UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
FORM 10-QSB
( X ) Quarterly report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934.
For the quarterly period ended June 30, 1999.
( ) Transition report pursuant to Section 13 or 15(d) of the Exchange Act
for the transition period from _________________ to ____________ .
Commission File Number: 333-06328
Sterling Financial Services of Florida I, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Florida 65-0716464
(State of Incorporation) (I.R.S. Employer I.D. No)
239 Halliday Park Drive, Tampa, Florida 33612
(Address of Principal Executive Offices)
(813) 932-2228
(Registrant's Telephone Number, Including Area Code)
Check whether the registrant: (1) has filed all reports required to be filed by
Section by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES ( ) NO (X)
Indicate the number of shares outstanding of each of the issuer's classes of
stock as of October 31, 1999
1,000 Common Shares
Transitional Small Business Disclosure Format:
YES ( ) NO (X)
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Sterling Financial Services of Florida I, Inc.
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets as of June 30, 1999 and December 31, 1998............. 3
Statements of Operations for the three and six-months ended June 30,
1999 and 1998..................................................... 4
Statement of Stockholders' Deficit for the six-months ended June 30,
1999.............................................................. 5
Statements of Cash Flows for the three and six-months ended June 30,
1999 and 1998 .................................................... 6
Notes to Financial Statements ....................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations(including Year 2000 Issues and Cautionary Statement). 9
PART II.OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 14
Item 2. Changes in Securities................................................ 14
Item 3. Defaults Upon Senior Securities...................................... 14
Item 4. Submission of Matters to a Vote of Securities Holders................ 14
Item 5. Other Information.................................................... 14
Item 6. Exhibits and Reports on Form 8-K..................................... 14
Signatures
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STERLING FINANCIAL SERVICES OF FLORIDA I, INC.
BALANCE SHEETS
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30,
1999 December 31,
ASSETS Unaudited 1998
-------------- ---------------
<S> <C> <C>
Cash and cash equivalents $ 1,883,896 1,282,906
----------------- ----------------
Receivables:
Finance-net 3,013,964 1,485,697
Mobile home floor plan 392,601 182,007
Affiliate 98,655 257,278
Interest and fees 20,134 8,920
----------------
-----------------
Total receivables 3,525,354 1,933,902
----------------- ----------------
Inventories 1,242,003 433,597
----------------- ----------------
Investment in and advances to Parkwood Estates
Mobile Home Park, L.C. 652,766 602,178
----------------- ----------------
Property and equipment - net 244,329 254,541
----------------- ----------------
----------------- ----------------
Other assets:
Software not yet placed in service 42,223
Deferred debt issuance costs - net 812,850 514,999
Repossessed mobile homes 153,866 85,417
----------------- ----------------
Total other assets 1,008,939 600,416
----------------- ----------------
TOTAL $ 8,557,287 5,107,540
================= ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES:
Secured notes payable $ 9,818,000 5,974,000
Due to Sterling Financial Services 80,989
Accrued and other liabilities 70,884 56,334
----------------- ----------------
Total liabilities 9,969,873 6,030,334
----------------- ----------------
STOCKHOLDERS' DEFICIT
Common stock, no par value, 10,000 shares authorized,
1,000 shares issued and outstanding 1,000 1,000
Deficit (1,413,586) (923,794)
----------------- ----------------
Total stockholders' deficit (1,412,586) (922,794)
----------------- ----------------
TOTAL $ 8,557,287 5,107,540
================= ================
</TABLE>
- ------------------------------------------------------------------------------
See accompanying notes.
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STERLING FINANCIAL SERVICES OF FLORIDA I, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three-Months Three-Months Six-Months Six-Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30,1999 June 30, 1998
----------------- ------------------- --------------- -----------------
<S> <C> <C> <C> <C>
REVENUES:
Mobile home sales $ 335,825 $690,525
Interest and fees 128,641 $65,211 282,350 $ 89,552
Rental income 33,139 24,437 63,369 43,317
Other 2,186 1,080 2,519 3,745
----------------- ------------------- ------------- ----------------
Total revenues 499,791 90,728 1,038,763 136,614
----------------- ------------------- --------------- -----------------
OPERATING EXPENSES:
Cost of mobile homes sold 263,239 540,659
Management fees - Related Party 150,078 88,488 308,474 137,189
Interest 256,952 102,579 462,921 161,428
Occupancy and equipment 29,240 35,392 58,988 80,660
Professional fees 40,500 10,763 50,500 15,013
Equity in loss of Parkwood Estates
Mobile Home Park, L.C. 7,726 19,412
Other 46,314 (1,310) 87,601 34,109
----------------- ------------------- --------------- -----------------
Total operating expenses 794,049 235,912 1,528,555 428,399
----------------- ------------------- --------------- -----------------
NET LOSS $(294,258) $(145,184) $(489,792) $(291,785)
================= =================== =============== =================
LOSS PER COMMON SHARE $(294.26) $(145.18) $(489.79) $(291.79)
================= =================== =============== =================
</TABLE>
- ----------------------------------------------------------------------------
See accompanying notes.
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STERLING FINANCIAL SERVICES OF FLORIDA I, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock
Shares Amount Deficit Total
------------ ---------------- -------------- -------------
<S> <C> <C> <C> <C>
Balances, December 31, 1998 1,000 $ 1,000 $ (923,794) $ (922,794)
Net loss for the six months ended
June 30, 1999 (unaudited) (489,792) (489,792)
------------ ---------------- ---------------- ----------------
Balances, June 30, 1999 (unaudited) 1,000 $ 1,000 $ (1,413,586) $ (1,412,586)
============ ================ ================ ================
</TABLE>
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See accompanying notes.
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STERLING FINANCIAL SERVICES OF FLORIDA I, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
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<TABLE>
<CAPTION>
Three-Months Three-Months Six-Months Six-Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(294,258) $(145,184) $(489,792) $(291,785)
Adjustments to reconcile net loss to net cash used in
operating
activities:
Depreciation 6,620 6,446 13,239 12,892
Amortization and write off of deferred debt issuance costs 49,583 21,189 86,749 33,750
Management Fees - Related Party 69,089 226,978
Equity in loss of Parkwood Estates Mobile Home Park, L.C. 7,726 19,412
Increase in inventories (406,378) (808,406)
Increase in interest and fee receivables (6,119) (11,214)
Increase in due to Sterling Financial Services 80,989 80,989
Increase in accrued and other liabilities 24,800 21,893 14,550 28,471
---------------- --------------- --------------- ----------------
NET CASH USED IN OPERATING ACTIVITIES (467,948) (95,656) (867,495) (216,672)
---------------- --------------- ---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment and software not yet
Placed in service (12,272) (37,164) (45,250) (68,230)
Advances to Parkwood Estates Mobile Home Park, L.C. (24,397) (70,000)
Proceeds of sales of repossessed mobile homes 50,743 132,751
Net increase in finance receivables (886,717) (444,940) (1,729,467) (563,130)
Net decrease (increase) in mobile home floor plan receivables 27,885 (54,526) (210,594) (105,026)
---------------- --------------- ---------------- ---------------
NET CASH USED BY INVESTING ACTIVITIES (844,758) (536,630) (1,922,560) (736,386)
---------------- --------------- ---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of secured notes payable 2,976,000 1,602,000 3,844,000 2,191,000
(Increase) decrease in affiliate receivables (1,200) (68,355) 250
Cash paid for deferred debt issuance costs (297,600) (167,001) (384,600) (218,301)
---------------- --------------- ---------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,677,200 1,434,999 3,391,045 1,972,949
---------------- --------------- ---------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,364,494 802,713 600,990 1,019,891
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 519,402 1,033,611 1,282,906 816,433
---------------- --------------- ---------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,883,896 $1,836,324 $1,883,896 $1,836,324
================ =============== ================ ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Interest paid $207,369 $ 81,390 $376,172 $ 127,678
================ =============== ================ ===============
- -------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
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STERLING FINANCIAL SERVICES OF FLORIDA I, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
- -------------------------------------------------------------------------------
NOTE A - FORMATION AND OPERATIONS OF THE COMPANY
Sterling Financial Services of Florida I, Inc, (the "Company") was incorporated
under the laws of the state of Florida on January 3, 1997. The Company is
primarily in the business of originating and purchasing retail mobile home
installment sales contracts created in connection with the financing of
manufactured homes. The Company also owns and rents mobile homes located in the
Halliday Village Mobile Home Park ("Halliday") and has a 25% ownership interest
in a mobile home park located in Hillsborugh County, Florida (see Note D). The
Company's operations are located in Tampa, Florida and substantially all of its
customers are Florida residents.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited financial statements of the Company have been
prepared in accordance with generally accepted accounting principals for interim
financial information and the instructions to Form 10-QSB and Rule 10-1 of
Regulation S-X of the Securities and Exchange Commission (the "SEC").
Accordingly, these financial statements do not include all of the footnotes
required by generally accepted accounting principals. In the opinion of
management, all adjustments (consisting of normal and recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three and six-month periods ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. The accompanying financial statements and the notes should be
read in conjunction with the Company's audited financial statements as of
December 31, 1998 contained in its Form 10-KSB.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principals requires that management make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements. The reported amounts of the revenues and expenses during the
reporting period may be affected by the estimates and assumptions that
management is required to make. Estimates from management that are critical to
the accompanying financial statements include the appropriate level or allowance
for credit losses which can be significantly impacted by future industry, market
and economic trends and conditions. Actual results could differ from those
estimates.
Loss Per Common Share
Loss per common share is based on the weighted average number of common and
common equivalent shares outstanding during the period. The weighted average
number of such shares outstanding for the three and six-month periods ended June
30, 1999 and 1998 was 1,000.
Reclassifications
Certain amounts in the June 30, 1998 financial statements have been reclassified
to conform with the June 30, 1999 presentations.
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NOTE C - SECURED NOTES PAYABLE
Secured notes payable bear interest at 10.5%, with interest payable monthly, and
mature on June 30, 2002. The notes, which may be prepaid in whole or in part at
any time without premium or penalty, are secured by a first lien on any assets
acquired with the proceeds. The Company had registered $9.9 million of such
notes and as of June 30, 1999 (the termination date of the offering) had sold
$9,818,000 of such notes. Broker-dealers, who are members of the National
Association of Securities Dealers, Inc, were offering the notes on a
"best-efforts" basis.
NOTE D - RELATED PARTY TRANSACTIONS
Sterling Financial Services, Inc. ("SFS"), a related party by virtue of Anthony
Sutter's ownership of SFS (Mr. Sutter is the Company's President and majority
stockholder), manages the Company and provides all services in connection with
the origination, purchasing and servicing of receivables. As consideration for
these services, the Company pays SFS for all of its expenses plus 20%.
Management fees expensed under this arrangement during the three and six-months
periods ended June 30, 1999 and 1998 are reflected as Management fees - Related
Party in the accompanying statements of operations.
At December 31, 1998, the Company had effectively prepaid a significant portion
of management fee expense for the three and six-month periods ended June 30,
1999 by advancing SFS approximately $227,000 as of December 31, 1998. As a
result of such prepayment, during the quarters ended March 31, and June 30,
1999, the Company reduced their receivable from SFS by approximately $158,000
and $69,000, respectively.
During the six-months ended June 30, 1999, the Company advanced approximately
$137,000 to Anthony Sutter and/or his affiliates (including Parkwood Estates
Mobile Home Park, L.C. discussed below) . With the exception of the advance to
SFS (see preceding paragraph) which is non-interest bearing, affiliate
receivables bear interest at 12.9%, are unsecured and contain no specified
repayment terms as to principal and/or accrued interest.
The Company rents certain lot space for mobile home rental units it owns, and
prior to April 1998 certain office space for its administrative operations, from
Halliday, a related party by virtue of Anthony Sutter's ownership. In May 1998,
SFS began to pay the rent on the administrative space and accordingly, the
related rent expense is included in SFS expenses on which the Company pays
management fees as discussed above. Total rent paid under these arrangements for
the three and six-months ended June 30, 1999 and 1998 was approximately as
follows:
June 30, 1999 June 30, 1998
------------- -------------
Three-Months Ended $22,900 $22,200
Six-Months Ended $45,800 $48,600
During the three-months ended September 30, 1998, the Company purchased a
twenty-five percent interest in Parkwood Estates Mobile Home Park, L.C.
("Parkwood") for approximately $561,600; such entity was formed in August 1998
for the purpose of purchasing, selling and leasing Parkwood Estates Mobile Home
Park. The remaining 75% interest is owned by Anthony Sutter. In addition to such
investment, the Company has agreed to loan Parkwood up to $350,000 to fund its
cash flow needs. Advances under this arrangement accrue interest at a fixed rate
of 12.9%, are unsecured and have no specified repayment terms as to principal
and/or interest. At June 30, 1999 the Company had advanced approximately
$125,000 under this arrangement, of which $70,000 was advanced during the
six-months ended June 30, 1999.
NOTE E - SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the respective three and six-month periods ended June 30, 1999,
approximately $142,200 and $201,200 of finance receivables were reclassified to
repossessed mobile homes when certain customers of the Company defaulted on
their finance receivables.
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<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
OVERVIEW
The following discussion and analysis should be read in conjunction with the
balance sheet as of December 31, 1998 and the financial statements as of and for
the three and six-months ended June 30, 1999 and 1998 included with this Form
10-QSB.
The Company is primarily in the business of originating and purchasing retail
mobile home installment sales contracts created in connection with the financing
of manufactured homes. The Company also owns and rents mobile homes located in
the Halliday Village Mobile Home Park ("Halliday") and has a 25% ownership
interest in Parkwood Estates Mobile Home Park, L. C. ("Parkwood") which was
formed in 1998 for the purpose of purchasing and leasing Parkwood Mobile Home
Park in Hillsborough County, Florida (the "Park"). Halliday and Parkwood are
related to the Company by virtue of Anthony Sutter's majority ownership in the
Company, Halliday and Parkwood. The Company's operations are located in Tampa,
Florida and substantially all of its customers are Florida residents.
Readers are referred to the Cautionary Statement at page 12, which addresses
forward-looking statements made by the Company.
RESULTS OF OPERATIONS
Three-Months Ended June 30, 1999 and 1998
During the three months ended June 30, 1999 and 1998, the Company generated
revenues of approximately $499,800 and $90,700, respectively. This represented
an increase of approximately 450% or $409,100 and resulted substantially because
the Company experienced significant growth in revenue generating assets in the
last six-months of 1998 and during the first six-months of 1999. This increase
was made possible by proceeds received from the sale of the Notes. Because of
the relatively small amount of revenues generated during the three-months ended
June 30, 1998, this analysis does not include any additional discussion on such
revenues.
Revenues generated during the three-months ended June 30, 1999 resulted
substantially from sales of mobile homes, and interest and fee revenues of
approximately $335,800 and $128,700, respectively. The Company generated margins
of approximately 22% on sales of mobile homes; substantially all of which
occurred at the Park, and management believes that sales of such homes, and
related costs of sales, will continue to represent a significant portion of the
Company's revenues and expenses for the foreseeable future. Interest and fee
revenues consisted substantially of interest and fees earned on finance
receivables, cash equivalents and mobile home floor plan receivables (interest
income on cash equivalents occurs because of the lag time between the receipt of
proceeds from sale of the Notes and the date the funds were invested in finance
and/or other interest bearing receivables). Interest earned on finance
receivables increased significantly because of the related increase in finance
receivables since June 30, 1998. In addition to interest and fee revenues, the
Company generated approximately $33,100 of rental revenues from the rental of
its mobile homes.
Operating expenses during the three months ended June 30, 1999 and 1998
approximated $794,000 and $235,900, respectively. This represented an increase
of approximately 235% or $558,100 and resulted substantially because of the
aforementioned growth in 1998 and the first six-months of 1999. The Company's
revenues grew at a faster pace than its expenses because certain expenses are
fixed and therefore did not increase significantly. In addition to the cost of
mobile homes sold discussed above, significant operating expenses arose from
management fees charged by SFS and interest paid on the Notes.
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Management fees approximated $150,100 for the three-months ended June 30, 1999
as compared to approximately $88,500 for the corresponding period of the
preceding year. This increase of approximately 70% or $61,600 resulted because
SFS required additional personnel and expenses to originate and service the
Company's finance and mobile home floor plan receivables, as well as to manage
the Company's operations.
Interest expense increased to approximately $257,000 for the quarter ended June
30, 1999 from approximately $102,600 for the quarter ended June 30, 1998. This
represented an increase of approximately $154,400 or 150%. Interest expense for
the respective quarters ended June 30, 1999 and 1998 consisted of interest paid
to the Note holders of approximately $207,400 and $81,400 and amortization of
deferred debt issuance costs of approximately $49,600 and $21,100, respectively
(the amortization is a non-cash expense and arises from commissions and other
costs incurred to sell the Notes). The significant increase in interest expense
resulted from the corresponding increases in the Notes and related deferred debt
issuance costs.
Occupancy and equipment expenses approximated $29,200 and $35,400 for the
respective quarters ended June 30, 1999 and 1998, respectively. This decline
resulted substantially because the Company was paying rent expense of
approximately $2,200 a month to Halliday until April 1998, at which time such
expenses were paid to SFS in accordance with the Servicing Agreement between the
entities. Accordingly, rent expenses subsequent to April 1998 are effectively
included in management fees paid to SFS. With respect to the Company's rental
homes, the Company rents lot space from Halliday. In connection therewith, the
Company paid lot rent of approximately $22,900 and $22,200 to Halliday during
the quarters ended June 30, 1999 and 1998, respectively.
The June 30, 1999 results of operations also included recognition of the
Company's loss of approximately $7,800 in Parkwood. This amount represents 25%
(the Company's ownership percentage) of the total loss generated by Parkwood
during such quarter.
There were no other individual expenses of significance for either of the
quarters ending June 30, 1999 and 1998.
The net losses for the respective quarters ended June 30, 1999 and 1998
approximated $294,200 and $145,200, respectively; such losses occurred because
the Company's interest bearing assets did not generate sufficient income to
cover expenses arising substantially from management fees and interest expense
on the Notes.
Six-Months Ended June 30, 1999 and 1998
During the six-months ended June 30, 1999 and 1998, the Company generated
revenues of approximately $1,038,800 and $136,600, respectively. This
represented an increase of approximately 660% or $902,200 and resulted
substantially because the Company experienced significant growth in revenue
generating assets in the last six-months of 1998 and during the first six-months
of 1999. This increase was made possible by proceeds received from the sale of
the Notes. Because of the relatively small amount of revenues generated during
the six-months ended June 30, 1998, this analysis does not include any
additional discussion on such revenues.
Revenues generated during the six-months ended June 30, 1999 resulted
substantially from sales of mobile homes, and interest and fee revenues of
approximately $690,500 and $282,400, respectively. The Company generated margins
of approximately 22% on sales of mobile homes; substantially all of which
occurred at the Park, and management believes that sales of such homes, and
related costs of sales, will continue to represent a significant portion of the
Company's revenues and expenses for the foreseeable future. Interest and fee
revenues consisted substantially of interest and fees earned on finance
receivables, cash equivalents and mobile home floor plan receivables (interest
income on cash equivalents occurs because of the lag time between the receipt of
proceeds from sale of the Notes and the date the funds were invested in finance
and/or other interest bearing receivables). Interest earned on finance
receivables increased significantly because of the related increase in finance
receivables since June 30, 1998. In addition to interest and fee revenues, the
Company generated approximately $63,400 of rental revenues from the rental of
its mobile homes.
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<PAGE>
Operating expenses during the six-months ended June 30, 1999 and 1998
approximated $1,528,600 and $428,400, respectively. This represented an increase
of approximately 257% or $1,100,200 and resulted substantially because of the
aforementioned growth in 1998 and the first six-months of 1999. The Company's
revenues grew at a faster pace than its expenses because certain expenses are
fixed and therefore did not increase significantly.
In addition to the cost of mobile homes sold discussed above, significant
operating expenses arose from management fees charged by SFS and interest paid
on the Notes. Management fees approximated $308,500 for the six- months ended
June 30, 1999 as compared to approximately $137,100 for the corresponding period
of the preceding fiscal year. This increase of approximately 125% or $171,400
resulted because SFS required additional personnel and expenses to originate and
service the Company's finance and mobile home floor plan receivables, as well as
to manage the Company's operations.
Interest expense increased to approximately $462,900 for the six-months ended
June 30, 1999 from approximately $161,400 for the six-months ended June 30,
1998. This represented an increase of approximately $301,500 or 185%. Interest
expense for the respective six-month periods ended June 30, 1999 and 1998
consisted of cash outlays of approximately $376,200 and $127,700 on the Notes
and amortization of deferred debt issuance costs of approximately $86,700 and
$33,800, respectively (the amortization costs represent non-cash expenses and
arise from commissions and other costs incurred to sell the Notes). The
significant increase in interest expense resulted from the corresponding
increases in the Notes and related deferred debt issuance costs.
Occupancy and equipment expenses approximated $59,000 and $80,700 for the
respective six-months ended June 30, 1999 and 1998, respectively. This decline
resulted substantially because the Company was paying rent expense of
approximately $2,200 a month to Halliday until April 1998, at which time such
expenses were paid to SFS in accordance with the Servicing Agreement between the
entities. Accordingly, rent expenses subsequent to April 1998 are effectively
included in management fees paid to SFS. In addition, June 30, 1998 occupancy
expense included repairs and maintenance of approximately $12,000 arising from
costs incurred on mobile home rentals; no such expenses were incurred during the
six-months ended June 30, 1999. With respect to the Company's rental homes, the
Company rents lot space from Halliday. In connection therewith, the Company paid
lot rent of approximately $45,800 and $248,600 to Halliday during the six-month
periods ended June 30, 1999 and 1998, respectively.
The June 30, 1999 results of operations also included recognition of the
Company's loss of approximately $19,400 in Parkwood. This amount represents 25%
(the Company's ownership percentage) of the total loss generated by Parkwood
during such quarter.
There were no other individual expenses of significance for either of the
six-months periods ended June 30, 1999 and 1998. . The net losses for the
respective six-month periods ended June 30, 1999 and 1998 approximated $489,800
and $291,800, respectively; such losses occurred because the Company's interest
bearing assets did not generate sufficient income to cover expenses arising
substantially from management fees and interest expense on the Notes.
LIQUIDITY AND CAPITAL RESOURCES
Three and Six-Months Ended June 30, 1998
Operating activities during the three and six months ended June 30, 1999 used
cash of approximately $467,900 and $867,500, respectively as compared to net
cash used by operating activities of approximately $95,700 and $216,700, for the
respective three and six-months ended June 30, 1998. This cash was primarily
used to fund the aforementioned net losses less non-cash expenses which did not
require the outlay of cash during such reporting periods, and to purchase mobile
home park inventories which are being sold at the Park.
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<PAGE>
Investing activities during the three and six-months ended June 30, 1999 used
cash of approximately $844,800 and $1,922,600, respectively as compared to net
cash used by such activities of approximately $536,700 and $736,400 during the
corresponding periods of the preceding year. This represented increases of
approximately $308,100 and $1,186,200 for the respective three and six-months
ended June 30, 1999, and resulted primarily from increased lending activity made
possible by proceeds received from the sale of the Notes. The net increases in
finance and floor plan receivables approximated $859,000 and $1,940,100 for the
respective three and six-month periods ended June 30, 1999 as compared to
$444,900 and $563,100 for the corresponding periods of the preceding fiscal
year. The Company is attempting to limit its exposure to risk resulting from
interest rate spread by investing funds in interest bearing receivables as
proceeds are received from the Notes since the cost of such Notes is
significantly higher than the yield on cash and cash equivalents.
In addition, during the three and six-months ended June 30, 1999, the Company
advanced approximately $24,400 and $70,000, respectively to Parkwood. This
advance resulted from an arrangement between the Company and Parkwood, whereby
the Company has agreed to loan Parkwood up to $350,000 to fund its cash flow
needs. Advances under this arrangement accrue interest at a fixed rate of 12.9%,
are unsecured and have no specified repayment terms for the principal and/or
accrued interest.
The only other investing cash outlays of significance arose from the net
increase in property and equipment, and software not yet placed in service,
which approximated $12,300 and $45,200 for the three and six-months ended June
30, 1999 as compared to expenditures of approximately $37,200 and $68,200 for
the respective three and six-months ended June 30, 1998. The 1999 increases
resulted substantially because the Company has engaged a software consultant to
develop software for use in its operations.
The above investment outlays for the three and six-months ended June 30, 1999
were partially offset by proceeds received from sales of repossessed mobile
homes of approximately $50,700 and $132,800, respectively.
Cash used by operating and financing activities was funded by financing
activities which generated net cash inflows of approximately $2,677,200 and
$1,435,000 for the respective three-month periods ended June 30, 1999 and 1998
and $3,391,000 and $1,972,900 for the respective six-month ended June 30, 1999
and 1998. These cash inflows resulted almost exclusively from net proceeds
received from the sale of Notes (principal amount less cash paid for deferred
debt issuance costs). Through June 30, 1999 (the termination date of the
offering), the Company was offering subscriptions for a maximum of 9,900 Notes
in the principal amount of $1,000 each. The Notes bear simple interest at 10.5%
(interest is payable monthly) and are payable in full on June 30, 2002. As of
June 30, 1999, the Company had sold $9,818,000 of Notes or approximately 99% of
the Notes offered to the public. Because debt issuance costs approximated 10% of
the Notes sold, net proceeds to the Company approximated $8,800,0000 in total.
The Notes are secured by a first lien on the assets acquired with proceeds
generated from their sale, and may be prepaid in whole or in part at any time.
The only other significant cash used by financing activities resulted from
advances of approximately $68,400 to Anthony Sutter and/or his affiliates during
the six-months ended June 30, 1999. These advances are unsecured, bear interest
at 12.9% per annum and contain no specified repayment terms as to principal or
interest.
The net impact of the above operating, investing and financing activities was
that cash and cash equivalents increased by approximately $1,365,000 and
$802,800 for the respective three-month periods ended June 30, 1999 and 1998,
and $601,000 and $1,019,900 for the respective six-month periods ended June 30,
1999 and 1998.
The Company believes that it will be able to satisfy its cash requirements for
the foreseeable future if it does not expand its business by originating
additional finance receivable contracts and/or making other
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<PAGE>
investments. However, in order for the Company to continue to expand its dealer
base and portfolio of finance receivable contracts, and to ultimately pay the
Notes in full, the Company will have to generate significant cash from
operations and/or secure additional capital resources (i.e. other debt or
equity). No assurance can be given that the Company will generate profitable
results of operations or that additional capital resources will be available, or
available on reasonable terms. Also, if the Company is unable to originate
finance receivable contracts in an amount and at a pace that approximates the
amount and the pace that capital is raised through the issue of the Notes, the
interest earned on the capital raised will not be sufficient to cover the cost
of the interest on the Notes.
YEAR 2000 ISSUE
Many software applications and operational programs written in the past were not
designed to recognize calendar dates beginning in the Year 2000. The failure of
such applications or systems to properly recognize the dates beginning in the
Year 2000 could result in miscalculations or system failures which could result
in an adverse effect on the Company's operations.
The Company does not currently utilize any critical date sensitive systems.
Although many of the Company's transactions rely on date sensitive calculations,
such calculations are currently being performed either manually or using off the
shelf spreadsheet programs. However, the Company is currently involved in
installing a new PC based server and accounting application, which is
represented to be Year 2000 compliant.
The Company has not incurred any costs to date related to Year 2000 compliance
nor does it believe that its cost of conversion will be significant because of
the installation of new systems that are represented to be fully Year 2000
compliant. The Company believes the costs to transition its remaining systems to
Year 2000 compliance will not have a material effect on its financial position
or results of operations.
The Company has not deferred any information technology projects to address the
Year 2000 issue. In addition to internal Year 2000 activities, the Company will
communicate with others with which their systems interface or on which they rely
to determine the extent to which those companies are addressing their Year 2000
compliance. There can be no assurance that there will not be an adverse effect
on the Company, if third parties, such as utility companies or mobile home
suppliers, do not convert their systems in a timely manner and in a way that is
compatible with the Company's systems. However, management believes that ongoing
communication with, and assessment of, these third parties will minimize these
risks. Although the Company anticipates minimal business disruption will occur
as a result of Year 2000 issues, possible consequences include, but are not
limited to, loss of electric power, inability to process transactions or engage
in similar business activities.
To date, the Company has not established a contingency plan for possible Year
2000 issues. Where needed, the Company will establish contingency plans based on
assessment of outside risks and actual testing experience with suppliers. It is
not anticipated that a contingency plan will need to be developed as manual
processes mitigate outside risks. The cost of the conversion and the completion
dates are based on management's best estimates and may be updated, as additional
information becomes available.
CAUTIONARY STATEMENT
This Form 10-QSB, press releases and certain information provided periodically
in writing or orally by the Company's officers or its agents contain statements
which constitute forward-looking statements within the meaning of Section 27A of
the Securities Act, as amended and Section 21E of the Securities Exchange Act of
1934. The words expect, anticipate, believe, goal, plan, intend, estimate and
similar expressions and variations thereof if used are intended to specifically
identify forward-looking statements. Those statements appear in a number of
places in this Form 10-QSB and in other places, particularly, Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
include statements regarding the intent,
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<PAGE>
belief or current expectations of the Company, its directors or its officers
with respect to, among other things: (i) the Company's liquidity and capital
resources; (ii) the Company's financing opportunities and plans and (iii) the
Company's future performance and operating results. Investors and prospective
investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those projected in the forward-looking
statements as a result of various factors. The factors that might cause such
differences include, among others, the following: (i) any material inability of
the Company to successfully identify, consummate and integrate the acquisition
of finance receivables at reasonable and anticipated costs to the Company; (ii)
any material inability of the Company to successfully internally develop its
products; (iii) any adverse effect or limitations caused by Governmental
regulations; (iv) any adverse effect on the Company's continued positive cash
flow and abilities to obtain acceptable financing in connection with its growth
plans; (v) any increased competition in business; (vi) any inability of the
Company to successfully conduct its business in new markets; and (vii) other
risks including those identified in the Company's filings with the Securities
and Exchange Commission. The Company undertakes no obligation to publicly update
or revise the forward looking statements made in this Form 10-QSB to reflect
events or circumstances after the date of this Form 10-QSB or to reflect the
occurrence of unanticipated events.
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
NONE
Item 2. Changes in Securities
NONE
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Securities Holders
NONE
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
NONE
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
- ---------------------------- --------------------------------
Date Anthony A. Sutter, President
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<PAGE>
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,883,896
<SECURITIES> 0
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