FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 2-81457
AMERICAN SOUTHWEST FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Arizona 86-0439495
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification Number)
2390 East Camelback Road, Suite 225, Phoenix, AZ 85016
(Address of principal executive offices) (Zip Code)
(602) 381-8960
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Number of shares of common stock outstanding as of May 10, 1994:
Class A - 18,000 Class B - 35,200
AMERICAN SOUTHWEST FINANCIAL CORPORATION
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Balance Sheets - March 31, 1994 (Unaudited)
and June 30, 1993 3
Statements of Operations - For the three months
ended March 31, 1994 and 1993 (Unaudited) and
for the nine months ended March 31, 1994 and
1993 (Unaudited) 5
Statements of Cash Flows - For the nine months
ended March 31, 1994 and 1993 (Unaudited) 6
Notes to Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 22
2
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements.
AMERICAN SOUTHWEST FINANCIAL CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31 June 30
1994 1993
----------------- -----------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 5,096,837 $ 3,989,969
Receivables pursuant to Funding
Agreements - Notes 2 and 3
Principal - (Net of issue discount
of $13,843,128 and $22,885,638,
respectively) 487,201,936 904,618,248
Interest 11,662,959 20,100,416
Mortgage Securities - Notes 2 and 3
Principal - (Net of purchase discount
of $34,263,258 and $52,776,968,
respectively) 748,984,644 1,146,695,390
Interest 8,471,775 12,683,480
Other receivables, primarily interest
and prepaid income taxes 595,939 431,685
Advances to affiliates 660,000
----------------- -----------------
Total Assets $ 1,262,014,090 $ 2,089,179,188
================= =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
AMERICAN SOUTHWEST FINANCIAL CORPORATION
BALANCE SHEETS (CONT'D)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31 June 30
1994 1993
----------------- -----------------
(Unaudited)
<S> <C> <C>
Liabilities
Bonds Payable - Notes 2 and 3
Principal - (Net of issue discount
of $48,106,386 and $75,662,606,
respectively) $ 1,235,085,837 $ 2,050,490,494
Interest 20,118,223 32,771,892
Accounts payable - Note 3 45,212 229,316
Payable to affiliates - Note 4 225,100 400,000
----------------- -----------------
Total Liabilities 1,255,474,372 2,083,891,702
----------------- -----------------
Shareholders' Equity
Class A Common Stock, $.10 par value; 100,000
shares authorized, 25,000 shares issued;
18,000 shares outstanding at March 31, 1994
and 19,000 shares outstanding at June 30, 1993 2,500 2,500
Class B Common Stock, $.10 par value; 50,000
shares authorized, 36,200 shares issued;
35,200 shares outstanding at March 31, 1994
and 36,200 shares outstanding at June 30, 1993 3,620 3,620
Capital in excess of par value 99,480 99,480
Retained earnings 6,648,377 5,250,606
----------------- -----------------
6,753,977 5,356,206
Less: Treasury stock - at cost, Class A Common
Stock, 7,000 shares at March 31, 1994 and
6,000 shares at June 30, 1993; Class B Common
Stock, 1,000 shares at March 31, 1994 214,259 68,720
----------------- -----------------
Total Shareholders' Equity 6,539,718 5,287,486
----------------- -----------------
Total Liabilities and
Shareholders' Equity $ 1,262,014,090 $ 2,089,179,188
================= =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
AMERICAN SOUTHWEST FINANCIAL CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the For the For the For the
three months three months nine months nine months
ended ended ended ended
March 31 March 31 March 31 March 31
1994 1993 1994 1993
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUES
Interest
Pursuant to Funding
Agreements -
Notes 2 and 3 $ 14,290,800 $ 28,252,085 $ 53,301,158 $ 96,692,478
Mortgage Securities -
Notes 2 and 3 21,391,605 30,846,617 73,157,593 100,479,015
Other 210,714 243,743 858,198 1,152,303
Management fees 15,605 18,262 51,308 57,872
Redemption income -
Note 3 725,961 2,627,328 1,582,669
------------- ------------ ------------- ------------
35,908,724 60,086,668 129,995,585 199,964,337
------------- ------------ ------------- ------------
COSTS AND EXPENSES
Interest on Bonds - Note 3 35,619,639 59,068,759 126,143,601 196,923,787
Interest on other
obligations - Notes
2 and 3 114,555
Interest on loan from
affiliates - Note 3 542 44,009
Management fees - Note 4 425,000 375,000 1,400,000 1,000,000
Other expenses 8,226 291,000 93,205 1,774,867
------------- ------------ ------------- ------------
36,053,407 59,734,759 127,680,815 199,813,209
------------- ------------ ------------- ------------
(LOSS) INCOME BEFORE
TAXES (144,683) 351,909 2,314,770 151,128
(Benefit) Provision
for Income Taxes (57,000) 122,000 917,000 52,000
------------- ------------ ------------- ------------
NET (LOSS) INCOME $ (87,683) $ 229,909 $ 1,397,770 $ 99,128
============= ============ ============= ============
(LOSS) EARNINGS PER
SHARE - Note 5 $ (4.87) $ 11.11 $ 74.88 $ 4.60
============= ============ ============= ============
Weighted average
number of Class A
shares outstanding 18,000 20,692 18,668 21,564
============= ============ ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
AMERICAN SOUTHWEST FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the For the
nine months nine months
ended ended
March 31 March 31
1994 1993
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,397,770 $ 99,128
---------------- ----------------
Adjustments to reconcile net income
to net cash provided by (used in) operating
activities:
Principal accretion on receivables
pursuant to Funding Agreements (12,348,070) (18,614,284)
Principal accretion on Mortgage
Securities (5,046,562) (7,994,196)
Principal accretion on Bonds Payable 17,394,632 26,608,480
Amortization of discount on
receivables pursuant to Funding Agreements (9,042,510) (10,288,670)
Amortization of discount on Mortgage
Securities (18,513,710) (15,162,805)
Amortization of discount on Bonds
Payable 27,556,220 25,451,475
Decrease in interest receivable
pursuant to Funding Agreements 8,437,457 11,359,388
Decrease in interest receivable on
Mortgage Securities 4,211,705 3,568,186
(Increase) decrease in other receivables (164,254) 21,543
Decrease in advances to affiliates 660,000 760,063
Decrease in interest payable - Bonds (12,653,669) (14,769,396)
Decrease in interest payable on
other obligations (124,230)
Decrease in accounts payable (184,104) (2,628,258)
Decrease in payable to affiliates (174,900) (452,387)
---------------- ----------------
Total Adjustments 132,235 (2,265,091)
---------------- ----------------
Net cash provided by (used in)
operating activities 1,530,005 (2,165,963)
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
AMERICAN SOUTHWEST FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS (CONT'D)
(Unaudited)
<TABLE>
<CAPTION>
For the For the
nine months nine months
ended ended
March 31 March 31
1994 1993
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Collection of receivables pursuant to
Funding Agreements 438,806,893 526,559,111
Principal payments on Mortgage
Securities 421,271,018 414,050,929
---------------- ----------------
Net cash provided by investing activities 860,077,911 940,610,040
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal reduction of Bonds Payable (860,355,509) (933,513,152)
Reduction in other obligations (4,497,028)
Acquisition of Class A Treasury Stock (145,439) (15,821)
Acquisition of Class B Treasury Stock (100) (100)
---------------- ----------------
Net cash used in financing activities (860,501,048) (938,026,101)
---------------- ----------------
Net increase in cash and cash equivalents 1,106,868 417,976
Cash and cash equivalents at
beginning of period 3,989,969 4,203,830
---------------- ----------------
Cash and cash equivalents at end of period $ 5,096,837 $ 4,621,806
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for income taxes $ 1,195,000 $ 2,031,172
================ ================
Cash paid for interest $ 111,285,059 $ 186,356,263
================ ================
</TABLE>
Disclosure of accounting policy:
For purposes of the statements of cash flows, the Company considers all highly
liquid investments purchased with maturities of three months or less to be
cash equivalents.
The accompanying notes are an integral part of these financial statements.
7
AMERICAN SOUTHWEST FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Organization
American Southwest Financial Corporation (the "Company") was organized
for the purpose of issuing mortgage-collateralized bonds ("Bonds") in series
("Series") consisting of one or more classes (each a "Class") to facilitate
the financing of long-term residential mortgage loans secured by single-family
residences. The Company last issued a Series of Bonds in September 1988. The
Bonds are collateralized by certificates of the Government National Mortgage
Association, the Federal National Mortgage Association and the Federal Home
Loan Mortgage Corporation (collectively, all such certificates are referred to
as "Mortgage Certificates") and by conventional mortgage loans (together with
Mortgage Certificates referred to as "Mortgage Collateral"). The Company does
not have and is not expected to have any significant assets other than cash
and the assets pledged to secure specific Series of Bonds.
Each Series of Bonds that has been issued is a nonrecourse obligation of
the Company payable solely from the Mortgage Collateral and other collateral
(together the "Collateral") pledged to secure such Series of Bonds. Neither
the Company, the participating finance companies ("Finance Companies") nor the
holders of the residual interest in the REMICs (defined below), as applicable,
have guaranteed, or otherwise are obligated to pay the Bonds of a Series
except from the proceeds of the Collateral securing such Series of Bonds. The
Company has made elections to treat the arrangement by which the Collateral
securing certain Series of Bonds is held as "real estate mortgage investment
conduits" ("REMICs") for federal income tax purposes. The residual interests
in the REMICs (generally, the right to receive the remaining cash flow
available on Collateral after debt service
8
and payment of administrative expenses on Bonds) are owned by persons other
than the Company.
Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. They do not include all information and notes required by
generally accepted accounting principles for complete financial statements.
However, except as disclosed herein, there has been no material change in the
information disclosed in the notes to the financial statements included in the
Annual Report on Form 10-K for the year ended June 30, 1993. In the opinion
of Management, all adjustments considered necessary for a fair presentation
have been included. Operating results for the three and nine-month periods
ended March 31, 1994 are not necessarily indicative of the results that may be
expected for the year ending June 30, 1994.
NOTE 2 - MORTGAGE COLLATERAL
As a result of the elections by the Company to treat the arrangement by
which the Collateral securing certain Series of Bonds is held as REMICs, the
related income and expense of each such Series is reported as a separate
entity for federal income tax purposes. For financial statement purposes, the
Mortgage Collateral securing the Bonds of a Series, including the REMICs, is
presented on the balance sheets as (i) "Receivables Pursuant to Funding
Agreements" (defined below) if the Mortgage Collateral securing such Series is
owned by Finance Companies and pledged by such Finance Companies to the
Company pursuant to funding agreements, or (ii) "Mortgage Securities" if the
Mortgage Collateral securing such
9
Series is owned by the Company. The Bonds secured by the Mortgage Collateral
are presented as "Bonds Payable".
With respect to a Series of Bonds for which the Mortgage Collateral
securing such Series is owned by the Finance Companies and pledged to the
Company, the Company and each Finance Company participating in such Series
enter into a funding agreement ("Funding Agreement") with respect to such
Series pursuant to which the Company lends and such Finance Company borrows
all or a portion of the proceeds from the sale of the Bonds of such Series.
Each participating Finance Company agrees to repay its loan from the Company
by causing payments to be made to the trustee (the "Trustee") for the related
Series of Bonds on behalf of the Company in such amounts as are necessary to
pay the principal of and interest on the Finance Company's loan from the
Company as it becomes due, and each Finance Company pledges to the Company
Collateral as security for its loan. The Company assigns to the Trustee its
entire right, title and interest in the Collateral and all proceeds thereof
pledged under the Funding Agreements as security for such Series of Bonds.
Funds generated by principal and interest payments on the Mortgage
Collateral securing a Series of Bonds are held by the Trustee until the
payment dates for the Bonds of such Series. Amounts not required to make
principal and interest payments on the Bonds of a Series are used to pay
current fees and expenses, held in reserve funds for future fees and expenses,
held in special reserve funds securing the Bonds, paid to the Finance
Companies pursuant to the Funding Agreements, if any, or paid to the purchaser
of the residual interest in the REMIC, if any, with respect to such Series.
10
NOTE 3 - BOND REDEMPTIONS
The indenture supplements (the "Series Supplements") relating to certain
Series of Bonds issued by the Company provide that the Company has the option
to redeem such Bonds in whole or in part when specific criteria are met. The
following table sets forth the redemptions that occurred during the nine-month
period ended March 31, 1994:
Principal
Series Portion of
Date (Class) Bonds Redeemed Description
-------- ------- -------------- -------------------
07/01/93 N $ 16,369,983 Redemption in whole
07/15/93 2 274,000 Redemption in whole
07/15/93 7 774,000 Redemption in whole
08/01/93 D 8,062,895 Redemption in whole
09/01/93 F(4) 1,641,897 Redemption in part
09/01/93 42(D) 454,000 Redemption in part
09/20/93 F 650,708 Redemption in whole
09/23/93 52 20,969,000 Redemption in whole
09/27/93 45(B&C) 26,762,767 Redemption in part
09/30/93 54 3,336,000 Redemption in part
10/08/93 E 2,474,732 Redemption in whole
11/01/93 O 11,606,038 Redemption in whole
11/01/93 47 13,585,000 Redemption in whole
12/30/93 59 10,639,000 Redemption in whole
At the time of a redemption, with the consent of each participating
Finance Company and the Trustee, the Company sells the underlying Mortgage
Collateral and cancels the appropriate Funding Agreements. The Company
utilizes the proceeds from such sales to redeem the Bonds and remits the
remainder to the participating Finance Companies after charging each a
prepayment penalty. Prepayment penalties, including those charged to
affiliates, are assessed in accordance with specific policies established by
the Company. Any deviation from these policies necessary to address unique
Bond structures, Collateral or other factors requires the approval of the
Company's Board of Directors, including a majority of the Directors who have
no financial or other interest in the matter. Included in accounts payable at
June 30, 1993 is a liability of $212,983 due to
11
Finance Companies that participated in the Series E partial redemptions.
Expenses related to the redemptions are included in other expenses. Although
redemption opportunities are favorable in the current interest rate
environment, the benefits of redemptions are not predictable due to a variety
of factors including uncertainty of the time at which the Company may effect
redemptions of the outstanding Bonds, prevailing interest rates, other similar
market factors and, in certain circumstances, limitations under agreements
entered into by the Company.
Additionally, during the nine-month periods ended March 31, 1994 and
1993, the Company exercised its right (pursuant to the indenture and the
applicable Series Supplements) to effect the optional Class redemptions (known
as "clean-up calls") of the remaining outstanding amounts of certain Classes
of Bonds, utilizing corporate cash, funds owned by Finance Companies
("Escrowed Reserve Funds" - see Note 6) and funds borrowed from affiliates.
Pursuant to the clean-up calls, payments of principal and interest that would
otherwise be payable to the holders of Bonds so redeemed are paid by the
Trustee to the Company. To the extent corporate cash was utilized to effect
clean-up calls of Classes of Bonds, the Company did not record any interest
expense on the Bonds, and retained the associated portion of interest income
pursuant to Funding Agreements. In 1992, to the extent Escrowed Reserve Funds
were utilized to effect the clean-up calls, the Company credited all principal
and interest (presented as interest on other obligations) to the Escrowed
Reserve Funds. In 1993 and 1994, the Company borrowed funds from affiliates
to effect certain clean-up calls, paying interest to such affiliates at the
prime interest rate. All borrowings from affiliates for clean- up calls had
been repaid as of March 31, 1994. Interest expense on Bonds is less
12
than interest income related to Funding Agreements and Mortgage Securities due
to these clean-up calls.
NOTE 4 - RELATED PARTY TRANSACTIONS
The Company receives the use of office space, equipment, and certain
managerial, administrative, financial and other services from an affiliate,
American Southwest Financial Services, Inc. ("ASFS") pursuant to the terms of
an agreement (the "Mortgage Securities Issuance and Administration Agreement")
between the Company and ASFS. The Mortgage Securities Issuance and
Administration Agreement generally provides for the Company to pay ASFS, on a
quarterly basis, the shortfall between the total fees earned for both the
securities issuance services and the securities administration services ASFS
performs, and 110% of the overhead of ASFS, subject to scheduled adjustments.
Management fees payable to ASFS at March 31, 1994 and June 30, 1993 are
$225,000 and $400,000, respectively, and are included in payable to
affiliates. For each Series of Bonds, ASFS also receives administration fees
which are paid from the cash held as Escrowed Reserve Funds or by the Trustee
and are not expenses of the Company. The holders of Class A Stock of the
Company and of American Southwest Finance Co., Inc., an affiliate, own 100% of
the Class A Stock of American Southwest Affiliated Companies ("ASAC"), parent
company of ASFS and various other affiliates.
Related party transactions involving the Company and Escrowed Reserve
Funds are discussed in Notes 3 and 6.
NOTE 5 - EARNINGS PER SHARE
Earnings per share calculations are based on the weighted average number
of Class A common shares outstanding since voting and dividend rights are
limited to Class A shareholders. Class B shareholders' rights are limited to
a return of
13
capital upon dissolution together with a share of the Company's profits, if
any, upon dissolution, provided such profits were not paid to Class A
shareholders as dividends prior to such dissolution.
NOTE 6 - ESCROWED RESERVE FUNDS
The Company maintains, and invests on behalf of participating Finance
Companies, Escrowed Reserve Funds held for current and future Bond
administration expenses. These funds are not included in the Company's assets
or liabilities on the accompanying balance sheets as of March 31, 1994 and
June 30, 1993.
The Company believes that the Escrowed Reserve Funds at March 31, 1994,
if needed, as well as ongoing fees charged to participating Finance Companies,
are sufficient to meet the future Bond administration obligations, including
the obligation to ASFS under the Mortgage Securities Issuance and
Administration Agreement.
14
AMERICAN SOUTHWEST FINANCIAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Company was organized for the purpose of issuing mortgage-
collateralized Bonds in Series to facilitate the financing of long-term
residential mortgage loans secured by single-family residences. The Company
does not have and is not expected to have any significant assets other than
cash and the assets pledged to secure specific Series of Bonds. On the
closing of a Series of Bonds issued by the Company, the Company applies the
net proceeds of the Bonds toward the simultaneous purchase or the repayment of
indebtedness with respect to the Mortgage Collateral securing such Series of
Bonds or to fund loans to Finance Companies pursuant to Funding Agreements
(see Note 2 of the Financial Statements). The Company last issued a Series of
Bonds in September 1988. Issuance fees ("Bond Issuance Fees") charged for
each Series of Bonds issued by the Company are used to pay Bond offering
expenses.
Each Series of Bonds that has been issued is a nonrecourse obligation of
the Company, payable solely from the Collateral pledged to secure such Series
of Bonds. Neither the Company nor the Finance Companies guarantee or are
obligated to pay the Bonds of a Series except from the proceeds of the
Collateral securing such Series of Bonds. The Company has made elections to
treat the arrangement by which the Collateral securing certain Series of Bonds
is held as REMICs for federal income tax purposes.
Results of Operations
The Company's net income for the nine-month period ended March 31, 1994,
as well as for the three and nine-month periods ended March 31, 1993, resulted
primarily from redemption income and other interest income. A lack of
redemption income during the three-month period ended March 31, 1994 resulted
in a net loss for that period. The increase in redemption income in the nine-
month period ended
15
March 31, 1994 over redemption income for the same period in 1993 was
primarily due to an unprecedented volume of prepayments on the Mortgage
Collateral underlying the Company's Funding Agreements and Mortgage
Securities as homeowners nationwide refinanced their mortgages. The increase
in prepayments is a direct result of significantly lower mortgage interest
rates, which decreased to their lowest levels in over 20 years.
Prepayments due to lower interest rates generally affect the Company
positively since they may accelerate redemptions made by the Company as
provided in certain Series Supplements. See Note 3 of the Financial
Statements. Additionally, greater proceeds may result in a low interest rate
environment from the higher sales price received upon the sale of Mortgage
Collateral underlying each Series which has met the criteria for redemption.
During the nine-month period ended March 31, 1994 the Company redeemed or
partially redeemed 13 Series totaling $117,600,020 of Bond principal, as
compared to 10 Series totaling $79,581,452 of Bond principal during the same
period in 1993. At the time of a redemption, with the consent of each
participating Finance Company and the Trustee, the Company sells the
underlying Mortgage Collateral and cancels the appropriate Funding Agreements.
The Company simultaneously applies the proceeds from such sales to redeem the
Bonds and remits the remainder to the participating Finance Companies after
charging each a prepayment penalty. The prepayment penalties are presented as
redemption income. Although redemption opportunities have been favorable in
the current interest rate environment, the benefits of redemptions are not
predictable due to a variety of factors including uncertainty of the time at
which the Company may effect redemptions of the outstanding Bonds, prevailing
16
interest rates, other similar market factors and, in certain circumstances,
limitations under agreements entered into by the Company.
The Company's principal sources of revenue are interest pursuant to
Funding Agreements and interest from Mortgage Securities, both of which are
substantially offset by interest expense on Bonds. See Notes 2 and 3 of the
accompanying Financial Statements. The interest income and related interest
expense has declined for the three and nine-month periods ended March 31, 1994
as compared to the three and nine-month periods ended March 31, 1993 due to
(i) regular payments and prepayments on the Mortgage Collateral securing the
various series of Bonds, (ii) the sale of Mortgage Collateral in conjunction
with Bond redemptions, and (iii) the clean-up calls on certain Classes of
Bonds. See Note 3 of the Financial Statements. These same factors caused the
reductions in the amounts of Collateral and Bonds outstanding.
The Company anticipates that interest income and related interest expense
from these sources will continue to decline due to the current low interest
rate environment (which encourages prepayments of residential mortgages with
higher than current market interest rates), future redemptions, clean-up calls
and the fact that the Company has not issued a new Series of Bonds since 1988.
Other interest income consists primarily of (i) interest earned on the
reinvestment of the monthly payments on the Collateral (for certain non-REMIC
Series of Bonds issued by the Company) prior to the assumed deposit date for
such Series as defined in the related Series Supplements and (ii) to a much
lesser degree, interest earned on the Company's cash and cash equivalents.
The Company's other interest income is primarily affected by changes in
prepayments on the Mortgage Collateral which result in an increase or decrease
in the amount of monthly payments available for reinvestment by the Trustee
prior to the assumed
17
deposit date. Such prepayments have caused a reduction in the Collateral
securing the Company's non-REMIC Bonds and, consequently, a decrease in the
amount of the monthly payments on the Collateral which may be reinvested by
the Trustee prior to the assumed deposit date, resulting in reduced other
interest income for the three and nine-month periods ended March 31, 1994 as
compared to the three and nine-month periods ended March 31, 1993. In the
long-term, other interest income attributable to reinvested payments is
expected to continue to decrease since the Company is not likely to issue
additional non-REMIC Series of Bonds as a result of changes in the Internal
Revenue Code.
The amount of interest income received on the Collateral securing the
various Series of Bonds issued by the Company, the rate at which principal
prepayments are made on such Collateral, the amount of other interest income
earned from the reinvestment of monthly payments on such Collateral, the
amount of other interest income earned on the Company's cash and cash
equivalents, the interest rates payable by the Company on certain Classes of
Bonds issued by it, and the amounts ("Surplus") distributed to the Finance
Companies pursuant to Funding Agreements, or to the holders of the residual
interests in the REMICs, as applicable, depend upon prevailing interest rates
and are significantly affected by interest rate fluctuations. However, since
Surplus (generally, the right to receive the remaining cash flow available on
Collateral after debt service and payment of administrative expenses on Bonds)
is payable to the Finance Companies or to the holders of the residual
interests in the REMICs, the risks associated with fluctuations in interest
rates are borne primarily by the Finance Companies, the holders of certain
Classes of Bonds and the holders of the residual interests in the REMICs
rather than by the Company.
18
The Company derives management fee revenue from fees charged to the
Finance Companies for management of current Bond administration funds. Fees
vary depending on investment returns on these funds held by the Company
specifically for payment of current Bond administration expenses. At the time
of a full redemption of a Series of Bonds, excess current Bond administration
funds are returned to the Finance Companies. This reduction of funds, and to
a lesser extent the low short-term interest rate environment, account for the
reduced management fee revenue for the three and nine-month periods ended
March 31, 1994 as compared to the same periods in 1993. Current Bond
administration funds are a portion of the Escrowed Reserve Funds administered
and invested on behalf of the Finance Companies by the Company. See Note 6 of
the Financial Statements.
Primary expenditures of the Company consist of management fees paid to
ASFS and professional fees. The Company receives the use of office space,
equipment, and certain managerial, administrative, financial and other
services pursuant to the terms of the Mortgage Securities Issuance and
Administration Agreement between the Company and ASFS. The Mortgage
Securities Issuance and Administration Agreement generally provides for the
Company to pay ASFS management fees for certain services it performs (see
Note 4 of the Financial Statements). Management fees increased in the three
and nine-month periods ended March 31, 1994 as compared to the three and nine-
month periods ended March 31, 1993. These variances are a function of the
timing of the issuance fees and Bond Administration fees earned by ASFS from
other issuing entities and the operating overhead of ASFS, both of which
directly affect the amount of management fees as explained in Note 4 of the
Financial Statements.
19
Professional fees, comprising substantially all of the Company's other
expenses, fluctuate depending on the activities of the Company. During the
three and nine-month periods ended March 31, 1993, the Company incurred
increased professional fees related to a litigation settlement disclosed in
the Company's Annual Report on Form 10-K for June 30, 1993.
Liquidity and Capital Resources
During the nine-month period ended March 31, 1994, the Company's cash
increased by approximately $1 million due to operating activities and
reductions in advances to affiliates. Additionally, the Company had
$1,100,743 invested in clean-up calls at March 31, 1994. During the nine-
month period ended March 31, 1993 the Company used cash from operating
activities to reduce accounts payable, including income taxes for the fiscal
year ended June 30, 1992. At March 31, 1993 the Company had $154,035 invested
in clean-up calls.
The Company anticipates that funds to meet its current and future
operating needs will be provided from current cash and future operations.
Each Series of Bonds that has been issued is a non-recourse obligation of
the Company payable solely from the Collateral pledged to secure such Series
of Bonds. The Company is not obligated to pay the Bonds of a Series from
other than the proceeds of the Collateral securing such Series of Bonds.
The Company believes that scheduled payments of principal and interest on
the Collateral pledged to secure each Series of Bonds, together with amounts
available from reserve funds established for such Bonds and any reinvestment
income on such amounts, will provide sufficient funds (i) to pay principal and
interest on such Bonds when due and to retire such Bonds not later than their
respective stated maturities, and (ii) to pay related Bond administration
expenses.
20
Impact of Inflation and Changing Prices
The primary revenue producing activities of the Company (Bond issuance
and redemptions) are impacted by interest rates, which in turn are affected by
numerous factors. These factors include conditions in financial markets, the
fiscal and monetary policies of the United States government and the Board of
Governors of the Federal Reserve System, international economic and financial
conditions and other factors, none of which can be predicted with any
certainty.
Virtually all of the assets and liabilities of the Company are monetary
in nature. As a result, interest rates have a more significant impact on the
performance of the Company than the effects of general levels of inflation
since changes in prevailing interest rates will affect the availability, cost
and expected maturity of Collateral. This in turn will affect the Company's
ability to issue new Series of Bonds and earn Bond Issuance Fees. Changes in
interest rates (particularly long-term interest rates) also affect the timing
and profit potential of Bond redemptions, with lower rates being a positive
factor and higher rates being a negative factor. Interest rates do not
necessarily move in the same direction or in the same magnitude as the price
of goods and services, since such prices are affected by inflation while
interest rates generally are not affected to the same degree. Nevertheless,
neither changes in interest rates nor inflationary pressures are expected to
significantly affect the ability of the Company to meet its obligations as
they become due because (i) each Series of Bonds is secured by Collateral
paying interest at fixed rates, and (ii) interest on each Class of Bonds is
paid at fixed rates, or at rates based on specified formulas subject to
specific maximum limitations.
21
AMERICAN SOUTHWEST FINANCIAL CORPORATION
PART II.
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: None.
(b) Reports on Form 8-K: None.
22
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.
AMERICAN SOUTHWEST FINANCIAL CORPORATION
Date: May 11, 1994 /s/ G. Thomas Eggebrecht
-----------------------------------------
G. Thomas Eggebrecht
President and Chief Executive Officer
Date: May 11, 1994 /s/ Richard H. Hackett
-----------------------------------------
Richard H. Hackett
Executive Vice President, Treasurer and
Chief Financial and Accounting Officer
Date: May 11, 1994 /s/ Michael H. Feinstein
-----------------------------------------
Michael H. Feinstein
Executive Vice President and Chief
Operating Officer
23
