1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
FIRST NATIONS FINANCIAL SERVICES COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
333-1612 76-0481583
(Commission File Number) (IRS Employer Identification Number)
C/O MR. GARY N. PELEHATY, PRESIDENT
FIRST NATIONS FINANCIAL SERVICES COMPANY
CHRISTIANA EXECUTIVE CAMPUS
220 CONTINENTAL ROAD, SUITE 310
NEWARK, DELAWARE 19713-4314
(Address of principal executive offices)
(302) 292-2100
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock $.001 par value
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months, and (2) has been subject to such filing requirements for the past 90
days.
X Yes No
-
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulations S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year were $88,377.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of December 19, 1997 was zero. The voting stock is 100%
owned by one insider.
The number of shares of the Registrant's common stock outstanding as of
December 19, 1997 was 1,000.
2
9
FORM 10-KSB
FIRST NATIONS FINANCIAL SERVICES COMPANY
========================================
PART I
ITEM 1. DESCRIPTION OF BUSINESS
First Nations Financial Services Company was organized as a Delaware
corporation on November 16, 1995.
OVERVIEW
The Company has identified two interrelated segments of the financial
services industry to which it is committed to become a significant
participant. The first segment of the industry upon which the Company will
focus and concentrate its resources is commercial and business lending, which
includes real estate and equipment financing. The second component of the
Company's overall strategy is the sale and securitization of loans originated
by the Company.
PRIMARY BUSINESS
The Company's present focus is limited to commercial and business loans.
This phase will expand to commercial and business lending that does require
licenses when, and only when, the necessary licenses are acquired. Management
does not believe the present lack of licenses will materially adversely affect
the Company's ability to do business and does not know of any impediment or
disqualification for the issuance of any licenses which may be required in the
future.
The Company has received preliminary expressions of interest to finance
approximately $5 Million of projects ranging from $500,000 or more. If the
Company successfully closes one or more of the possible projects, the
anticipated interest rate payable by the borrower will be 10% or more and the
borrower will pay to the Company a loan origination fee of not less than 1% of
the original principal, or in lieu of an origination fee a negotiated interest
rate, as well as the costs of document preparation, appraisal cost, title
insurance premiums, attorneys fees and other third party expenses.
COMMERCIAL AND BUSINESS LOANS
The Company intends to make loans to owners of businesses who the Company
determines has the business purpose, motivation, cash flow and collateral
required to repay the obligation.
Collateral. The Company intends to make commercial loans to
corporations, partnerships, sole proprietors and other entities. All loans
may be collateralized by one or more of the following: (i) a mortgage lien on
a principal residence or some other parcel of real property, (ii) a junior
mortgage lien on a parcel of real property, (iii) marketable securities, or
(iv) other real or personal property. Commercial lending may also take the
form of the lease of equipment or a loan secured by other personal property.
Real property eligible for collateral includes single family residences,
office and apartment buildings, mixed use buildings, unimproved land, motels,
hotels and restaurant buildings owned by the borrower, a principal of the
borrower, or a guarantor of the borrower. The Company generally intends to
further collateralize its loans by obtaining a lien on the borrower's other
tangible and intangible assets by filing appropriate Uniform Commercial Code
financing statements and, if possible, obtain personal guarantees from the
Borrower. At September 30, 1997, the Company had unsecured outstanding notes
receivable from related entities in the amount of $858,813.
The Company intends to make loans for various business purposes
including, but not limited to, working capital, business expansion, equipment
or real estate acquisition and debt-consolidation.
Strategy. The Company markets its business loans through existing
personal relationships with management and members of the Board of Directors.
Lending Policies and Practices. Summarized below are certain of the
lending policies and practices which the Company follows. Such policies and
practices will be altered, amended and supplemented as conditions warrant.
The Company has the right to make changes in its day to day practices and
policies in its sole discretion.
The Company keeps its interest and other charges competitive with the
lending rates of other lenders. Generally, loans are made at fixed rates for
fixed terms. Generally, the Company intends to compute interest due on its
outstanding loans by the simple interest method. Generally, the Company
intends to require that title insurance be obtained in connection with its
loans and to permit borrowers to prepay such loans. Where permitted by
applicable law, the Company may impose a prepayment penalty. Whether a
prepayment penalty is imposed and the amount of such penalty, if any, is
negotiated between the Company and the individual borrower prior to
consummation of the loan.
Generally, the Company will make a loan collateralized by residential
real estate only if the overall loan to value ratio (based on independent
appraised fair market value) on the properties collateralizing the loans is
less than ninety (90%) percent. Generally, the Company will make a loan
collateralized by commercial real estate where the overall loan to value ratio
(based on independent appraised fair market value) is less than ninety (90%)
percent. Occasionally, exceptions to these maximum levels may be made if
other collateral is available or if there are other compensating factors.
Servicing of Loans. Generally, the Company will not be responsible for
servicing loans. The Company will subcontract servicing of the loans in its
portfolio or loans which will be securitized in accordance with specific
servicing procedures. In servicing its loans, the Company, itself or through
a subcontractor, initiates the collection process one day after a borrower
misses a monthly due date. When a loan becomes forty-five (45) to sixty (60)
days delinquent, it will be transferred to loan work-out personnel. The
work-out personnel attempt to reinstate a delinquent loan, seek a payoff, or
occasionally enter into a loan modification agreement with the borrower to
avoid foreclosure. If a borrower declares bankruptcy, the matter will be
immediately referred to counsel.
Purchase of Existing Loans. In the normal course of business, the
Company may purchase business/commercial loan portfolios from individuals,
banks, other commercial lenders and other sources of commercial loans. Any
loans so purchased would be collateralized by real estate located in the
Company's market area. Each such individual loan would be reviewed by an
executive officer of the Company prior to acquisition to see if the loan and
all related matters conform to the Company lending procedures and policies.
Competition. As a commercial lender, the Company competes against many
other lenders, many of which have larger capitalization and better name
recognition. The Company will have significant competition in the equipment
leasing industry. The Company competes with banks, leasing and financial
companies with greater resources, capitalization and name recognition
throughout its market area. Other companies participating in the equipment
leasing industry will have the ability to enter into leases which contemplate
the payment of funds sufficient to recover the lessor's investment in the
equipment plus a profit over the term of the lease which does not give the
lessee any option to purchase the equipment. Competitors may also lease
equipment under renewable leases which do not contemplate full recovery of the
lessor's original costs during their initial term. Therefore, competitors
have many ways in which to compete which are not available to the Company.
Leasing. Generally, the Company's leases will be two types: (i) finance
leases which have a term of twelve (12) months or more and provide a purchase
option exercisable by the lessee at $1.00 at the termination of the lease and
(ii) fair market value or true leases which have a similar term but provide a
purchase option exercisable by the lessee at the fair market value of the
equipment at the termination of the lease.
Strategy. The Company primarily intends to obtain its business leasing
customers through equipment manufacturers, brokers and vendors with whom
directors or management have a relationship.
Leasing Policies and Practices. Generally, the Company's interest rate
and other terms and conditions of its leases will be competitive with the
leasing terms of other leasing companies in the area. The leases will be for
terms of twelve (12) to sixty (60) months and structured with purchase options
whose exercise prices range from $1.00 to the fair market value of the
equipment at the time of the lease termination.
All of the leases will be secured by the leased equipment or, in some
cases, other or additional collateral. However, creditworthiness and
financial strength of the lessee are an important criteria to be utilized by
the Company in determining to enter into a lease arrangement with a specific
lessee. It is anticipated that in the future, the Company may develop
relationships with third party purchasers of leases and will sell a portion of
the leases it makes to such third parties. The sale of leases to third party
purchasers may or may not require the Company to retain the servicing rights
to such leases.
The above policies and practices may and will be altered, amended and
supplemented as conditions and circumstances warrant. The Company has the
right to make changes in its day to day practices and policies in its sole
discretion.
Service Area. The Company intends to market and originate business
equipment leases throughout the United States. The Company will conduct its
business operations from the Company's main offices. As markets develop in
other areas, the Company may open additional offices within or outside its
present service area.
SECURITIZATION OF LOANS
The Company anticipates that it will build portfolios of business and
commercial loans (which include business leases) and enter into
securitizations of all or part of these portfolios. The Company believes that
a securitization program provides a number of benefits by allowing the Company
to create an additional profit center, diversify its funding base, provide
liquidity and lower its cost of funds.
The diversification of its funding base through securitization is an
objective of the Company. Generally, a securitization involves the transfer
by the Company of loans representing a series of loans to a single purpose
trust in exchange for certificates issued by the trust. The certificates
represent an undivided ownership interest in the loans transferred to the
trust. Typically, the certificates will consist of a class of senior
certificates, a class of subordinated certificates and a residual interest.
In connection with the securitization, the senior certificates are sold to
investors and the subordinate certificates and residual interest are typically
retained by the Company. As a result of the sale of the senior certificates,
the Company will receive a cash payment representing a substantial portion of
the principal balance of the loans held by the trust. The senior certificates
will entitle the holder to be repaid the principal of its purchase price and
the certificates will bear interest at a stated rate of interest. The stated
rate of interest will typically be substantially less than the interest rate
required to be paid by the borrowers with respect to the underlying loans. As
a consequence, the Company is able to receive cash for a portion of its
portfolio and to pay the principal and interest required by the senior
certificate with the cash flows from the underlying loans owned by the trust.
However, since the interest in the loans held by the Company (the subordinate
certificate and the residual interest) is subordinate to the senior
certificate, the Company retains a portion of the risk that the full value of
the underlying loans will not be realized. Additionally, the holder of the
senior certificates will receive certain additional payments on account of
principal in order to reduce the balance of the senior certificates in
proportion to the subordinate certificate held by the Company. The additional
payments of principal are designed to increase the senior certificate holder's
protection against loan losses by preserving the availability of the
subordination provided by the subordinate certificates. In the typical
subordination structure, the Company, as the holder of the residual interest
in the trust will be entitled to receive all of the remaining interest in the
loans at the time of the termination of the trust.
In order to securitize pools of loans, the Company believes it will be
necessary to aggregate similar loans into a common offering. The Company
expects that the minimum dollar amount necessary to effectively justify the
origination and offering costs is in the range of $7.5 million for a private
offering and $25 million for a public offering. The Company expects to enter
into the securitization market during the first quarter of 1999 and is
conditioned on the Company's ability to develop the necessary business
reputation and industry relationships.
In order to successfully securitize its loans, the Company must develop a
reputation in the financial community and with the commercial rating agencies
as having the ability to acquire and service, or arrange for the servicing, of
loans which are intended to become a part of the securitized pool. In
addition, the Company must develop relationships with one or more banks or
trust companies which are qualified to act as owner trustee and indenture
trustee in order to qualify for participation in the securitization market.
Any successful securitization of loans is, therefore, dependent upon
assembling the several necessary participants including the indenture trustee,
credit enhancement facility, owner trustee and the underwriter or placement
agent who will ultimately sell the securitized instrument into the capital
markets. The ability to demonstrate expertise in the necessary functions to
securitization and to attract the necessary industry participants may be an
expensive and time consuming process for a Company whose management team has
no experience in these matters. However, based upon preliminary discussions
by the Company with representatives of the several necessary participants, the
Company's forecast of entry into the securitization market during the first
quarter of its second year of operations is reasonable.
GOVERNMENT REGULATION AND LICENSING
Rules and Regulations. The Company's motor vehicle lending business will
be subject to numerous federal and state consumer protection laws and related
regulations which impose substantial requirements upon lenders and servicers
involved in consumer finance.
Licensing. The Company does not need any further government approval or
other licenses for its present primary business, commercial lending, in the
states in which it presently proposes to operate. Furthermore, the Company
does not and will not need federal or local government approval or licenses
for the purchase or securitization of the commercial loans. However, as the
geographic coverage of the Company's commercial lending business increases in
the future some states will require licensing for the Company to offer some of
its mortgage banking services. In such event the Company will seek to acquire
such licenses.
As of the date of this annual report, the Company is licensed as a
mortgage lender in the State of Florida and has not applied for any licenses
in any other state. Management of the Company does not believe the lack of
licenses will materially adversely affect the Company's ability to do business
because there are ample investment opportunities in unlicensed activities.
Management does not know of any impediments, disqualification or other reason
why the Company will not qualify for any licenses it may need in the future.
EMPLOYEES
The executive officers of the Company devote substantially all their time
to operations of the Company for no compensation until the Company's cash flow
is adequate to cover market level compensation. Bookkeepers, secretaries,
administrative assistants and support staff are presently employed by William
T. Juliano, or one of his affiliates, and he will make their services
available without cost to the Company until cash flow from operations will
cover their costs, or in lieu fund, these operations until cash flow is
sufficient. The Company believes its relationship with the employees is good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company presently does not hold title to any real estate. The
Company currently receives the use of certain free office space funded by Mr.
William T. Juliano. On April 15, 1997, the Company entered into a twelve
month lease agreement with a third party for 1,333 square feet of office space
in Newark, Delaware. Rent expense for the fiscal year ended September 30, 1997
associated with this lease amounted to $12,230. Monthly rental charges are
approximately $2,027.
The Company has filed an application for registration of its name and
logo as a service mark with the U.S. Patent and Trademark Office. The
application is pending.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently involved in trademark opposition litigation.
This opposition litigation is an administrative proceeding concerning the
Company's service mark and federal registration thereof. Management intends
to vigorously defend this opposition litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of the securityholders of the Company
during the year ended September 30, 1997.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock does not trade on any market, therefore, there
is currently no public trading market for shares of the Company's common
stock, par value $.001 (the "Common Stock"). As of the date of this annual
report, Thomas E. Juliano is the owner of all the outstanding shares of Common
Stock. The Company has never declared a dividend on the Common Stock.
As a result of net losses, the Company has a cumulative deficit of
$99,003 as of September 30, 1997; accordingly, the Company may be prohibited
by legal restrictions on capital from paying cash dividends for the
foreseeable future. While any determination as to the payment of cash
dividends will depend upon the Company's earnings, general financial
condition, capital needs, and other factors, the Company presently intends to
retain any earnings to finance working capital needs and expand its business,
and therefore does not expect to pay cash dividends in the foreseeable future.
Since inception, the shareholders of the Company have contributed capital
amounting to $1,129,180 and certain operating space, furniture, fixtures and
equipment, and services without cost to the Company. See Item 2, Description
of Property, Item 7., Financial Statements, Footnote F, and Item 12., Certain
Relationships and Related Transactions.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
CAUTIONARY STATEMENTS FOR PURPOSES OF FORWARD-LOOKING STATEMENTS
Certain information contained in this Annual Report on Form 10-KSB
(particularly that contained in this Part I., Item 6. "Management's Discussion
and Analysis or Plan of Operation") may be deemed to be forward-looking
statements within the meaning of Section 21E of Securities Exchange Act of
1934 and is subject to the "Safe Harbor" provisions of that section. This
information includes, without limitation, statements concerning future
revenues, future earnings, future costs, future margins and future expenses;
anticipated interest rates and yields, releases and technological advances;
the future mix of business and future asset recoveries; and future demand,
future industry conditions, future capital expenditures, and future financial
condition. These statements are based on current expectations and involve a
number of risks and uncertainties. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to be correct.
When used in this report, the words "anticipate," "estimate," "expect,"
"may," "project" and similar expressions are intended to be among the
statements that identify forward-looking statements. Important factors which
could affect the Company's actual results and cause actual results to differ
materially from those results which might be projected, forecast, estimated or
budgeted by the Company in such forward-looking statements include, but are
not limited to, the following: inability of the Company to sell its unsecured
senior subordinate notes at attractive interest rates; inability of the
Company to loan the funds at attractive interest rates; fluctuation of
financial performance due to the effect on gross profit margins by the yields
on investments and borrowing costs in any period; the uncertainty of
conditions affecting the real estate industry; credit risks associated with
loans to customers; retention and financial condition of major customers;
effects of future costs; collectibility of receivables; effects of
governmental regulations; future levels and timing of capital expenditures;
the risk of a disruption in credit markets; the level of competition in the
financial services industry; risks associated with foreign sales; potential
challenges to the Company's intellectual property rights; and the dependence
on and retention of key personnel.
The Company undertakes no obligation to publicly release the result of
any revisions to any such forward-looking statements which may be made to
reflect the events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
RESULTS OF OPERATION
Fiscal year ended September 30, 1997, compared to the period ended
October 8, 1996 the Company's revenues from related parties increased
approximately 26% to $88,377, compared to $70,000 for the period ended October
8, 1996. This increase resulted for increased lending activity with related
parties. Of the $88,377 in related party revenue, $27,942 remains uncollected
at September 30, 1997 and is reflected as interest receivable, related parties
on the Company's balance sheet. For the year ended September 30, 1997, the
Company incurred a net loss of $63,560 compared to a net loss of $35,443 for
the period ended October 8, 1996. The increase in the fiscal 1997 loss
resulted from increased advertising and other general and administrative costs
associated with marketing the Company's subordinated debentures and operating
the Company for a full year.
PLAN OF OPERATION - OVERVIEW
The Company's objective is to become a significance participant in two
interrelated segments of the financial services industry. The Company
believes that it can achieve its objective by its commitment to servicing a
market niche which is not adequately serviced by commercial banks or
traditional lending sources. In servicing its market, the Company will stress
the importance of identifying profitable lending opportunities and quick
closing.
The income generated from the Company's loan portfolio will be used to
pay principal and interest on the Notes, related operating costs and expenses
of the Company. The earnings on the loans and other assets owned by the
Company and the interest cost of the Notes will determine the Company's
results of operations in the future. The Company believes there are no
changes, trends or anomalies which will materially adversely affect the
anticipated delinquency and loss experience of the loans.
PLAN OF OPERATION FOR NEXT 12 MONTHS
Until the Company receives proceeds from the sale of Notes, invests the
proceeds and receives a return on the investment, the Company's only source of
funds for advertising, marketing and promotion will be its limited equity
capital and the income derived from its investments in notes receivables with
related parties. Therefore, the Company will expend significant cash and
incur additional losses in the early months of operation to cover its cost of
developing and operating the business.
The Company anticipates that proceeds from the sale of Notes will begin
slowly and increase as the Company's marketing plan takes effect. Although no
assurances can be given, the Company's first year forecast assumes total
proceeds from the sale of Notes in the range of $35,000,000. Without regard
to the amount of Notes sold, management believes that the Company has
sufficient resources to pay its operating expenses for the next 12 months of
operations because the Company's executive office and the furniture and
equipment located in the space is furnished by Mr. Juliano without cost to the
Company. On April 15, 1997, the Company entered into a twelve month lease
agreement with a third party for 1,333 square feet of office space in Newark,
Delaware. Rent expense for the fiscal year ended September 30, 1997 associated
with this lease amounted to $12,230. Monthly rental charges are approximately
$2,027. The executive officers of the Company will devote substantially all
their time to operations without compensation until the Company's cash flow is
adequate to cover market level compensation and all other operating expenses.
The Company will initially sell Notes only through its employees.
However, the Company is likely to engage the services of one or more
broker-dealers during the first year of operations. In order to arrive at its
forecasted Note sales for the first 12 months, management had preliminary
discussions with several small broker-dealers and examined the amount of
similar debt instruments sold by two comparable issuers. The sales of other
issuers was discounted substantially to account for the differences in
experience at raising funds. Management believes its estimates are realistic
and conservative. A part of the Company's plan to sell the Notes is direct
personal contact with selected broker-dealers in the states where the offering
is registered. The broker-dealers will be selected based upon their number of
registered representatives and access to financial products comparable to the
Notes offered by the Company. Management believes that it will fill a need
for broker-dealers identified by its selection process because each have a few
clients for whom the Notes are suitable investments and do not otherwise have
the ability to participate in a similar offering.
The following forward-looking table is the Company's present best
reasonable estimate of the possible use of different increments of proceeds
from the offering. Numerous uncertainties exist in estimating the amount and
use of future proceeds. The accuracy of any estimate is a result of the
quality of available market data, interpretation of the data, and business
judgment. Actual results after the date of an estimate may indicate the need
to revise the estimate. The quantity, quality, yield and category of
available loans and other investments cannot be accurately predicted as well
as changes in general economic conditions and interest rates. Accordingly,
the actual use of proceeds set forth in the following table may be materially
different from the actual use of proceeds.
<TABLE>
<CAPTION>
Time after date of Debt Issuance
--------------------------------
Type Investment Three Months Six Months
- ------------------------- ---------- ---------- ---------- -----------
Case 11 Case 22 Case 1 Case 2
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Commercial loans
and leases3 . . . . . . $2,600,000 $5,000,000 $5,000,000 $ 9,850,000
Securitization. . . . . . -0- -0- -0- -0-
General and
Administrative Costs4 -0- -0- -0- 50,000
Offering expenses
sales commissions 5%5 150,000 275,000 250,000 525,000
other offering expense 138,000 138,000 -0- -0-
Uninvested proceeds . . . 112,000 87,000 50,000 75,000
---------- ---------- ---------- -----------
Total Use of
Proceeds . . . . $3,000,000 $5,500,000 $5,300,000 $10,500,000
========== ========== ========== ===========
</TABLE>
Type Investment Nine Months One Year
- ---------------- ---- ------ --- ----
Case 1 Case 2 Case 1 Case 2
------ ------ ------ ------
Commercial loans
and leases $9,350,000 $20,050,000 $16,050,000 $33,100,000
Securitization -0- -0- -0- -0-
General and
Administrative
Costs4 50,000 50,000 50,000 50,000
Offering expenses
sales commissions
5%5 500,000 1,075,000 850,000 1,750,000
other offering
expense -0- -0- -0- -0-
Uninvested proceeds 100,000 325,000 50,000 100,000
------- ------- ------ -------
Total Use of
Proceeds $10,000,000 $21,500,000 $17,000,000 $35,000,000
=========== =========== =========== ===========
__________________________
1 Worst case.
2 Most likely case.
3 This category includes commercial first and second mortgage loans ranging
from $50,000 to $3,500,000 or more.
4 The executive officers of the Company will devote substantial time to
operations without compensation until the Company's cash flow is adequate to
cover market level compensation and all other operating expenses.
5 Assumes sale by broker-dealers which have not yet been identified.
The Company presently has received preliminary expressions of interest to
finance projects ranging from $500,000 or more. The Company anticipates, but
is not assured, that the initial proceeds from the sale of Notes may be used
to fund the commercial real estate investment opportunities which are
tentatively available or other similar investments which do not require any
state license. In such event, the yield will be below the Company's expected
average rate of interest income but the credit will be high quality and the
origination cost will be minimal.
The Company forecasts a cost of funds in the range of 9.4% per annum,
after offering and selling expenses, and net investment yield from its total
portfolios of commercial loans after a reasonable reserve for losses,
delinquencies and servicing costs, in the range of 15.75% [currently earning
12.75% with related entities]. Thus, the positive spread on the Company's
loan portfolio is forecasted to be approximately 6.35%, or $2,222,000 per year
when the projected first year Note proceeds (before deductions for costs
reflected above) of $35,000,000 are fully invested. After allowing for the
time to market the Notes, receive and invest the proceeds, the Company's
financial model assumes average invested proceeds for the first 12 months of
$15,000,000 and income before operating expenses of approximately $970,000.
Because the Company's staffing needs are driven by the amount of Note proceeds
received and funds available for investment, additional operations personnel
will be hired at a rate to match receipt and investment of Note sales
proceeds. However, the Company believes that salaries, general and
administrative, and other operating costs for the first 12 months at the
projected level of business should not exceed $600,000.
The Company intends to maximize its interest and fee income to be earned
on its loan portfolio by selling loans from its portfolio to unrelated third
parties and by securitizing all or a portion of its portfolio. These
transactions are intended to provide an additional source of liquidity for
lending activities.
YIELD ASSUMPTIONS
Annual rates are expected to range from a low of 10% for higher quality,
low risk commercial real estate and business loans. The average yield on
commercial loans and leases is assumed to be 10% or more. Because the
Company's initial primary business will be limited to commercial loans and
leases, the positive spread on the Company's loan portfolio will be
substantially lower than the spread expected when the projected first year
note proceeds (before deductions for costs reflected above) of $35,000,000 is
fully invested. Annual investment yield includes reserves for loan losses
which have been calculated by examining the loan loss reserves and actual loss
experience of companies with loan portfolios similar to the loans contemplated
by the Company. Because management of the Company has limited experience with
originating, servicing and managing a loan portfolio similar to the portfolio
intended by the Company, management will continually monitor its loans for
delinquencies and potential losses in order to establish proper reserves and
predict actual losses.
SOURCES OF INCOME
The Company will derive income from four basic sources: (i) interest and
other charges paid on its loans, (ii) loan origination fees, (iii) a limited
amount of prepayment penalties, and (iv) securitization of loans. The Company
does not anticipate significant income from prepayment of loans in its
portfolio principally because of the fees payable upon prepayment. Thus, the
Company expects the asset/liability maturity risk arising out of prepayments
to be minimal even in periods of declining interest rates because of the
substantial prepayment penalties. The Company anticipates that substantially
all of its loans will be made at fixed rates. However, the Company's cost of
funds will be sensitive to changes in long and short term interest rates.
Therefore, a rise or fall in the general interest rate market will have the
effect of increasing or decreasing the spread which the Company anticipates
between the cost of funds on its short and medium term Notes and the interest
earned on its loan portfolio.
In order to minimize the interest rate risk, the Company intends to
match, to the extent possible, maturities of its loan portfolio and maturities
of the Notes. There will be no interest rate risk in connection with Notes
which mature at the same time as the same dollar amount of portfolio loans
because the obligation to pay interest and the offsetting interest income will
terminate at the same time. Therefore, proceeds from newly issued Notes at
current market interest rates may be used to fund new loans at comparable
market interest rates. To the extent that the loan maturities are of
significantly longer term than the Note maturities, the Company intends to
manage the interest rate risk by selling whole loans in the secondary loan
market or securitizing pools of loans for sale in the public or private
capital markets and reinvesting the funds in loans with maturities that match
maturities of the same dollar amount of Notes. If the Company is successful
it its interest rate management strategy, interest rate risk will be
substantially reduced or eliminated entirely.
SOURCES OF CAPITAL AND LIQUIDITY
The proceeds of the sale of the Notes is the primary source of funds to
meet the Company's liquidity requirements. The proceeds of the Note sales
will be used to fund general operating and lending activities. After receipt
and investment of the Note proceeds, the Company's primary sources of
liquidity will be payments on the loans and the secondary source will be the
equity capital of the Company as of the date of this annual report.
The Company intends to meet its obligations to repay the Notes as they
mature with income generated from its lending activities, funds generated from
repayment of outstanding loans, extensions of maturing Notes and new debt
financing. There can be no assurance that the Company will be able to sell
the Notes at a rate that will permit growth and expansion at the expected
levels or to satisfy future debt obligations. If all of the Notes are sold,
the Company will have debt in the amount of $50,000,000 and only $1,129,180 in
equity which has been provided by the shareholders of the Company. Therefore,
substantially all the risk of loss will be borne by the Noteholders because
for approximately every $1.00 at risk by the shareholders of the Company,
$50.00 is at risk by the Noteholders.
The Company will continue to invest its $1,129,180 of presently available
equity capital without regard to the amount of Notes sold. The proceeds from
the sale of any amount of Notes will increase the Company's ability to make
investments. It is anticipated that such additional investments will produce
yields in excess of the interest payable under the terms of the Notes and the
maturities will be timed to coincide with maturities of the Notes. Therefore,
the Company believes it will be able to timely pay interest and principal on
any amount of Notes sold.
ITEM 7. FINANCIAL STATEMENTS -- SEPTEMBER 30, 1997 AND OCTOBER 8, 1996
11
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
First Nations Financial Services Company
Newark, Delaware
We have audited the accompanying balance sheets of First Nations Financial
Services Company (a development stage company) as of September 30, 1997 and
October 8, 1996, and the related statements of operations, changes in
shareholders' equity, and cash flows for the periods then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Nations Financial
Services Company at September 30, 1997 and October 8, 1996, and the results of
its operations and cash flows for the periods then ended in conformity with
generally accepted accounting principles.
/s/HARPER & PEARSON COMPANY
Houston, Texas
December 19, 1997
See accompanying notes.
- -------------------------
13
FIRST NATIONS FINANCIAL SERVICES COMPANY
----------------------------------------
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
SEPTEMBER 30, 1997 AND OCTOBER 8, 1996
<TABLE>
<CAPTION>
ASSETS
- -------------------------------------------------------
September 30, October 8,
1997 1996
--------------- ------------
CURRENT ASSETS
<S> <C> <C>
Cash. . . . . . . . . . . . . . . . . . . . . $ 16,850 $ 1,001,930
Interest receivable, related parties.. . . . 27,942 -0-
--------------- ------------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . 44,792 1,001,930
--------------- ------------
PROPERTY AND EQUIPMENT
Furniture, fixtures and equipment . . . . . . 24,964 -0-
Computer equipment. . . . . . . . . . . . . . 25,345 1,990
--------------- ------------
50,309 1,990
Less accumulated depreciation . . . . . . . (5,711) -0-
--------------- ------------
44,598 1,990
--------------- ------------
OTHER ASSETS
Notes receivable, related parties . . . . . . 858,813 -0-
Security deposit. . . . . . . . . . . . . . . 2,898 -0-
Trademarks. . . . . . . . . . . . . . . . . . 5,196 217
Organization costs. . . . . . . . . . . . . . 169,006 107,923
--------------- ------------
1,035,913 108,140
--------------- ------------
$ 1,125,303 $ 1,112,060
=============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------
CURRENT LIABILITIES
Note payable, shareholder .. . . . . . . . . . $ 3,000 $ 87,503
Notes payable . . . . . . . . . . . . . . . . 5,000 -0-
Interest payable, shareholder . . . . . . . . -0- 10,000
Accounts payable. . . . . . . . . . . . . . . 31,100 -0-
Accrued payroll taxes payable . . . . . . . . 1,026 -0-
--------------- ------------
TOTAL CURRENT LIABILITIES .. . . . . . . . . . 40,126 97,503
--------------- ------------
NOTE PAYABLE, RELATED PARTY . . . . . . . . . . 55,000 -0-
--------------- ------------
COMMITMENT
SHAREHOLDERS' EQUITY
6% Series A, cumulative, nonvoting, preferred
shares, $.001 par value, 1,000 shares authorized,
issued and outstanding; liquidation preference
of $1,000,000 . . . . . . . . . . . . . . . 1 1
Common stock, $.001 par value, 2,000 shares
authorized, and 1,000 shares issued and outstanding 1 1
Additional paid-in capital. . . . . . . . . . . 1,129,178 1,049,998
Deficit accumulated during the development stage. (99,003) (35,443)
--------------- ------------
1,030,177 1,014,557
------------ ------------
$ 1,125,303 $ 1,112,060
=============== ============
</TABLE>
See accompanying notes.
14
FIRST NATIONS FINANCIAL SERVICES COMPANY
----------------------------------------
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED SEPTEMBER 30, 1997 AND OCTOBER 8, 1996
<TABLE>
<CAPTION>
Year Ended Inception to Inception to
September 30, October 8, September 30,
1997 1996 1997
--------------- -------------- ---------------
<S> <C> <C> <C>
INTEREST INCOME,
RELATED PARTIES. . . . . . $ 88,377 $ 70,000 $ 158,377
--------------- -------------- ---------------
EXPENSES
Advertising . . . . . . 44,625 -0- 44,625
Bank charges. . . .. . . . 972 409 1,381
Depreciation. . . . . . . 5,711 -0- 5,711
Equipment rental. . . . . 2,510 -0- 2,510
Insurance expense . . . . 1,822 -0- 1,822
Interest expense, related party 170 10,000 10,170
Legal fees. . . . . . . . . . . 5,305 469 5,774
License and fees. . . . . . . . 3,026 -0- 3,026
Miscellaneous . . . . . . . . . 260 300 560
Payroll expense . . . . . . . . 10,662 -0- 10,662
Supplies. . . . . . . . . . . . 2,379 760 3,139
Payroll taxes . . . . . . . . . 1,178 -0- 1,178
Postage . . . . . . . . . . . . 10,231 1,828 12,059
Printing. . . . . . . . . . . . 15,843 235 16,078
Professional fees . . . . . . . 10,689 307 10,996
Recruitment . . . . . . . . . . 2,096 -0- 2,096
Rent, related party . . . . . . 30,195 90,000 120,195
Telephone expense . . . . . . . 3,917 58 3,975
Travel expense. . . . . . . . . 346 1,077 1,423
------------ -------------- ---------------
151,937 105,443 257,380
--------------- -------------- ---------------
NET LOSS . . . . . . . . . . $ (63,560) $ (35,443) $ (99,003)
=============== ============== ===============
LOSS PER COMMON SHARE. . . . $ (63.56) $ (35.44) $ (99.00)
=============== ============== ===============
SHARES USED IN COMPUTING
LOSS PER COMMON SHARE. . . 1,000 1,000 1,000
=============== ============== ===============
</TABLE>
See accompanying notes.
15
FIRST NATIONS FINANCIAL SERVICES COMPANY
----------------------------------------
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIODS ENDED SEPTEMBER 30, 1997 AND OCTOBER 8, 1996
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-In Retained
Stock Stock Capital (Deficit) Total
----------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
SALE OF STOCK. . . . $ 1 $ 1 $1,049,998 $ -0- $1,050,000
NET LOSS . . . . . . -0- -0- -0- (35,443) (35,443)
----------- -------- ---------- ---------- -----------
BALANCE -
OCTOBER 8, 1996. . 1 1 1,049,998 (35,443) 1,014,557
CONTRIBUTION OF
ADDITIONAL PAID-IN
CAPITAL. . . . . . -0- -0- 79,180 -0- 79,180
NET LOSS . . . . . . -0- -0- -0- (63,560) (63,560)
----------- -------- ---------- ---------- -----------
BALANCE -
SEPTEMBER 30, 1997 $ 1 $ 1 $1,129,178 $ (99,003) $1,030,177
=========== ======== ========== ========== ===========
</TABLE>
See accompanying notes.
17
FIRST NATIONS FINANCIAL SERVICES COMPANY
----------------------------------------
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED SEPTEMBER 30, 1997 AND OCTOBER 8, 1996
<TABLE>
<CAPTION>
Year Ended Inception to Inception to
September 30, October 8, September 30,
1997 1996 1997
--------------- -------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . $ (63,560) $ (35,443) $ (99,003)
--------------- -------------- ---------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation . . . . . 5,711 -0- 5,711
Change in operating assets and liabilities:
Interest receivable, related party (27,942) -0- (27,942)
Accounts payable . . . . . . . . 31,100 -0- 31,100
Accrued payroll taxes payable. . 1,026 -0- 1,026
Interest payable, related party.(10,000) 10,000 -0-
--------- -------------- ---------------
Total Adjustments. . . . (105) 10,000 9,895
--------------- -------------- ---------------
Net Cash Used by Operating
Activities. . . . (63,665) (25,443) (89,108)
--------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures
and equipment. . . . . . (24,964) -0- (24,964)
Purchase of computer equipment . (23,355) (1,990) (25,345)
Payment for security deposit . . (2,898) -0- (2,898)
Payments for organization costs. (61,083) (107,923) (169,006)
Payments for trademark . . . . . (4,979) (217) (5,196)
Sale of mortgage note receivable,
related party. . . . . . . . . -0- 1,000,000 1,000,000
Issuance of notes receivable,
related parties. . . . (858,813) -0- (858,813)
--------------- -------------- ---------------
Net Cash (Used) Provided by
Investing Activities . (976,092) 889,870 (86,222)
--------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable. 60,000 -0- 60,000
Proceeds from note payable,
shareholder. . . . 3,000 87,503 90,503
Payment of note payable,
shareholder . . . . (87,503) -0- (87,503)
Issuance of stock. . . -0- 50,000 50,000
Contribution of additional
paid-in capital . . 79,180 -0- 79,180
--------------- -------------- ---------------
Net Cash Provided by
Financing Activities . 54,677 137,503 192,180
--------------- -------------- ---------------
NET (DECREASE) INCREASE IN CASH. (985,080) 1,001,930 16,850
CASH AT BEGINNING OF PERIOD. . . 1,001,930 -0- -0-
---------- -------------- ---------------
CASH AT END OF PERIOD. . . . $ 16,850 $ 1,001,930 $ 16,850
=============== ============== ===============
NONCASH INVESTING AND FINANCING ACTIVITIES
Note receivable obtained from related
party for additional
paid-in capital . . . $ -0- $ 1,000,000 $ 1,000,000
=============== ============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
</TABLE>
21
16
FIRST NATIONS FINANCIAL SERVICES COMPANY
----------------------------------------
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND OCTOBER 8, 1996
NOTE A BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of Operations - First Nations Financial Services Company (the Company)
- ---------------------
is a Delaware corporation with its principal objective to become a significant
participant in the financial services industry. The Company believes that its
growth will be sustained by its commitment to servicing a segment of the
market, which is not adequately serviced by commercial banks. The Company has
only recently completed its initial capitalization and has not commenced
significant operations. Because the Company has only limited equity capital
with which to operate, the Company will not commence significant operations
until the Company's offer to sell a substantial amount of the $50,000,000 in
subordinated debt is successful.
Estimates - The preparation of financial statements in conformity with
- ---------
generally accepted accounting principles requires management to make estimates
- -------
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk - At September 30, 1997, all of the Company's
- -------------------------------
secured notes receivable ($858,813) are from companies related by common
- ---
ownership and controlled by Mr. Juliano, the Company's President. (See Note C)
- ---
Fair Value of Financial Instruments - Management is of the opinion that the
- --------------------------------------
carrying value of all financial instruments is substantially equal to fair
- --
value at September 30, 1997 and October 8, 1996.
- --
Property and Equipment - Property and equipment are stated at cost.
- ------------------------
Depreciation is calculated considering the estimated useful lives of the
- ----------
respective assets on the straight-line method. Property and equipment are
- -----
depreciated over a three to five year period.
- ----
Expenditures for additions are capitalized and expenditures for maintenance
and repairs are charged to earnings as incurred.
When properties are retired or otherwise disposed of, the cost thereof and the
applicable accumulated depreciation and amortization are removed from the
respective accounts and the resulting gain or loss is reflected in earnings.
Organization Costs - Organization costs include filing fees with the
- -------------------
Securities and Exchange Commission ($17,991), the National Association of
- ---------
Securities Dealers, Inc. ($5,750), Blue Sky registration fees in several
- ----
states ($15,475), legal ($94,102), accounting ($23,508) and other costs
- ----
($12,180) associated with the organization and subordinated debt offering of
- ----
the Company.
Of these costs, approximately $106,000 will be amortized over the average life
of the subordinated debt, if any, discussed in Note E. Remaining capitalized
costs will be amortized over a five year period.
Income Taxes - Since inception, the Company has incurred net operating losses
- -------------
amounting to $99,003. These net operating loss carryforwards will expire
through the year 2012, if not previously utilized.
No tax benefit for the loss carryforwards has been reported in the financial
statements. Accordingly, the tax benefit of approximately $34,000 which may
result from the utilization of the loss carryforward has been offset by a
valuation allowance of the same amount.
Statement of Cash Flows - For purposes of reporting cash flows, cash and cash
- ------------------------
equivalents include only cash on hand and in demand deposit accounts with a
bank.
Loss Per Common Share - Loss per common share is computed using the weighted
- -----------------------
average number of shares of common stock outstanding during the period.
NOTE B MORTGAGE NOTE RECEIVABLE, RELATED PARTY
The 12% $1,000,000 mortgage note receivable assigned to the Company by Mr.
William T. Juliano in exchange for 1,000 shares of preferred stock was
receivable from Plaza Investment Corporation (Plaza), a New Jersey
corporation, and was payable to Mr. William T. Juliano. Mr. Juliano is an
officer and stockholder of both the Company and Plaza. Mr. Juliano acquired
the mortgage note during December 1992 in exchange for $1,000,000 cash
advanced to the then unrelated company, Plaza.
On October 8, 1996, the Company sold, for $1,000,000 cash, the $1,000,000 note
receivable from Plaza Investment Corporation to Mr. Juliano.
NOTE C NOTES RECEIVABLE, RELATED PARTIES
The Company entered into unsecured demand notes receivable amounting to
$858,813 at September 30, 1997, respectively, with entities related to Mr.
Juliano by common ownership. These notes bear interest at 12.75% per annum.
The proceeds of these notes were used to fund and refinance commercial
construction projects in New Jersey and Delaware. Because it is not
anticipated that these notes will be called or paid within the next fiscal
year, they have been classified as long-term at September 30, 1997.
NOTE D NOTE PAYABLE, SHAREHOLDER
Note payable, shareholder amounting to $87,503 plus accrued interest of
$10,000 was fully paid on October 9, 1996. During fiscal 1997, an additional
$3,000 was loaned to the Company.
NOTE E NOTES PAYABLE
Notes payable at September 30, 1997 consist of the following:
Note payable to individual, due June 23, 1998,
interest at 8.5%, unsecured $ 1,000
Note payable to individual, due January 11, 1998,
interest at 7.15%, unsecured 1,000
Note payable to individual, due July 7, 1998,
interest at 8.5%, unsecured 2,000
Note payable to individual, due July 8, 1998,
interest at 8.5%, unsecured 1,000
---------
$ 5,000
=========
The Company also has a long-term note payable to Mrs. Juliano in the amount of
$55,000 with interest at 8.75% and principal due September 22, 1999. This note
is unsecured.
The Company intends to offer for sale up to $50,000,000 in unsecured senior
subordinated notes with varying interest rates on a best-efforts basis with
maturities ranging from three months to ten years. The notes may be extended,
at the option of the Company, for a term equal to the original term unless the
holder requests repayment within seven days prior to the original maturity
date. There is no minimum amount of the notes that must be sold. The Company
may pay commissions of up to an approximate amount of 6% of the principal
amount of each note sold plus any out-of-pocket expenses incurred in
connection with the offer and sale of the notes up to 1% of the principal
amount of each note sold.
The Company will utilize the net proceeds from the sale of the notes for its
general corporate purposes. Corporate general purposes may include financing
of future growth, origination or acquisition of a business loan portfolio,
origination or acquisition of loans secured by equipment, such as automobiles,
trucks, golf carts, boats and other vehicles; origination or acquisition of a
portfolio of home equity loans as well as other finance related activities;
and possible future acquisition of related businesses or assets. The precise
amounts and timing of the application of such proceeds will depend upon many
factors, including, but not limited to, the amount of any such proceeds,
actual funding requirements and the availability of other sources of funding.
Until such time as the proceeds are utilized, they may be invested in short
and long-term investments, including treasury bills, commercial paper,
certificates of deposit, securities issued by U.S. government agencies, money
market funds and repurchase agreements, depending on the Company's cash flow
requirements. The Company's investment policies permit significant flexibility
as to the types of such investments that may be made by the Company. The
Company may also maintain daily unsettled balances with certain
broker-dealers. While the Company may from time to time consider potential
acquisitions, the Company as of the date of this report had no commitments or
agreements with respect to any material acquisitions.
NOTE F COMMITMENT AND CONTINGENCY
The Company formerly leased, from a company owned by Mr. William T. Juliano,
office space for its executive offices as well as furniture, fixtures and
equipment at 560 Fellowship Road, Mount Laurel, New Jersey 08054. Effective
October 1, 1996, the lease commitment was renegotiated for a period commencing
on that date and expiring January 31, 1998 at a minimum annual rental of
$60,000. This agreement was not the result of arm's length negotiation. Prior
to its cancellation, the aggregate lease commitment for the remaining lease
term was approximately $65,000. During fiscal 1997, this lease was cancelled
with the understanding that Mr. Juliano would provide substitute space, and
furniture, fixtures and equipment for the Company without cost until cash flow
from operations is adequate to cover these costs. Prior to the cancellation of
this lease agreement, the Company paid rent amounting to $17,965 to this
related entity.
On April 15, 1997, the Company entered into a twelve month lease agreement
with a third party for 1,333 square feet of office space in Newark, Delaware.
Rent expense for the fiscal year ended September 30, 1997 associated with this
lease amounted to $12,230. Monthly rental charges are approximately $2,027.
The Company is currently involved in trademark opposition litigation. This
opposition litigation is an administrative proceeding concerning the Company's
service mark and federal registration thereof. Management intends to
vigorously defend this opposition litigation.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
EXECUTIVE OFFICERS AND DIRECTORS
The number of directors is presently fixed at five. Each of the
directors hold office for the current year and until their successors are
elected and qualify. At each annual meeting of stockholders, directors will
be elected by the holders of the Common Stock to succeed those directors whose
terms are expiring. As the Company grows and its level of activity increases,
additional independent directors, executives, management and support staff
will be added. The new hires will come from a large available pool of people
with experience in originating and servicing loans to the class of borrowers
intended to be targeted by the Company. Because of recent and continuing
consolidations in the banking industry, many executive and middle managers
with extensive operational and lending experience are available. Until the
Company reaches a size level sufficient to attract qualified independent
directors and provide director liability insurance coverage, management of the
Company will operate without outside oversight. The Company has adopted a
policy not to enter into any transactions in which any of its security holders
or affiliates have a direct or indirect pecuniary interest without approval of
a majority of the disinterested directors unless the Company is provided an
independent appraisal to establish the value of the transaction. "Certain
Relationships and Related Transactions."
The following table sets forth certain information with respect to each
of the directors and executive officers:
<TABLE>
<CAPTION>
Name Age Position
- ----------------- --- ----------------------------------------------------
<S> <C> <C>
Gary N. Pelehaty. 44 President, Chief Executive Officer and Director
Philip DeMena . . 57 Director
Thomas E. Juliano 25 Treasurer, Chief Financial Officer, Secretary and
Director
Todd Beck . . . . 35 Director
</TABLE>
All officers serve at the discretion of the Board of Directors.
Gary N. Pelehaty has been an officer and director of the Company since
August 1997 and for the last five years has been President & Chief Executive
Officer, Chief Lending Officer and Compliance Officer of Peoples Savings Bank,
Bordentown, New Jersey. Mr. Pelehaty's 25 years in the banking industry
include Executive Vice President of Mercer Federal Savings Bank, Vice
President and Director of Corporate Planning and Development for Penn Federal
Savings Bank, Vice President and Chief Financial Officer for Old Borough
Savings and Loan, and Senior Accountant and Auditor for Stephen P. Radics and
Company, CPA. Mr. Pelehaty holds a Bachelor of Arts with a major in
accounting from LaSalle University, Philadelphia, Pennsylvania.
Philip DeMena has been an officer and director of the Company since
October 1997 and has served as Senior Vice President of Real Estate and
Construction of HomeUSA, Inc. since May 1997. From 1995 until 1997, Mr.
DeMena was Senior Vice President of Development for Papa John's U.S.A., Inc.,
a publicly traded restaurant company. From 1994 to 1995, Mr. DeMena served as
Senior Vice President of Development for Kenny Rogers Roasters, Inc., a
restaurant company. Form 1988 through 1993, Mr. DeMena held various positions
with Blockbusters, including Vice President - Real Estate and Construction.
Prior to that, Mr. DeMena held various real estate development positions with
Kentucky Fried Chicken, a unit of Pepsico, Inc., Burger Chef System, Inc., and
British Petroleum Oil Corporation.
Thomas E. Juliano has been an officer and director of the Company since
its organization, November 16, 1995 and is a graduate of Rider University with
a Bachelor of Science in Business. Since his graduation from college in 1994,
Thomas Juliano has been engaged in the real estate operations with his father,
William T. Juliano. During 1995 he had management responsibility for all
aspects connected with the development of a retail shopping center and since
1994 has had management responsibility for the day-to-day operation of two (2)
hotels, one with 168 units and the other with 240 units.
Todd Beck has been a director of the Company since October, 1997 and has
been a practicing attorney since 1988. Mr. Beck's law practice has included
banking, environmental and toxic tort matters as well as corporate governance
and real estate transactions. Mr. Beck graduated from Cornnell Law School,
Cum Laude in May 1988 and from the University of Pennsylvania, Summa Cum
Laude. Mr. Beck is presently enrolled in the law school of Temple University
pursuing a Masters of Laws in taxation.
ITEM 10. EXECUTIVE COMPENSATION
No executive officers have received compensation from the Company since
its incorporation and no compensation will be paid to the executive officers
of the Company until the Company is profitable.
ITEM 11. SECURITY OWNESHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company's currently authorized equity securities are as follows: (i)
1,000 shares of authorized, issued and outstanding 6% Series A Cumulative,
non-voting, $.001 par value preferred shares with a liquidation preference of
$1,000,000, and (ii) 2,000 shares of , $.001 par value Common Stock with 1,000
shares issued and outstanding.
The following table sets forth certain information concerning the
directors, executive officers and the beneficial owners of all classes of
capital stock of five (5%) percent or more of the Common Stock of the Company.
<TABLE>
<CAPTION>
NAME AND POSITION NUMBER OF SHARES PERCENTAGE
BENEFICIALLY OWNED OF CLASS
- ------------------------------- ------------------------ ------------------
<S> <C> <C>
William T. Juliano . . . . . . . . . . 1,000 Series A 100%
1235 Cherry Grove Road Cumlative Preferred Shares
Earleville, Maryland 21919
Thomas E. Juliano. . . . . . . . . . . 1,000 Common Shares 100%
Chief Financial Officer,
Secretary, Treasurer and Director
Christiana Executive Campus
220 Continental Drive, Suite 310
Newark, Delaware 19713-4313
TOTAL (All executive officers and. . . 1,000 Common Shares 100%
directors as a group (1 person))
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company does not have any formal policy concerning the direct or
indirect pecuniary interest of any of its officers, directors, security
holders or affiliates in any investment to be acquired or disposed of by the
Company or in any transaction to which the Company is a party or has an
interest. However, the Company has adopted a policy not to enter into any
such transactions unless approved by a majority of the entire Board of
Directors, not including any interested director.
As of and for the year and period ended September 30, 1997 and October 8,
1996 respectively, the Company borrowed $55,000 from Mrs. Juliano and funded
$858,813 to entities owned and controlled by Mr. William T. Juliano. The
loans to the related entities generated interest income of $88,377 and
interest receivable of $27,942. The Company has also incurred rental expenses
of $17,965 at September 30, 1997 and $90,000 at October 8, 1996 from an entity
owned by Mr. William T. Juliano.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
On May 15, 1997, the Company filed Form 8-K, stating the following
events:
(a) On the 10th day of April, 1997 the State of Florida, Department of
Banking and Finance issued a Mortgage Lender License to First Nations
Financial Services Company (the "Company").
(b) On the 23rd day of April, 1997 the Company entered into an Indenture
with Norwest Bank Minnesota, National Association for the benefit of each
other and for the equal and ratable benefit of the Holders of the Senior
Subordinated, Fixed Rate Term Notes of the Company issued pursuant to the
Company's registration statement on Form SB-2 declared effective by the
Securities and Exchange Commission on February 19, 1996.
(c) On the 30th day of April, 1997 the State of Delaware, Department of
Justice approved the individual's Issuer Agent registration and is allowing
the Company to sell its own securities.
(d) On the 14th day of May, 1997 the State of Florida, Department of
Banking and Finance approved the Company as an Issuer/Dealer.
with the following exhibits:
1. Indenture dated as of the 23rd day of April, 1997 between
First Nations Financial Services Company and Norwest Bank Minnesota, National
Association.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST NATIONS FINANCIAL SERVICES COMPANY
By:/s/Gary N. Pelehaty
---------------------
Gary N. Pelehaty, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following persons on behalf of the Company and in the
capacities and on the date indicated.
/s/Philip DeMena Director
- -----------------
Philip DeMena December 19, 1997
/s/Thomas E. Juliano Director, Treasurer, Principal Financial
- ----------------------
Thomas E. Juliano Officer and Principal Accounting Officer
December 19, 1997
/s/Todd Beck Director December 19, 1997
- -------------
Todd Beck
Exhibit 27 - 1
EXHIBIT 27
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from the
financial statements as of and for the year ended September 30, 1997, and is
qualified in its entirety by reference to such financial statements. (In
thousands, except EPS.)
<TABLE>
<CAPTION>
ITEM NUMBER
- -------------
ITEM DESCRIPTION AMOUNT
--------------------------------------------------- --------
<C> <S> <C>
5-02(1) Cash and cash items.. . . . . . . . . . . . . . . $ 17
5-02(2) Marketable securities . . . . . . . . . . . . . . 0
5-02(3)(a)(1) Notes and interest receivable-trade . . . . . . . 0
5-02(4) Allowances for doubtful accounts. . . . . . . . . 0
5-02(6) Inventory . . . . . . . . . . . . . . . . . . . . 0
5-02(9) Total current assets. . . . . . . . . . . . . . . 45
5-02(13) Property, plant and equipment . . . . . . . . . . 50
5-02(14) Accumulated depreciation. . . . . . . . . . . . . 6
5-02(18) Total assets. . . . . . . . . . . . . . . . . . . 1,125
5-02(21) Total current liabilities . . . . . . . . . . . . 40
5-02(22) Bonds, mortgages and similar debt . . . . . . . . 55
5-02(28) Preferred stock-mandatory redemption. . . . . . . 0
5-02(29) Preferred stock-no mandatory redemption . . . . . 1
5-02(30) Common stock. . . . . . . . . . . . . . . . . . . 1
5-02(31) Other stockholders' equity. . . . . . . . . . . . 1,030
5-02(32) Total liabilities and stockholders' equity. . . . 1,125
5-03(b)1(a) Net sales tangible products . . . . . . . . . . . 0
5-03(b)1 Total revenues. . . . . . . . . . . . . . . . . . 88
5-03(b)2(a) Cost of tangible goods sold . . . . . . . . . . . 0
5-03(b)2 Total costs and expenses applicable to sales and
revenues. . . . . . . . . . . . . . . . . . . 0
5-03(b)3 Other costs expenses. . . . . . . . . . . . . . . 152
5-03(b)5 Provision for doubtful accounts and notes .. . . . 0
5-03(b)(8) Interest and amortization of debt discount. . . . 0
5-03(b)(10) Income before taxes and other items . . . . . . . . <64>
5-03(b)(11) Income tax expense. . . . . . . . . . . . . . . . 0
5-03(b)(14) Income/loss continuing operations . . . . . . . . <64>
5-03(b)(15) Discontinued operations . . . . . . . . . . . . . 0
5-03(b)(17) Extraordinary items . . . . . . . . . . . . . . . 0
5-03(b)(18) Cumulative effect-changes in accounting principles. 0
5-03(b)(19) Net income or loss. . . . . . . . . . . . . . .. . <64>
5-03(b)(20) Earnings per share-primary. . . . . . . . . . . . . <63.56>
5-03(b)(20) Earnings per share-fully diluted. . . . . . . . . . 0
</TABLE>
