SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_________________
FORM 10-QSB
_________________
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2005
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE
SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________.
Commission File Number: 0-28325
TMSF HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State of other jurisdiction of incorporation or organization)
_________________
87-0642252
(I.R.S. Employer Identification No.)
727 West Seventh Street Suite 850 Los Angeles, CA
90017
(Address of principal executive office)
(213) 234-2400
(Registrant’s telephone number, including area code)
_________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 |_|
The number of shares of Common Stock outstanding as of May 16, 2005: 15,000,000
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| PART I | FINANCIAL INFORMATION | |||||||
| Item 1 | Financial Statements | |||||||
| Consolidated Balance Sheets as of March 31, 2005 (unaudited) | ||||||||
| and December 31, 2004 | 1 | |||||||
| Consolidated Statements of Operations for the three months | ||||||||
| ended March 31, 2005 (unaudited) and 2004 (unaudited) | 2 | |||||||
| Consolidated Statements of Cash Flows for the three months ended | ||||||||
| March 31, 2005 (unaudited) and 2004 (unaudited) | 3 | |||||||
| Notes to the Consolidated Financial Statements (unaudited) | 4 | |||||||
| Item 2 | Management Discussion and Analysis of Financial Condition | |||||||
| and Results of Operations | 13 | |||||||
| Item 3 | Controls and Procedures | 38 | ||||||
| PART II | OTHER INFORMATION | |||||||
| Item 1 | Legal Proceedings | 38 | ||||||
| Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | 38 | ||||||
| Item 3 | Defaults Upon Senior Securities | 38 | ||||||
| Item 4 | Submission of Matters to a Vote of Securities Holders | 38 | ||||||
| Item 5 | Other Information | 39 | ||||||
| Item 6 | Exhibits | 39 |
| ASSETS | ||
| March 31, | December 31, | |
| 2005 | 2004 | |
| (unaudited) | ||
| Current assets | ||
| Cash and cash equivalents | $ 7,025,640 | $ 8,565,215 |
| Mortgage loans held for sale | ||
| (net of loss reserves of $127,500 & $43,690 respectively) | 91,062,307 | 121,115,941 |
| Mortgage loans to be repurchased | ||
| (net of loss reserves of $775,600 & $475,238 respectively) | 6,535,998 | 3,843,045 |
| Prepaid expenses | 255,818 | 84,227 |
| Warehouse receivables | 4,579,169 | 3,126,439 |
| Other receivables and employee advances | 82,257 | 128,855 |
| Total current assets | 109,541,189 | 136,863,722 |
| Restricted cash | 1,551,087 | 1,356,170 |
| Real estate owned (net of loss reserves of $50,000 & $0, respectively) | 654,821 | - |
| Property and equipment, (net of accumulated depreciation of | ||
| $419,269 & $342,704, respectively) | 939,546 | 667,269 |
| Deposits and other assets | 30,390 | 28,574 |
| Deferred tax asset | 439,701 | 439,701 |
| Total assets | $113,156,734 | $139,355,436 |
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||
| Current liabilities | ||
| Warehouse lines of credit | $ 84,522,516 | $ 115,554,147 |
| Obligation to repurchase mortgage loans | 7,311,598 | 4,318,283 |
| Accounts and other payables | 1,648,625 | 4,464,956 |
| Accrued expenses | 596,706 | 346,770 |
| Accrued income taxes | 1,694,311 | 259,063 |
| Total current liabilities | $95,773,756 | $124,943,219 |
| Long Term Liabilities | ||
| Deferred tax liability | 102,709 | 102,709 |
| Total Liabilities | 95,876,465 | 125,045,928 |
| Commitments and contingencies | ||
| Shareholders' equity | ||
| Preferred stock, $0.001 par value | ||
| 10,000,000 shares authorized | ||
| no shares issued and outstanding | - | - |
| Common stock, $0.001 par value | ||
| 100,000,000 shares authorized | ||
| 15,000,000 shares | ||
| issued and outstanding | 15,000 | 15,000 |
| Additional paid-in capital | 3,078,682 | 3,078,682 |
| Retained earnings | 14,186,587 | 11,215,826 |
| Total shareholders' equity | 17,280,269 | 14,309,508 |
| Total liabilities and shareholders' equity | $ 113,156,734 | $ 139,355,436 |
The accompanying notes are an integral part of these financial statements.
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|
For the Three Months Ended March 31, | ||
|---|---|---|
| 2005 | 2004 | |
| (unaudited) | (unaudited) | |
| Loan income | ||
| Income from the sale of mortgage loans | $15,673,881 | $6,196,081 |
| Mortgage interest income | 3,420,680 | 1,049,650 |
| Escrow service income | - | 74,671 |
| Commission fee income | 59,649 | 84,833 |
| Total loan income | 19,154,210 | 7,405,235 |
| Costs of loan origination and sale of | ||
| mortgages | ||
| Appraisals | 310,312 | 159,298 |
| Commissions | 4,898,396 | 2,063,451 |
| Credit reports | 43,462 | 29,186 |
| Other costs | 61,166 | 76,369 |
| Provision for impairment of EFL, REO, and | ||
| loans to be repurchased | 524,822 | 100,000 |
| Warehouse fees | 92,379 | 46,620 |
| Warehouse interest expense | 2,766,444 | 707,436 |
| Total costs of loan origination | ||
| and sale of mortgages | 8,696,981 | 3,182,360 |
| Gross profit | 10,457,229 | 4,222,875 |
| Operating expenses | 5,531,900 | 2,488,101 |
| Income from operations | 4,925,329 | 1,734,774 |
| Other income | ||
| Interest income | 18,659 | 1,673 |
| Other income | - | 15,000 |
| Income (loss) on disposal of property | ||
| & equipment | - | 78,280 |
| Total other income | 18,659 | 94,953 |
| Income before provision | ||
| for income taxes | 4,943,988 | 1,829,727 |
| Provision for income taxes | 1,973,226 | 781,600 |
| Net income | $2,970,762 | $1,048,127 |
| Basic earnings per share | $ 0.20 | $ 0.07 |
| Diluted earnings per share | $ 0.19 | $ 0.07 |
| Basic weighted-average common shares outstanding | 15,000,000 | 15,000,000 |
| Diluted weighted-average | ||
| common shares outstanding | 16,057,691 | 15,750,000 |
The accompanying notes are an integral part of these financial statements.
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| For the Three Months Ended March 31, | ||
| 2005 | 2004 | |
| (unaudited) | (unaudited) | |
| Cash flows from operating activities | ||
| Net income | $ 2,970,762 | $ 1,048,126 |
| Adjustments to reconcile net income to net cash | ||
| provided by (used in) operating activities | ||
| Depreciation and amortization | 76,565 | 30,091 |
| Provision for losses from EFL and loans | ||
| to be repurchased | 434,172 | 100,000 |
| (Increase) decrease in | ||
| Mortgage loans held for sale (net) | 29,969,824 | (30,788,876) |
| Mortgage loans to be repurchased | (2,993,315) | (856,500) |
| Prepaid Expenses | (171,590) | 7,456 |
| Other receivables & employee advances | 46,598 | (213,505) |
| Warehouse receivables | (1,452,731) | - |
| Deposits and other assets | (1,816) | 128,066 |
| Increase (decrease) in | ||
| Accounts and other payables | (2,816,331) | 29,742 |
| Obligation to repurchase mortgage loans | 2,993,315 | 856,500 |
| Escrow funds payable | - | (5,776) |
| Accrued Expenses | 249,936 | (80) |
| Income tax payable | 1,435,247 | (1,089,000) |
| Deferred tax liability - current | - | 154,000 |
| Net cash provided by (used in) operating activities | 30,740,636 | (30,599,756) |
| Cash flows from investing activities | ||
| (Increase) decrease in restricted cash | (194,917) | (270,896) |
| Proceeds from sale of real estate owned | (704,821) | 110,554 |
| Purchase of property and equipment | (348,842) | (23,108) |
| Net cash provided by (used in) investing activities | (1,248,580) | (183,450) |
| Cash flows from financing activities | ||
| Warehouse lines of credit | (31,031,631) | 30,582,076 |
| Net cash provided by (used in) financing activities | (31,031,631) | 30,582,076 |
| Net increase (decrease) in cash and cash equivalents | (1,539,575) | (201,130) |
| Cash and cash equivalents, beginning of period | 8,565,215 | 2,843,172 |
| Cash and cash equivalents, end of period | $ 7,025,640 | $ 2,642,042 |
| Supplemental disclosures of cash flow information | ||
| Interest paid | $ 11,301 | $ 531,402 |
| Income taxes paid | $510,000 | $1,716,600 |
The accompanying notes are an integral part of these financial statements.
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NOTE 1 — ORGANIZATION AND LINE OF BUSINESS
General
| The Mortgage Store Financial, Inc. was incorporated on August 25, 1992. The Company (as defined in Note 2) is licensed by the California Department of Corporations and respective agencies in 31 other states. It is principally engaged in the origination and purchase of residential mortgage loans. Generally, such loans are subsequently sold to financial institutions or to other entities that sell such loans to investors as a part of secured investment packages. The Company has obtained approval from the Department of Housing and Urban Development to act as a supervised mortgagee. |
| In August 2003, the Company formed a new subsidiary, CPV Limited, Inc. The sole purpose of this subsidiary is to hold real estate properties repossessed by the Company. |
Share Exchange, Redemption of Stock, and Consulting Agreement
| On November 4, 2002, the Company and its sole shareholder entered into a share exchange agreement with Little Creek, Inc. (“Little Creek”), a publicly traded company listed on the NASDAQ Bulletin Board, in which the sole shareholder received 9,500,000 shares, or approximately 97% of the stock of Little Creek, in exchange for 100% of the stock of the Company. Under the terms of the exchange agreement, 1,295,118 shares of Little Creek were canceled prior to the transaction, and 336,365 shares remained issued and outstanding. Subsequently, Little Creek’s name was changed to TMSF Holdings, Inc., and its incorporated domicile was changed from the state of Utah to the state of Delaware. The transaction was accounted as a reverse acquisition. The accompanying financial statements reflect the consolidated statements of TMSF Holdings, Inc. and its wholly owned subsidiary, The Mortgage Store Financial, Inc. Pro forma information of the combined businesses is not furnished as Little Creek had insignificant assets, liabilities, and operations. |
| In addition, on the closing, TMSF Holdings, Inc. entered into a one-year consulting agreement under which it was required to pay the consultant $265,000 and issued a five-year warrant to purchase 163,635 shares of common stock of TMSF Holdings, Inc. at a per share exercise price of $0.05. The fair value of the warrants was insignificant. All warrants were exercised in February 2003. The consulting fee was amortized over one year. |
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
| The accompanying consolidated financial statements of TMSF Holdings, Inc. (the “Company”) are unaudited, other than the consolidated balance sheet at December 31, 2004, and reflect all material adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair statement of the Company’s financial position, results of operations, and cash flows for the interim periods. The results of operations for the current interim periods are not necessarily indicative of the results to be expected for the entire fiscal year. |
| These consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnotes normally included in the financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted pursuant to these rules and regulations. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Form 10-K, as filed with the SEC for the year ended December 31, 2004. |
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NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Principles of Consolidation
| The consolidated financial statements include the accounts of TMSF Holdings, Inc. and its wholly owned subsidiaries, The Mortgage Store Financial, Inc. and CPV Limited, Inc. (collectively, the “Company”). All significant inter-company accounts and transactions are eliminated in consolidation. |
Revenue Recognition
| Loan origination fees and other lender fees earned on loans that are funded by the Company are recorded as income when the related loan is sold. Origination fees for loans which are brokered to other lenders are recognized at the time such fees are received. The Company recognizes mortgage interest income on all loans from the date they are funded to the date they are sold or to the end of reporting period for loans which are held for sale. |
Mortgage Loans Held for Sale
| Mortgage loans held for sale are recorded at the aggregate lower of cost or market, less an estimated allowance for losses on repurchased loans. All mortgage loans are collateralized by residential property. |
| Revenues associated with closing fees received by the Company and costs associated with obtaining mortgage loans are deferred and recognized upon sale of the related mortgage loans. Mortgage loans held for sale are reported net of such deferred revenues and costs in the accompanying balance sheet. |
Real Estate Owned
| Real estate owned by the Company is recorded at the repurchase price less fees and commissions paid to the broker on the purchase. Real estate owned is recorded at the aggregate lower of cost or market. |
Advertising Costs
| The Company expenses advertising costs as incurred. Advertising costs for the three months ended March 31, 2005 and 2004 were $1,289 and $32,512 , respectively. |
Earnings Per Share
| The Company follows Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS 128”), and related interpretations for reporting Earnings per Share. SFAS 128 requires dual presentation of Basic Earnings per Share (“Basic EPS”) and Diluted Earnings per Share (“Diluted EPS”). Basic EPS excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding during the reported period. Diluted EPS reflects the potential dilution that could occur if stock options were exercised using the treasury stock method. |
| In accordance with SFAS 128, basic earnings per share is calculated based on the weighted average number of shares of common stock outstanding during the reporting period. Diluted earnings per share is calculated giving effect to all potentially dilutive common shares, assuming such shares were outstanding during the reporting period. |
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NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
As of the three months ended March 31, 2005 and 2004 the Company had potential common stock as follows:
| 2005 (unaudited) |
2004 (unaudited) | |
|---|---|---|
| Weighted average number of common shares outstanding used in computation of basic EPS |
15,000,000 | 15,000,000 |
| Dilutive effect of outstanding stock options | 1,057,691 | 750,000 |
| Weighted average number of common and potential shares outstanding used in computation of diluted EPS |
16,057,691 | 15,750,000 |
Stock-Based Compensation
| SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” defines a fair value based method of accounting for stock-based compensation. However, SFAS No. 123 allows an entity to continue to measure compensation cost related to stock and stock options issued to employees using the intrinsic method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” Entities electing to remain with the accounting method of APB Opinion No. 25 must make pro forma disclosures of net income and earnings per share as if the fair value method of accounting defined in SFAS No. 123 had been applied. The Company has elected to account for its stock-based compensation to employees under APB Opinion No. 25 using the intrinsic value method. |
| If the Company had elected to recognize compensation expense based upon the fair value at the grant date for awards under its plan consistent with the methodology prescribed by SFAS No. 123, the Company’s net income and earning per share would be reduced to the pro forma amounts indicated below for the three months ended March 31, 2005 and 2004: |
| 2005 (unaudited) |
2004 (unaudited) | |
| Net income as reported | $2,970,762 | $1,048,126 |
| Add stock based employee compensation | ||
| expense included in net income, net of tax | 0 | 0 |
| Deduct total stock based employee | ||
| compensation expense detemined under | ||
| fair value method for all awards, net of tax | ($4,275) | ($4,275) |
| Pro forma | $2,966,487 | $1,043,851 |
| Earnings per common share | ||
| Basic - as reported | $ 0.20 | $ 0.07 |
| Basic - pro forma | $ 0.20 | $ 0.07 |
| Diluted - as reported | $ 0.19 | $ 0.07 |
| Diluted - pro forma | $ 0.19 | $ 0.07 |
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NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassifications
| Certain amounts included in the prior period financial statements have been reclassified to conform to the current period presentation. Such reclassifications did not have any effect on reported net income. |
Concentration of Credit Risk
| At March 31, 2005 and December 31, 2004, the Company maintained cash balances with banks totaling $10,842,941 and $ 11,141,680 respectively, in excess of federally insured amounts of $100,000 per bank. |
Major Customers
| During the three months ended March 31, 2005 the Company sold 75%, 11%, 8% of its mortgage loans to three institutional investors . |
Market Risk
| The Company is involved in the real estate loans market. Changes in interest rates or other market conditions within the real estate loans market may have a significant effect on the volume and profitability of the business of the Company. |
Impact of Recently Issued Accounting Statements
| In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations.” FIN No. 47 clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. This interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN No. 47 is effective no later than the end of fiscal years ending after December 15, 2005 (December 31, 2005 for calendar-year companies). Retrospective application of interim financial information is permitted but is not required. Management does not expect adoption of FIN No. 47 to have a material impact on the Company’s financial statements. |
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NOTE 3 — RESTRICTED CASH
| The Company maintains restricted cash deposits in financial institutions. These restrictions relate to the warehouse lines of credit, whereby the Company must maintain a reserve for funding in excess of warehouse’s advance limit. The Company does not have direct access to these funds. Such cash balances at March 31, 2005 and December 31, 2004 aggregated $ 1,551,087 and $ 1,356,170, respectively. |
NOTE 4 — PROPERTY AND EQUIPMENT
Property and equipment as of March 31, 2005 and December 31, 2004 consisted of the following:
| March 31, 2005 (unaudited) |
December 31, 2004 | |
| Furniture and fixtures | $ 171,300 | $ 130,323 |
| Office equipment | 336,805 | 154,674 |
| Computer equipment | 794,234 | 668,500 |
| Leasehold improvements | 56,476 | 56,476 |
| 1,358,815 | 1,009,973 | |
| Less accumulated depreciation and amortization | 419,269 | 342,704 |
| Total | $939,546 | $667,269 |
| Depreciation and amortization expense was $ 76,565 and $ 30,091 for the three months ended March 31, 2005 and 2004, respectively. |
NOTE 5 — WAREHOUSE LINES OF CREDIT
| The Company maintains a warehouse line of credit with a financial institution, which is subject to renewal on an annual basis. Advances are received by the Company up to a maximum of $80,000,000 based upon a specified percentage of mortgage loans, which are pledged as collateral, and interest accrues at 1 month LIBOR (2.87% at March 31, 2005), plus 2.4% per annum. This facility expires on December 31, 2005 and is renewed automatically |
| Advances are due upon the earlier of the sale of the mortgage loans that are pledged as collateral or a specified period of time from the date on which the advance was received. The warehouse line of credit is guaranteed by the shareholder and contains a financial covenant concerning a minimum net worth of $8,744,904. At March 31, 2005, Management believes the Company was in compliance with such covenant. |
| In addition, the Company must maintain a balance in a separate restricted cash account as a pledge for amounts funded by the warehouse lender in excess of a specified percentage of the loan amount agreed upon by the warehouse lenders. At March 31, 2005 and December 31, 2004, the pledged amounts aggregated to $ 1,070,570 and $ 877,388, respectively. |
| In February 2004, the Company secured a second warehouse line of credit with a financial institution. The credit facility is structured as a repurchase agreement where the financial institution may, at its sole discretion, purchase mortgage loans from the Company. The maximum purchase amount on this credit line is $30,000,000 and interest accrues at LIBOR plus a pricing spread between 2.25% and 2.75% per annum, which is dependent on the specific investor type and the mortgage loan category. This facility has a one year term and is renewable with the consent of both parties. |
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NOTE 5 - WAREHOUSE LINES OF CREDIT (Continued)
| In addition, the Company must maintain a balance in a separate restricted cash account as a pledge for amounts funded by the warehou |