3
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the quarterly period ended June 30, 1998
Transition report under Section 13 or 15(d) of the Exchange Act.
For the transition period from ___________ to ___________
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 WILLIAM T. JULIANO
CHRISTIANA EXECUTIVE CAMPUS
220 CONTINENTAL DRIVE, SUITE 310
NEWARK, DELAWARE 19713-4314
(Address of principal executive offices)
(800) 790-2474
(Registrant's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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.
X Yes No
-
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: August 14, 1998 -- 1,000
shares of Common Stock
Transitional Small Business Disclosure Format (check one):
Yes X No
-
FORM 10-QSB
FIRST NATIONS FINANCIAL SERVICES COMPANY
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST NATIONS FINANCIAL SERVICES COMPANY
----------------------------------------
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
ASSETS
- -----------------------------------
CURRENT ASSETS
<S> <C>
Cash $ 99,210
Due from related party 4,934
-----------
TOTAL CURRENT ASSETS 104,144
-----------
PROPERTY AND EQUIPMENT
Furniture, fixtures and equipment 31,966
Computer equipment 27,017
-----------
58,983
Less accumulated depreciation (15,991)
-----------
42,992
-----------
OTHER ASSETS
Notes receivable, related parties 818,090
Security deposit 334
Trademarks 5,196
Organization costs 169,006
-----------
992,626
-----------
$1,139,762
===========
</TABLE>
<PAGE>
------
FIRST NATIONS FINANCIAL SERVICES COMPANY
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET (CONTINUED)
MARCH 31, 1998
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------
CURRENT LIABILITIES
<S> <C>
Note payable, shareholder $ 5,200
Notes payable 11,018
Accounts payable 34,396
Accrued payroll taxes payable 67
-----------
TOTAL CURRENT LIABILITIES 50,681
-----------
NOTE PAYABLE, RELATED PARTY 55,000
-----------
CERTIFICATE OF DEPOSIT 9,697
-----------
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
Common stock, $.001 par value, 2,000 shares authorized, and 1,000
shares issued and outstanding 1
Additional paid-in capital 1,132,179
Deficit accumulated during the development stage (107,797)
-----------
1,024,384
-----------
$1,139,762
===========
</TABLE>
<PAGE>
See accompanying notes.
5
FIRST NATIONS FINANCIAL SERVICES COMPANY
----------------------------------------
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
OCTOBER 16, 1995 THROUGH JUNE 30, 1998
AND THE THREE AND NINE MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
INCEPTION TO THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30 1998 JUNE 30,
--------------------
1998 1998 1997 1998 1997
-------------------- ------------------ ----------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME,
RELATED PARTIES $ 239,178 $ 26,615 $ 27,416 $ 80,801 $ 61,054
MISC. INCOME $ 25 $ 25 $ 0 $ 25 $ 0
------------------ ---------------- ---------------- ---------------- ----------------
$ 239,203 $ 26,640 $ 27,416 $ 80,826 $ 61,054
EXPENSES:
Accounting Fees $ 0 $ 0 -
Advertising $ 44,625 $ 0 $ 0 -
Bank Charges $ 1,728 $ 107 ($119) $ 347 -
Business Taxes $ 200 $ 200 $ 0 $ 200
Depreciation, $ 3,426 -
Furn.,Fixtures & Equip. $ 15,991 $ 0 $ 0 $ 10,280 $ 0
Equipment Rental $ 5,932 $ 1,293 $ 1,331 $ 3,422 $ 1,331
Licenses & Fees $ 2,502 $ 102 $ 866 ($524) $ 2,863
Interest Expense $ 10,282 $ 75 $ 1,956 $ 112
related parties $ 0 $ 0
Legal Fees $ 15,891 $ 6,169 $ 0 $ 10,117
Insurance Expense $ 3,067 $ 1,045 ($200) $ 1,245 $ 1,956
Miscellaneous Expense $ 560 $ 0 $ 0 $ 0
Office Payroll Expense $ 18,336 $ 28 $ 3,392 $ 7,674 $ 3,392
Office Supplies &
Expenses $ 4,738 $ 67 $ 1,782 $ 1,599 $ 2,356
Payroll Taxes $ 1,178 ($840) $ 375 $ 0 $ 375
Postage $ 20,975 $ 375 $ 7,371 $ 8,916 $ 9,764
Printing $ 23,926 $ 419 $ 14,003 $ 7,848 $ 14,003
Professional Fees $ 27,845 $ 8,362 $ 10,689 $ 16,849 $ 10,689
Recruitment $ 2,096 $ 0 $ 0 $ 0
Rent, related party $ 107,965 $ 0 $ 6,132 $ 0 $ 26,132
Rent , third party $ 30,698 $ 6,202 $ 0 $ 18,468
Telephone Expense $ 7,042 $ 1,107 $ 891 $ 3,067 $ 943
Travel Expense $ 1,423 $ 0 ($145)
------------------ ------------------ ------------------ ---------------- ----------------
$ 347,000 $ 28,137 $ 48,324 $ 89,620 $ 73,804
------------------ ---------------- ---------------- ---------------- ----------------
NET (LOSS) ($107,797) ($1,497) ($20,908) ($8,794) ($12,750)
=========== ========== ========== ========== ==========
BASIC AND DILUTED LOSS
PER COMMON SHARE ($108) ($1) ($21) ($9) ($13)
=========== ========== ========== ========== ==========
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING 1000 1000 1000 1000 1000
========== ========= ========= ========== ==========
</TABLE>
<PAGE>
See accompanying notes.
6
FIRST NATIONS FINANCIAL SERVICES COMPANY
----------------------------------------
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
OCTOBER 6, 1995 THROUGH SEPTEMBER 30, 1997
AND THE NINE MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Additional Additional
Preferred Common Paid-In Retained
Stock Stock Capital (Deficit) Total
----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
SALE OF STOCK $ 1 $ 1 $1,129,179 $ -0- $1,129,181
NET LOSS -0- -0- -0- (99,003) (99,003)
----------- ----------- ---------- ---------- -----------
BALANCE -
SEPTEMBER 30, 1997 1 1 1,129,179 (99,003) 1,030,178
CONTRIBUTION OF
ADDITIONAL PAID-IN
CAPITAL -0- -0- 3,000 -0- 3,000
NET LOSS -0- -0- -0- (8,794) (8,794)
----------- ----------- ---------- ---------- -----------
BALANCE -
MARCH 31, 1998 1 1 1,132,179 (107,797) 1,024,384
=========== =========== ========== ========== ===========
</TABLE>
<PAGE>
See accompanying notes.
7
FIRST NATIONS FINANCIAL SERVICES COMPANY
----------------------------------------
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
<PAGE>
INCEPTION TO NINE MONTHS
JUNE 30, ENDED JUNE 30,
----------------
1998 1998 1997
-------------- ---------------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) ($107,797) ($8,794) ($12,750)
Adjustments to reconcile net income (loss) to
net cash used by operating activities:
Change in Operating Assets and Liabilities:
Interest Receivable - related party ($4,934) $ 23,008 ($620)
Interest Payable - related party $ 0 $ 0 ($10,000)
Accumulated Depreciation $ 15,991 $ 10,280
Accounts Payable $ 34,398 $ 3,299 $ 16,612
Accrued Payroll Taxes Payable $ 67 ($959) $ 935
Total Adjustments $ 45,522 $ 35,628 $ 6,927
Net Cash Used by Operating Activities ($62,275) $ 26,834 ($11,027)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of computer equipment ($27,017) ($1,672) ($21,122)
Purchase of Furniture, Fixtures & Equipment ($31,966) ($7,002) ($17,010)
Payments of Organization Costs ($169,006) $ 0 ($61,083)
Payments for Trademark ($5,196) $ 0 ($1,049)
Security Deposit - Leased Office Space ($334) $ 2,564
Sale of Mortgage Note Receivable-related party $ 1,000,000 $ 0 $1,000,000
Issuance of Notes Receivable, related parties ($818,090) $ 40,723 ($852,413)
Net Cash Provided (used) by
investing activities ($51,609) $ 34,613 $ 47,323
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Sale of Investment Notes $ 75,715 $ 15,715
Proceeds from note payable, shareholder $ 5,200 $ 2,200 $ 4,000
Payment of note payable, shareholder ($87,503)
Contribution of additional paid-in capital $ 75,930
Additional paid-in capital $ 132,181 $ 3,000
Net Cash Provided (used) by Financing
activities $ 213,096 $ 20,915 ($7,573)
NET INCREASE (DECREASE) IN CASH $ 99,210 $ 82,360 $ 28,723
CASH AT BEGINNING OF PERIOD - $ 16,850 $ 1,930
CASH AT END OF PERIOD $ 99,210 $ 99,210 $ 30,653
-------------- ---------------- -----------
NONCASH INVESTING AND FINANCING ACTIVITIES
Note receivable obtained from related
party for paid-in-capital $ 1,000,000 -
--------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash Paid For Interest $ 10,000 $ 10,000
-------------- ----------------
</TABLE>
<PAGE>
11
7
<PAGE>
------
FIRST NATIONS FINANCIAL SERVICES COMPANY
----------------------------------------
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
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 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.
Basis of Presentation - The interim financial data is unaudited; however, in the
- ---------------------
opinion of management, the interim data includes all adjustments, consisting
only of normal recurring adjustments necessary for a fair statement of the
results for the interim periods. The financial statements included herein have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures
included herein are adequate to make the information presented not misleading.
The organization and business of the Company, accounting policies followed by
the Company and other information are contained in the notes to the Company's
financial statements filed as part of the Company's Registration Statement Form
SB-2 and as reflected in the Company's Form 10-KSB at September 30, 1997. This
report should be read in conjunction with such statements.
Income Taxes - Since inception, the Company has incurred net operating losses
- -------------
amounting to $107,797. These net operating loss carryforwards which if not used
- --
will expire during the year 2010 to 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 $35,000 which may
result from the utilization of the loss carryforward has been offset by a
valuation allowance of the same amount.
New Authoritative Pronouncements - Net Income (Loss) Per Share. Effective
- ----------------------------------
quarter ended December 31, 1997, the Company implemented SFAS No. 128 "Earnings
- -----
Per Share". This statement established standards for computing and presenting
EPS, replacing the presentation of currently required primary EPS with a
presentation of Basic EPS. For entities with complex capital structures, the
statement requires the dual presentation of both Basic EPS and Diluted EPS on
the face of the statement of operations. Under this new standard, Basic EPS is
computed based on weighted average shares outstanding and excludes any potential
dilution: Diluted EPS reflects potential dilution from the exercise or
conversion of securities issued for periods ending after December 15, 1997,
including interim periods, and earlier application is not permitted. Adoption
of SFAS 128 is not expected to have a material effect on the company's loss per
share.
Prior year amounts for net income (loss) per common share were recomputed in
accordance with SFAS No. 128; however, such recomputed amounts were unchanged
from those previously reported.
NOTE B NOTES RECEIVABLE, RELATED PARTIES
The Company entered into unsecured demand notes receivable. The balances of
these notes receivables were $818,090 at June 30, 1998, 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 June 30, 1998.
NOTE C 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 a shareholder loaned the
Company $5,200.
NOTE D NOTES PAYABLE
Notes payable at March 31, 1998 consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Note payable to individual, due August 27, 1998,
interest at 7.1%, unsecured $ 1,017
Note payable to individual, due December 27, 1998,
interest at 8.5%, unsecured $ 1,000
Note payable to individual, due July 1, 1999,
interest at 8.5%, unsecured 2,000
Note payable to individual, due January 7, 1999,
interest at 8.5%, unsecured 1,000
-------
Note payable to individual, due February 23, 1999,
interest at 8.5%, unsecured $ 1,000
Note payable to individual, due September 25, 2007,
interest at 10.75%, unsecured $ 2,696
Note payable to individual, due March 5, 2008,
interest at 11%, unsecured $ 2,000
Note payable to individual, due October 28, 1998,
interest at 7.1%, unsecured $ 4,000
Note payable to individual, due April 15, 1999,
interest at 8.5%, unsecured $ 1,000
Note payable to individual, due June 18, 2002,
interest at 10%, unsecured $ 3,000
Note payable to individual, due May 12, 2003,
interest at 10.5%, unsecured $ 2,000
-------
$20,714
Less: Current Portion of Long Term Debt 11,017
-------
$ 9,697
=======
</TABLE>
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 minimum annual repayment requirements on long-term debt as of June 30,
1998 are as follows:
1998 $6,017
1999 60,000
2000 -0-
2001 -0-
2002 3,000
Thereafter 6,697
--------
$75,714
=======
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.
NOTE E COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
130, Comprehensive Income, for the first quarter of fiscal year 1998. However,
the Company has no items of other comprehensive income which are excluded from
net loss for the three months and six months ended June 30, 1998 and 1997.
<PAGE>
17
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
Certain information contained in this Quarterly Report on Form 10-QSB
(particularly that contained in this Part I., Item 2. "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
Nine months ended June 30, 1998, compared to the nine months ended June 30,
1997 the Company's revenues from related parties increased to $80,801 from
$61,054. This increase resulted from increased lending activity with related
parties. All of the $80,801 of interest income has been collected at June 30,
1998. For the nine months ended June 30, 1998, the Company incurred a Net Loss
of $8,794, compared to a Net Loss of $12,750 for the same period 1997. These
losses are still the result of printing and postage expenses, together with
essential accounting and legal services, plus third party office rents.
Three months ended June 30, 1998 produced an operating Net Loss of $1,497,
compared with the three months ended June 30, 1997 Net Loss of $20,908. A
____________ effort has been made to hold expenses at or near the level of
revenue produced at this time.
PLAN OF OPERATION - OVERVIEW
The Company's objective is to become a 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 unsecured, senior subordinated 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
status 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 of operation to cover its cost of developing and operating the
business for the foreseeable future.
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 full year of operations 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 June 30, 1998 associated with
this lease amounted to $18,468. Monthly rental charges are approximately
$2,000. The executive officers of the Company will devote substantially all of
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 Nine Months One Year
- ------------------------- ---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Case 11 Case 22 Case 1 Case 2 Case 1 Case 2 Case 1 Case 2
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial loans
and leases3 $2,600,000 $5,000,000 $5,000,000 $ 9,850,000 $ 9,350,000 $20,050,000 $16,050,000 $33,100,000
Securitization -0- -0- -0- -0- -0- -0- -0- -0-
General and
Administrative Costs4
-0- -0- -0- 50,000 50,000 50,000 50,000 50,000
Offering expenses
sales commissions 5%5 150,000 275,000 250,000 525,000 500,000 1,075,000 850,000 1,750,000
other offering expense 138,000 138,000 -0- -0- -0- -0- -0- -0-
Uninvested proceeds 112,000 87,000 50,000 75,000 100,000 325,000 50,000 100,000
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Total Use of
Proceeds $3,000,000 $5,500,000 $5,300,000 $10,500,000 $10,000,000 $21,500,000 $17,000,000 $35,000,000
========== ========== ========== =========== =========== =========== =========== ===========
</TABLE>
__________________________
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.
5Assumes 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 in 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 $1,024,384 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 $1,024,384 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.
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 1998. However, an 8-K Report Form was filed on August 5, 1998,
indicating the dismissal of the independent accountants.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST NATIONS FINANCIAL SERVICES COMPANY
Date: August 31, 1998 By: /s/ Gary N. Pelehaty
------------------------
Gary N. Pelehaty, President & Chief Executive Officer
Date: August 31, 1998 By: /s/Thomas E. Juliano
-----------------------
Thomas E. Juliano, Treasurer, Chief
Financial
Officer and Secretary
<PAGE>
Exhibit 27 - Page 1
EXHIBIT 27
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from the
financial statements as of and for the nine months ended June 30, 1997, and is
qualified in its entirety by reference to such financial statements. (In
thousands, except EPS.)
ITEM NUMBER
-----------
ITEM DESCRIPTION AMOUNT
---------------- ------
5-02(1) Cash and cash items. $ 99
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 104
5-02(13) Property, plant and equipment 59
5-02(14) Accumulated depreciation 16
5-02(18) Total assets 1,140
5-02(21) Total current liabilities 51
5-02(22) Bonds, mortgages and similar debt 65
5-02(28) Preferred stock-mandatory redemption 0
5-02(29) Preferred stock-no mandatory redemption 0
5-02(30) Common stock 0
5-02(31) Other stockholders' equity 1,024
5-02(32) Total liabilities and stockholders' equity 1,140
5-03(b)1(a) Net sales tangible products 0
5-03(b)1 Total revenues 81
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 90
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 <9>
5-03(b)(11) Income tax expense 0
5-03(b)(14) Income/loss continuing operations <9>
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 <9>
5-03(b)(20) Earnings per share-primary <8.79>
5-03(b)(20) Earnings per share-fully diluted 0
