the branch in Texas but the
Company's Texas operation affected the results of operations
until end-March 2000. The Company closed the Reno branch in
December, and these operations did not affect the Company's
revenue or expenses in the first quarter of 2000.
Net gain on the sale of mortgage loans during the first
quarter of 2000 decreased by $1,076,287 or 73.1% compared to
the same period last year. Lower production volume and the
narrower profit margins on loan sales as a result of greater
competition caused this decline.
Production income increased by $366,216 or 39.1% because of
increased retail production described earlier. Production
income is primarily derived from loan fees from both
wholesale and retail production.
Interest income is derived from payments received on mortgage
loans during the period prior to the mortgage loan being sold
by the Company. Interest expense is incurred under the
Company's warehouse line of credit when the Company is
required to borrow to fund mortgage loans. During the first
quarter of 2000, the cost of borrowing exceeded the interest
received by the Company on the mortgage loans funded by the
Company resulting in a net interest expense of $19,049 in
contrast to a net interest income of $29,373 during the first
quarter of 1999. While the Company lowered interest costs by
changing to another warehouse line provider at the beginning
of this year, the change in loan mix, dictated by the market,
accounts for the negative interest spread this year compared
to 1999. As interest rates rose, competition increased and
the Company offered extremely low rates during the initial
loan period for certain variable rate mortgage loans. While
successfully attracting business, these rates are
significantly below the rates the Company pays for its
warehouse line until the loan is sold.
Salaries and benefits, general and administrative, and
occupancy expenses were all higher during the first three
months of 2000 compared to the first quarter of 1999 due to
expenses for the new loan production offices in Houston and
Phoenix which opened mid-June 1999 and most significantly due
to the addition of general overhead for the acquired LRS,
Inc. starting August 1999. The Company also paid a higher
combined rent when it consolidated its retail and wholesale
offices as well as its Accounting Department in one building
in San Francisco in July of 1999. Excluding interest expense,
other expenses combined increased by 57.1%, with salaries and
benefits up 45.8%, general and administrative expenses by 87%
and occupancy costs by 96.0%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's funding resources consist principally of a
warehouse line provided by a lender who fund mortgage loans
pending resale of the loans to investors. Until termination
on December 30, 1999, Guaranty Federal Bank provided this
facility. Beginning January 1, 2000 Residential Funding
Corporation replaced this facility. The Company's present
warehouse line with Residential Funding Corporation is for
$40 Million.
The Company also has a $10 Million Quick Sale Master Loan
Participation and Custodian Agreement with Gateway Bank. The
line terminates only upon written notice from either party.
The Company also had a Gestation Repurchase Line with Gateway
Bank for $15 Million which expired March 31, 2000 and which
is being renegotiated. There is also a whole loan Purchase
and Sales Agreement (Gestation Repurchase Line) with
Greenwich Capital for $30 Million. The line terminates only
upon written notice from either party. These lines provide
for the sale of mortgage loans pending final resale.
The Company believes that funds provided through these
facilities combined with cash flows from operations,are
sufficient to support its operations.in accordance with the
Year 2000 budget.
The acquisition of LRS, Inc. increased capital stock to
$10,558,709, or by $2,105,650 on July 31, 1999 which
increased the Company's capital and leveraged borrowing
capacity. The Company recorded goodwill of $3,944,425, which
is solely attributable to the acquisition of LRS, Inc. As
previously stated, this goodwill is being amortized over ten
years.
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 22, 2000 /s/ Joseph Kristul
--------------------------------------------
Joseph Kristul, Chief Executive Officer
And Principal Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-03-2000
<CASH> 1,737,542
<SECURITIES> 20,683,823
<RECEIVABLES> 29,978
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 523,982
<DEPRECIATION> 0
<TOTAL-ASSETS> 27,935,086
<CURRENT-LIABILITIES> 0
<BONDS> 20,358,746
0
0
<COMMON> 10,558,709
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,309,306
<SALES> 2,203,334
<TOTAL-REVENUES> 2,203,334
<CGS> 0
<TOTAL-COSTS> 3,549,833
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,346,449)
<INCOME-TAX> (1,346,449)
<INCOME-CONTINUING> (1,346,449)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,346,499)
<EPS-BASIC> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
