April 16, 2001 Management's Discussion and Analysis of Financial Condition and Results of Operations.
CFI MORTGAGE INC (CFIM.OB)
Annual Report (SEC form 10KSB)
Management's Discussion and Analysis of Financial Condition and Results of Operations.
Forward Looking Statements
The following discussion contains certain "forward-looking statements" (rather than historical facts) which are subject to the
safe harbor provision created by the "Private Securities Litigation Reform Act of 1995" (the "Act") and regulations and interpretations there under, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements and other information contained herein including such words as "may," "will," "expect," "believe," "plan," "estimate," "goal," "anticipate," "intend," and other similar terminology and use of future tense, constitute forward-looking statements. These forward-looking statements represent management's current
expectations and are subject to business and economic uncertainties and risks. Actual results could differ materially from
those set forth in and suggested by the forward-looking statements. This discussion should be read in conjunction with the
consolidated financial statements of the Company and the related notes thereto.
Bankruptcy Proceeding
On March 10, 1999, the Company filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the Southern District of Florida, case number 99-31134-BKC-PGH. On July 6, 1999, the bankruptcy court confirmed a Plan of
Reorganization effective August 2, 1999, whereby creditors' claims that were approved by the court were satisfied by the
issuance of one share of the Company's common stock in exchange for each dollar of debt of the approved claim. As a
result, the Company was discharged from any debt that arose before the date of confirmation. As a result of the confirmation
of the Reorganization Plan, the Company is no longer threatened by any litigation, claims, and assessments, which may have existed as of December 31, 1998. The Company's Reorganization Plan provided for an infusion of up to $800,000 in loans secured by the Company's assets. The Company received $311,920, net of expenses of $106,900, of funding under the Plan. The lender had the option of converting the loan to common stock of CFI at a rate of 2% of the Company's shares
outstanding per $80,000 funded to the Company after the effective date of the Plan. Conversion of this debt resulted in the
issuance of 2,004,986 shares. The Plan included claims by two financial institutions in the aggregate amount of $4 million. The Company issued 2,400,000 shares of its common stock in satisfaction of these claims, resulting in the recognition of
forgiveness of debt amounting to $3,100,000. The Company also had certain non-priority claims of $83,328 by employees
and former employees for unpaid compensation. During the Chapter 11 proceeding in 1999, certain non-management
employees were issued 750,000 warrants for the purchase of one share of common stock of CFI at $.39 per share in
satisfaction of claims totaling $83,328. The price represented 125% of the bid price on the effective date of the bankruptcy
plan, August 2, 1999. None of these warrants have been exercised at the present time. Additionally, the Company issued
68,415 shares of its common stock in satisfaction of $68,415 of liabilities to general creditors. The Company's Series "A",
"B" and "C" convertible preferred stock received an aggregate of 4.5 million shares of common stock in the reorganization.
The Company's reorganization under Chapter 11 was triggered primarily by the loss of the Company's credit facilities in
November 1998 and did not resume its mortgage business until the third quarter of fiscal 2000. The Company's
reorganization has been completed, but the Company has not filed for discharge from Chapter 11, which it intends to do in
the near future.
Acquisitions
Beginning in January through August 2000, the Company acquired Inventek, Inc. in exchange for one share of each of the
Company's Series 2 and 3 Convertible Preferred Stock, without dividend rights, and common stock purchase warrants. The
Series 2 Convertible Preferred Stock has a par value of $700,000 and 1,000,000 common stock purchase warrants valued
at $380,000, for an aggregate value of $1,080,000, for sixty-five percent of Inventek, Inc. The Company acquired the remaining 35% of Inventek, Inc. in exchange for 300,000 shares of the Company's common stock and 30,000 common
stock purchase warrants at exercisable at $.5250 per share (120% of the Company's closing price on the day of closing). In
connection with the acquisition, the Company agreed to contribute $250,000 to Inventek, Inc. as additional paid-in capital.
Though December 31, 2000, the Company had contributed $229,000. The Series 3 Convertible Preferred Stock has not
been issued. The par value of the Series 3 Convertible Preferred Stock will be equal to two times net profits from software
operations for the twenty-four month period beginning February 2000, less $1 million in initial consideration, not to exceed a
cap of $5 million in the aggregate. The Class 2 preferred stock is convertible into such number of shares as is determined by
dividing the par value by the average closing asked quotation of the Company's common stock over the last five days prior to
election of conversion. If converted on December 31, 2000, the number of shares into which the Class 2 preferred stock
would have been converted into was 2,912,985 shares. The Class 3 preferred stock will be convertible into the Company's
common stock on the same basis as the Class 2 preferred stock, except the applicable closing asked quotation will be from
the last five days in the twenty-four month period during which the par value is determined.
On June 13, 2000, the Company acquired two commercial office buildings in Evansville, Indiana in exchange for shares of the
Company's Series 4 and 5 Convertible Preferred Stock, without dividend rights, and stock purchase warrants exercisable for
the purchase of 750,000 shares of its common stock at a price of $.15, $35 and $.50 per share for each incremental
250,000 shares. If converted on December 31, 2000, the number of shares into which the Series 4 preferred stock would
have been converted into was 1,353,786 shares. The buildings have been appraised at a value of $2,550,000 with the
mortgages and liens aggregating of approximately $1,200,000 at December 31, 2000. The Company has treated the
difference between the appraised value of the assets acquired and the liabilities assumed as the value of the Series 4 preferred stock. The transaction resulted in goodwill in the amount of $117,200. These properties are held for investment for the purpose of securing credit facilities and meeting capital requirements for licensing standards. The Series 5 preferred stock was issued in connection with the property acquisition in anticipation of services to be rendered by the seller in the
development of the Company's mortgage business, with the par value of the Series 5 preferred stock equal to two and one
half times net profit from mortgage operations, less not more than one-half of the parent company's expenses and before
depreciation and amortization, during the eighteen month period commencing July 2000. Subsequent to December 31, 2000,
that person's employment by the Company was terminated for cause, with the consequence that he will not participate in
development of the Company's mortgage lending business. The Company intends to reduce the par value of the Series 4
preferred stock and cancel the Series 5 preferred stock, which could result in litigation. See, Item 3, "Legal Proceedings".
Results of Operations
Revenues. As a result of the loss of its credit facilities in November 1998, the Company discontinued its mortgage banking
operations. The Company did not have any operations during the year ended December 31, 1999 and revenues were limited
to $21,228. Revenues for the year ended December 31, 2000 are attributable to both the Company's increased development
and marketing of its computer software business through its subsidiary Surfside Software, and the beginning of its wholesale
mortgage lending business through its subsidiary First United MortgageBanc, Inc. in the third quarter of that year, resulting in a dramatic increase in revenues to $2,561,922 compared to 1999.
The Company recognized $1,168,314 of income for the year ended December 31, 2000, resulting from forgiveness of
indebtedness. This income arose from an assignment for the benefit of creditors and liquidation of a subsidiary, Direct
Mortgage Partners, Inc. (DMP).
Subsequent to year-end 2000, the Company discovered that its executive officer responsible for overseeing the Company's
mortgage lending operations had diverted approximately $40,000 in mortgage payment checks due to the Company to his
own company. Furthermore, the Company also discovered that this individual had misrepresented his officership on the
Company's warehouse credit application, resulting in the termination of the Company's line of credit. The Company has
applied for and expects to secure new warehouse lines, however, since it typically takes 60 - 90 days from application until
revenue from loan sales, the actions of the former executive officer will result in lower revenues for the first quarter of 2001.
The Company is seeking a criminal prosecution of this person for embezzlement. The Company believes that all the funds are in an account that has been frozen and is optimistic that it will be able to recover the funds in civil litigation.
Expenses
The Company recorded total operating expenses of $3,440,895 for the year ended December 31, 2000, compared to total
operating expenses of $3,686,191 for the year ended December 31, 1999. Selling expenses increased to $762,731 for the
year ended December 31, 2000 as a result of restarting wholesale mortgage lending operations in the third quarter, compared to none for the year ended December 31, 1999 due to the loss in the Company's credit facilities in 1998. The increase in selling expense was more than offset by a decrease in general and administrative expenses by $1,214,224 to $2,413,203 for the year ended December 31, 2000, compared to $3,627,427 for the year ended December 31, 1999. The primary reason for this decline in general and administrative expenses to 2000 from 1999 was due to a decrease in legal and accounting fees incurred in the Company's Chapter 11 reorganization and reduction in management compensation and consulting expenses for the year ending December 31, 2000. Legal and accounting fees declined by $315,985, to $141,569 for the year ended December 31, 2000, compared to $457,554 for the year ended December 31, 1999. Compensation costs and consulting expense declined by $839,714 to $2,058,231 for the year ended December 31, 2000, compared to $2,897,945 for the year ended December 31, 1999. Also, interest expense increased by $206,197 to $264,961 for the year ending December 31, 2000, compared to $58,764 for the year ending December 31, 1999. The increase is the result of interest expense attributable to the beginning of First United MortgageBanc's Inc. wholesale mortgage lending operations.
Net Loses
The Company generated a loss from operations of $878,973 for the year ended December 31, 2000, compared to
$3,664,963 for the year ended December 31, 1999. The turnaround in the financial position of the Company is primarily
attributable to resumption of the wholesale lending operations. The loss from operations is attributable to the first half of the
year before the Company resumed these operations. Without the loss from operations generated in the first six months of
2000, the Company would have had a profit from operations of approximately $185,000.
The Company's net income for the year ended December 31, 2000 was $3,163,486, which includes an extraordinary gain of
$4,436,530, compared to a net loss of $216,168 after preferred stock dividends of $197,576, and an extraordinary gain of
$3,646,371 for the year ended December 31, 1999
Liquidity and Capital Resources
The Company has been dependent on stock sales and third party borrowings to sustain its operations. In April 2000, the
Company sold 1,787,143 shares of common stock plus 1,787,143 warrants to purchase one share of CFI common stock at
$1.67 per share in a private placement for $500,400. Going forward, the Company believes that cash flow from operations
will be sufficient to fund operations. However, if additional funds are needed to support working capital or to complete
acquisitions, the Company would seek to raise such funds through one or more public or private financing of equity, or from
other sources. There is no assurance any such additional financing, if needed, will be available or, if available, that it would be on terms acceptable to the Company.
During the year ended December 31, 1999, 2,450 shares of series A, B and C preferred stock were converted into
5,025,521 shares of common stock and accordingly additional paid-in capital decreased by $50,230.
During 1999, the Company sold 15% convertible debentures under its Plan of Reorganization for proceeds of $311,920 net
of expenses of $106,900. The debentures were subsequently converted into 2,004,986 shares of the Company's common
stock.
During the third quarter of 1999, the Company borrowed $100,000 on a balloon note at 10% interest, which has been
repaid. As part of the consideration for that loan, the lender was granted 100,000 warrants to purchase common stock at a
price of $.20 per share, which represented 110% of the bid price on date of the loan agreement. Also, as part of that
transaction, a finders fee of $10,000 was paid together with 10,000 warrants to purchase one share of CFI common stock at
$.20 per share. Additional financing was provided by an affiliate who provided a line-of-credit of up to $150,000 with
interest charged at 9%. As an inducement to make this loan, a shareholder of the affiliate was granted 150,000 warrants for
the purchase of common stock at a price of $.25 per share, which represented 105% of the bid price as of the date of the loan.
This loan is outstanding.
In the last quarter of 1999, the Company sold two million shares of common stock to an individual investor in a private
placement for $300,000 and the investor received 150,000 warrants to purchase common stock at a price of $.25 per share,
which represents the 125% of the bid price on the date of the investment.
Net cash used in operating activities was $13,003,506 for the year ending December 31, 2000 the single largest component
of which was the increase in mortgage loans held for resale of $13,149,612, as a result of the Company's renewed financing
activities. Accounts payable, accrued expenses and other current liabilities decreased $1,201,552 to $1,199,871. Net cash
of $535,612 was used in investing activities, for software development cost for Surfside Software and the purchase of
property and equipment for general corporate purposes. Net cash of $13,562,625 was generated by financing activities. This
was primarily the result of the warehouse line of credit, which is used by First United MortgageBanc in its mortgage
operations, and proceeds from the sale of the Company's securities for approximately $455,000.
Net cash used in operating activities was $705,217 for the year ending December 31, 1999. Accounts payable, accrued
expenses and other current liabilities increased $488,169 to $2,401,423. Net cash of $29,689 was used in investing
activities. The substantial portion being $25,000 paid out in connection with a note receivable to Surfside Software in
anticipation of acquiring it. Net cash of $740,109 was generated by financing activities. This was primarily the result of
$611,020 raised through the issuance of convertible debentures and common stock.
Working capital at December 31, 2000 was a deficit of $1,066,324 compared with a deficit of $2,442,858 at December 31,
1999, an increase of $1,376,534. The decrease in the deficit is primarily the result of the Company's improved operating
efficiency.
