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, 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
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(Exact name of small business issuer as specified in its charter)
California 94-2964195
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
401 Taraval Street, San Francisco, CA 94116
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(Address of principal executive offices) (Zip Code)
(415) 242-7800
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(Registrant's telephone number)
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 October 20, 2000: 4,279,310
<PAGE>
TRANSNATIONAL FINANCIAL NETWORK, INC.
SEPTEMBER 30, 2000
UNAUDITED
TABLE OF CONTENTS PAGE NUMBER
PART 1 ITEM 1 FINANCIAL INFORMATION
Condensed Balance Sheets as of
September 30, 2000 and
December 31, 1999 2
Condensed Statements of Operations
For the Three and Nine Months
Ended September 30, 2000 and 1999 3
Condensed Statements of Cash Flows
for the Nine Months Ended
September 30, 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
SIGNATURES 14
<PAGE>
TRANSNATIONAL FINANCIAL NETWORK, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------------- ---------------
---------------- ---------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 1,638,394 $ 862,257
Mortgage loans held for sale 27,224,066 2,009,092
Accrued interest receivable 69,396 40,126
Due from Shareholders 25,428 0
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 0 190,671
Goodwill 3,529,040 3,758,827
Property and equipment, net 349,971 577,079
Other assets 962,660 988,930
------------- -------------
TOTAL ASSETS $ 34,198,955 $ 9,062,801
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Warehouse notes payable $ 26,864,753 $ 0
Accrued interest payable 256,839 164,278
Real estate mortgage 0 140,283
Due to shareholders 0 22,043
Accounts payable and accrued liabilities 513,446 80,392
Long term liabilities- Subordinated debt 560,000 0
------------- -------------
TOTAL LIABILITIES 28,195,038 406,996
------------- -------------
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 June 30, 2000 and December 31, 1999 10,594,450 10,558,709
Accumulated deficit (4,590,533) (1,902,904)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 6,003,917 8,655,805
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 34,198,955 $ 9,062,801
================= =============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
TRANSNATIONAL FINANCIAL NETWORK, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
---- ---- ---- ----
INCOME
<S> <C> <C> <C> <C>
Net gain on sale of mortgage loans $ 561,696 $ 920,010 $ 1,435,302 $ 3,255,114
Production income 1,268,356 1,472,620 3,910,249 2,976,591
Interest Income 538,651 587,445 1,415,468 2,087,817
Other 43,976 21,305 250,129 41,423
----------- ---------- ---------- ----------
2,412,679 3,001,380 7,011,148 8,360,945
----------- ---------- ---------- ----------
EXPENSES
Interest expense 613,156 495,191 1,542,222 1,839,598
Salaries and benefits 1,725,181 2,574,334 5,698,424 5,361,527
General and administrative 655,666 885,611 2,143,222 1,891,124
Occupancy 164,190 185,335 534,099 371,363
----------- ----------- ---------- ----------
3,158,193 4,140,471 9,917,967 9,463,612
----------- ----------- ---------- ----------
LOSS BEFORE INCOME TAXES (745,514) (1,139,091) (2,906,819) (1,102,667)
INCOME TAX (BENEFIT) EXPENSE (219,190) (14,987) (219,190) 0
----------- ----------- ---------- ----------
NET (LOSS) $ (526,324) $ (1,124,104) $(2,687,629) $(1,102,667)
============ =========== ========== ==========
NET (LOSS) INCOME PER SHARE
Basic and diluted $ (0.12) $ (0.27) $ (0.63) $ (0.29)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic and diluted 4,279,310 4,090,405 4,279,310 3,831,565
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
TRANSNATIONAL FINANCIAL NETWORK, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30,
2000 1999
-------------- -------------
-------------- -------------
Cash flows from operating activities:
<S> <C> <C>
Net loss income $ (2,687,629) $ (1,102,667)
Adjustments to reconcile net loss to net cash provided
by(used in)operating activities:
Gain on sale mortgage loans (1,294,033) (3,817,179)
Provision for early payoffs 141,269 39,975
Depreciation and amortization 477,498 171,938
Issuance of stock warrants for services 35,741 0
Mortgage loans originated for sale (435,605,766) (599,163,141)
Proceeds from sales of mortgage loans 411,543,556 654,277,048
Net gain on sale of investment property (65,298) 0
Changes in assets and liabilities:
Accrued interest receivable (29,270) (6,246)
Notes receivable 35,819 0
Other assets 117,867 (400,236)
Accrued interest payable 92,561 (365,398)
Accounts payable and accrued liabilities 433,054 (718,932)
------------ -----------
Net cash provided by(used in)operating activities (26,804,632) 48,915,162
------------ -----------
Cash flows from investing activities:
Purchases of property and equipment (12,391) (333,824)
Repayment of advances by Loan Link, LLC 200,000 0
Purchase/additional cost to acquire LRS (30,438) (1,806,930)
------------ -----------
Net cash provided by (used in) investing activities 157,171 (2,140,754)
------------ -----------
Cash flows from financing activities:
Borrowings on warehouse notes payable 316,490,191 786,591,762
Payments on warehouse notes payable (289,625,438) (833,125,936)
Payments on distribution payable to "S" corporation stockholders 0 (65,742)
Payments on real estate mortgage (1,156) (2,566)
Borrowings on subordinated debt 560,000 0
------------ -----------
Net cash provided by (used in) financing activities 27,423,597 (46,602,482)
------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 776,137 171,926
------------ -----------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 862,257 990,115
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,638,394 $ 1,162,041
============ ===========
Cash paid during the period for:
Interest paid 1,386,465 1,917,484
============ ===========
Income taxes paid (refund) (597,278) 515,016
============ ===========
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
TRANSNATIONAL FINANCIAL NETWORK, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 September 30, 1999
financial statements have been reclassified to conform to the
September 30, 2000 presentation.
NOTE2 The results of operations of the Company for the nine-month
periods ended September 30, 2000 and 1999 are not necessarily
indicative of the results to be expected for the full year.
NOTE 3 Net (Loss) Income Per Share
Basic net (loss) income per share is computed by dividing net (loss)
income by the weighted average common shares outstanding during the
period. Diluted net (loss) income per share is computed based on the
weighted average number of common shares outstanding adjusted for
potentially dilutive securites. For the nine months ended September
30, 2000 and 1999, the effect of including potentially dilutive
securities in the calculation of diluted net (loss) income per share
would be antidilutive. As a result, the effect of potentially
dilutive securities of 769,500 has not been included in the
calculations.
<PAGE>
NOTE 4 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 September 30, 2000, options granted
under the 2000 Plan consist of automatic grants to outside directors
and options for 100,000 shares given to a senior executive officer
hired in August 2000. The 2000 Plan was ratified by the shareholders
at the annual shareholders meeting held on May 11, 2000.
NOTE 5 Subordinated Debt -
In August ($500,000) and September ($60,000), the Company borrowed
$560,000 in subordinated debt. Interest is payable monthly at 15%
with the debt maturing in 2002.
NOTE 6 Income Taxes -
During the third quarter of 2000 the Company received income tax
refunds in excess of amounts previously recorded as receivables.
<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. ("Transnational Financial Network,
Inc." 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 principally in the San Francisco Bay area, Southern
California, and Arizona. During the second quarter of 1999, the Company
opened additional loan production offices in Houston, Texas, Phoenix, Arizona
and Reno, Nevada. The Nevada and Texas offices were subsequently closed.
The Company's loan production and results of operations are strongly affected
by mortgage interest rates. Increasing mortgage rates raises the qualifying
income required of a homebuyer and reduces housing affordability. It also
causes mortgage refinancing activity to decline because fewer homeowners can
successfully obtain a mortgage at a lower interest rate than their original
mortgage. Thus, when mortgage interest rates started to rise in 1999,
industry-wide refinancing, which was $740 billion in 1998 dropped and is
expected to total only $180 billion in 2000, a decline of over 75%.
In January 1999, 30-year mortgage interest rates were 6.74%, reaching 7.55%
at the end of the second quarter and 7.91% at year-end. During the first
quarter of 2000 the 30-year mortgage rate went up to 8.24%, then peaked at
8.54% in the middle of June and moved down to 8.14% by the end of the month.
Since then, the rate has stabilized at around 8% until recently on October
25, 2000 when the 30-year fixed rate average dropped to 7.36%.
<PAGE>
The Company's mortgage loan production started to decline from the third
quarter of 1999 and continued through the second quarter of 2000.
Subsequently, loan production increased slightly in tandem with the favorable
decline in interest rates in the third quarter of this year. The following
table sets forth the wholesale and retail production for the periods
indicated:
Mortgage Loan Volume
For the First Three Quarters of 1999
<TABLE>
<CAPTION>
1st Qtr-99. 2nd Qtr.-99 3rd Qtr.-99 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>
Mortgage Loan Volume
For the First Three Quarters of 2000
<TABLE>
<CAPTION>
1st Qtr-00. 2nd Qtr.-00 3rd Qtr.-00 Total
<S> <C> <C> <C> <C>
Wholesale $144,043,724 $130,878,546 $154,913,511 $429,835,781
Retail 77,405,856 82,928,025 67,973,925 228,307,806
----------- ------------- ----------- -----------
TOTAL $221,449,580 $213,806,571 $222,887,436 $658,143,587
</TABLE>
Overall, the Company's mortgage loan volume decreased by $85,893,095 or 11.5%
for the first nine months of 2000 when compared to the first nine months of
1999. Wholesale mortgage loan production through September 30 this year was
$190,591,444 or 30.7% less than in the same period in 1999. Of this decline,
94.5% occurred in the first six months of 2000 when interest rates were
highest compared to the rates in the comparable period. Retail loan
production, on the other hand, was $104,698,349 or 84.7% more compared to the
first three quarters of 1999. All of this increase in retail loan production
was recorded in the first six months of 2000 compared to the same period last
year because of the large retail operations of LRS, Inc. which was acquired
on July 30, 1999.
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
For the nine-month period ended September 30, 2000, the Company incurred a
net loss of $2,651,888 compared to a net loss of $1,102,667 during the same
period in 1999. Gross revenue declined by $1,349,797 or 16.1% attributable to
reduced wholesale loan originations while expenses for the first nine months
of 2000 increased by $418,614 or by 4.4% over the same period last year.
Expenses of the Arizona office established mid-1999 and those of LRS, Inc.
which was acquired at the end of July 1999 account for higher expenses during
the first three quarters of 2000 compared to the same period last year.
Reductions of corporate expenses were not sufficient to offset the increased
cost of these offices.
Net gain on sale of mortgage loans decreased by $1,819,812 or 55.9% during
the first nine months of 2000 compared to the same period last year. This was
the combined effect of lower wholesale production and the narrower profit
margin on loans sold during the first nine months of 2000. 59% of this
decrease in gain on sale of loans occurred in the first quarter, 21% in the
second quarter, and 20% in the third quarter of 2000 compared to the same
period last year.. Wholesale production was $ 126 million less for the first
three months of 2000, was $54 million less during the second quarter and was
$10.5 million less during the third quarter compared to the same periods last
year. The decrease in production was industry wide and was the dominant cause
of lower gains on sale. Beginning in April of 2000, the Company also
discontinued the wholesale sub-prime loan operations of the acquired LRS,
Inc., which accounts for part of the decrease in production this year
compared to the same period last year.
Production income is derived from wholesale loan fees and retail loan
origination fees. Production income went up by $933,658 or 31.4% for the nine
months ended September 30, 2000 compared to the same period last year because
of increased retail loan production as previously described.
Interest income is derived from borrowers' payments on mortgage loans prior
to the loan being sold by the Company. Interest expense is incurred on
drawdowns made by the Company on its warehouse line of credit at the time of
funding the mortgage loans until the loans are sold. As in the first and
second quarters of this year, interest expenses for the warehouse line in the
third quarter exceeded interest income received by the Company from loans
funded but not yet sold. This resulted in net interest expense of $126,754
for the first nine months of 2000 in contrast to a net interest income of
$248,219 during the same period in 1999.
The Company lowered interest costs by changing to another warehouse lender at
the beginning of this year. Nonetheless, the amount the Company received on
mortgage loans after they were funded was less than the interest the Company
paid on its warehouse line of credit during the first nine months of 2000
compared to a positive net interest income during the same period last year.
The Company funded an increased number of adjustable rate mortgages (ARMs)
some of which have initial rates as low as 2.95%, substantially lower than
what the Company pays for its warehouse line. The Company anticipates having
a negative interest spread for the rest of the year.
<PAGE>
Salaries and benefits, general and administrative, and occupancy expenses
were all higher during the first nine months of 2000 compared to the same
period in 1999. Expenses have actually been significantly pared down since
the beginning of the year. This is not readily apparent, however, because
expense totals for 2000 include expenses of Arizona branch and of the
acquired LRS, Inc. from the beginning of the year while 1999 expense totals
reflect expenses for these offices only starting mid-June 1999 in the case of
Arizona branch and August 1, 1999 in the case of the acquired LRS, Inc.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
The Company incurred a net loss after income taxes of $526,324 for the three
months ended September 30, 2000 compared to a net loss after income taxes of
$1,124,104 during the comparable period last year. The smaller net loss in
the third quarter of 2000 compared to the same period last year was the
result of reductions in expenses and a refund of income taxes which offset
the decrease in revenue.
Net gain on sale of mortgage loans decreased $358,313 or 39.0%, production
income decreased by $204,264 or 13.9% and other income was higher by $22,671
or 106.4% for the third quarter of 2000 compared to the totals for the same
period last year. Other income rose because of interest accruals on the
$300,000 notes receivable from 4ADream Loan Link LLC, a holding company for
an internet mortgage loan brokerage.
The bulk of the decrease in net gain on sale arose from lower wholesale loan
production. Total wholesale loans closed were $10,513,101 or 6.4% less than
in the same period last year. Production income went down because of a
decrease in retail origination fees posted by the acquired LRS, Inc. during
the third quarter this year compared to fee income it contributed immediately
after acquisition in 1999. Retail loan production was $7,483,711 or 9.9%
lower than in the third quarter of 1999, principally because of a decline in
LRS's retail production.
During the third quarter of 2000, the Company incurred a net interest expense
of $74,505 compared to a net interest income in the third quarter of 1999 of
$92,254. The unfavorable result in 2000 reflects the negative gap between the
initial interest rates on mortgage loans funded and the interest rate on the
warehouse line.
The Company has taken steps to reduce controllable expenses since the
beginning of the year. Among others, the Company reduced the number of
support staff, placed account executives on straight commission so that
compensation will vary with loan production, renegotiated vendor contracts to
bring down monthly costs, prioritized and limited technology projects to the
most important, and managed down delivery and fax expenses by limiting
distribution of rate sheets to only active brokers. The effect of these
aggressive cost cutting measures which was not apparent in the comparison of
expenses between the nine-month period ending September 30, 2000 and the same
period in 1999 is visible in the analysis of expenses for the third quarter.
Unlike in previous quarter comparisons, general overhead for Arizona branch
and the former LRS, Inc.'s expenses are included in both the 1999 and 2000
third quarter numbers.
<PAGE>
Excluding interest expense, total expenses were $1,100,243 or 30.2% lower
during the third quarter of 2000 compared to the same period in 1999.
Commissions decreased by $177,423 or 18.2% because of lower production.
Salaries and benefits decreased by $843,153 or 32.8%, general and
administrative expenses by $229,945 or 28%, and occupancy costs by $21,145 or
11.4% mainly as a result of aggressive cost reduction efforts.
Production started to increase during the latter part of the third quarter at
the same time that the Company made better spreads on loans sold. The Company
will continue to implement an action plan to return to profitability.
The pre-tax loss for the first, second, and third quarters of 2000 were
$473,942, $814,806, and $745,514, respectively. While the third quarter loss
narrowed in comparison to the second quarter 2000 loss, the benefit of cost
reduction was not as much in the third quarter as in the prior two quarters.
LIQUIDITY AND CAPITAL RESOURCES
The Company's main funding source is a $40 million revolving warehouse line
of credit provided by Residential Funding Corporation (RFC) to fund mortgage
loan originations. Interest on warehoused loans are at LIBOR + 1.5% (8.12 %
at September 30, 2000) and LIBOR + 2% starting October 23, 2000. The RFC
credit agreement matured on August 31, 2000 and the warehouse line was
extended to January 15, 2001 at a reduced amount of $35 million effective
November 1, 2000. and a higher interest rate of LIBOR + 2% starting October
2000. The new terms also provide that no further advances can be made on the
line after November 30, 2000.
As of November 10, 2000, the Company has received credit approval from Lehman
Brothers Bank for a $20 million warehouse line beginning on or before
November 30, 2000. Lehman Brothers Bank requires a minimum of $3 million of
adjusted tangible net worth. In addition, Gateway Bank has approval for the
Company's immediate use of $10 Million on a QuickSale line (warehouse) and
Gateway Bank stated that they are increasing the line to $20 million by
year-end.
The Company is in negotiations with four other national entities for
warehouse and gestation lines in an aggregate of over $57 million . The
Company requires a minimum of $30 Million to fund acceptable levels of
revenues. The Company believes that by mid-December it will have in place
adequate funding sources to support its increasing production. Failure to
achieve the $30 million credit lines will have a material adverse effect on
the Company's operations and financial performance.
<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 14, 2000 /s/ Joseph Kristul
---------------------------------------
Joseph Kristul, Chief Executive Officer
And Principal Financial Officer
<PAGE>
