SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q/A-1
[X]Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996.
[ ]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: 33-46921-A
KELLER FINANCIAL SERVICES OF FLORIDA, INC.
FLORIDA 59-3110610
------- ----------
(State of Incorporation) (IRS Employer I.D. No.)
Address of Principal Executive Offices:
18167 U.S. HIGHWAY 19 NORTH, CLEARWATER, FLORIDA 34624-6572
Registrant's telephone number, including area code:
(813) 524-1400
Indicate by check mark whether the registrant: (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such other 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
stock, as of August 10, 1996.
1,600,000 COMMON SHARES
<PAGE>
TABLE OF CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION
Item I - Financial Statements 3
Item 11 - Management's Discussion and Analysis
of Financial Condition and Results of Operation 9
PART II OTHER INFORMATION
Item I - Legal Proceedings 14
Item II - Changes in Securities 14
Item III - Default upon Senior Securities 14
Item IV - Submission of Matters to a Vote of Security 14
Holders
Item V - Other Information 14
Item VI - Exhibits and Reports on Form 8-K 14
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
KELLER FINANCIAL SERVICES OF FLORIDA, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- -----------
ASSETS
<S> <C> <C>
Cash and cash equivalents $10,496,689 $17,976,477
Commercial Floor Plan Loans 134,896 -0-
Finance receivables, principal 99,939,994 103,048,408
Non-refundable acquisition discounts (1,396,464) (2,108,093)
Less allowance for credit losses (11,551,706) (10,945,525)
----------- -----------
Finance receivables, Net 86,991,824 89,994,790
----------- -----------
Marketable equity securities -0- -0-
Due from affiliates 249,500 -0-
Deferred issue costs 8,352,091 10,451,345
Furniture, equipment & leaseholds, net 1,827,119 902,241
Other assets 6,087,970 4,210,891
------------ -----------
TOTAL ASSETS $114,140,089 $123,535,744
============ ============
LIABILITIES AND EQUITY
Accounts payable & accrued exp. $ 70,525 $ 171,953
Secured notes 132,767,600 132,814,000
Notes payable - related party -0- 80,000
Due to affiliate -0- -0-
------------ ------------
TOTAL LIABILITIES 132,838,125 133,065,953
------------ ------------
Cumulative Convertible Preferred Stock, 10,000,0000 shares
authorized, 1,490,700 and 0 shares issued and outstanding 13,548,129 -0-
Common stock, $1 par value, 2,000,000 issued and outstanding 1,000 1,000
Additional paid-in capital 965,600 965,600
Retained earnings (33,187,765) (10,496,809)
Treasury stock, at cost
400,000 shares at $.0625 (25,000) -0-
------------ ------------
TOTAL EQUITY (18,698,036) (9,530,209)
------------ ------------
TOTAL LIABILITIES & EQUITY $114,140,089 $123,535,744
============ ============
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
KELLER FINANCIAL SERVICES OF FLORIDA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ----------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Finance charges, fees, and
other income 5,532,722 $ 5,922,303 $ 16,052,048 $ 14,842,854
Interest expense (3,972,952) (4,113,009) (12,587,987) (9,959,200)
------------ ------------ ------------ ------------
Net interest income (loss) 1,559,770 1,809,294 3,464,061 4,883,654
Provision for credit losses (182,444) (1,275,000) (17,991,569) (1,275,000)
------------ ------------ ------------ ------------
Net interest income (loss)
after provision for credit
losses 1,377,326 534,294 (14,527,508) 3,608,654
EXPENSES
Administrative &
marketing
- paid to related party 2,091,079 1,574,136 6,151,417 3,424,467
Other operating expenses 212,000 100,091 508,715 261,258
Restructuring costs - paid
to related party 643,885 -0- 643,885 -0-
------------ ------------ ------------ ------------
NET INCOME (LOSS)
BEFORE INCOME TAXES (1,569,638) (1,139,933) (21,831,525) (77,071)
Provision for income taxes -0- -0- -0- -0-
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (1,569,638) $ (1,139,933) (21,831,525) $ (77,071)
============ ============ ============ ============
Preferred Dividends 335,549 -0- 859,431 -0-
------------ ------------ ------------ ------------
NET INCOME (LOSS)
applicable to common
shareholders $ (1,905,187) $ (1,139,933) $(22,690,956) $ (77,071)
============ ============ ============ ============
NET INCOME (LOSS) PER
SHARE $ (1.19) $ (0.57) $ (11.87) $ (0.04)
============ ============ ============ ============
WEIGHTED AVERAGE
SHARES OUTSTANDING 1,600,000 2,000,000 1,911,111 2,000,000
============ ============ ============ ============
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
KELLER FINANCIAL SERVICES OF FLORIDA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(21,831,525) $ (77,071)
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 225,000 50,000
Provision for credit losses 17,991,569 1,275,000
Amortization of deferred issue costs 2,099,255 1,745,447
Net increase (decrease) in discounts (711,629) 2,820,707
Net increase in other assets (1,877,079) (3,295,657)
Net (increase) decrease in due from affiliate (249,500) -0-
Net increase (decrease) in accrued expenses and other
liabilities (100,840) 129,285
------------ ------------
(4,454,749) 2,647,711
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Finance receivables originated, net of charge-offs (57,386,685) (80,724,212)
Finance receivables repaid 43,109,122 30,265,645
Investment in floor plan receivables (134,896) -0-
Purchase of furniture, fixtures, and equipment, net of minor
disposals (1,149,878) (333,787)
------------ ------------
(15,562,337) (50,792,354)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes payable - related party (80,000) (600,000)
Net proceeds (repayments) of secured notes (46,400) 58,472,000
Net proceeds from issuance of preferred stock 13,548,129 -0-
Purchase of treasury stock (25,000)
Preferred dividends (859,431) -0-
Increase in deferred issue costs (5,849,747)
Common shareholder distributions -0- (1,262,019)
------------ ------------
12,537,298 50,760,234
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH (7,479,788) 2,615,591
EQUIVALENTS
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 17,976,477 21,198,721
------------ ------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 10,496,689 $ 23,814,312
============ ============
SUPPLEMENTAL DISCLOSURES
Interest paid to creditors $ 10,488,732 $ 8,213,904
============ ============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Unrealized loss on marketable equity securities $ -0- $ 5,620
============ ============
</TABLE>
5
<PAGE>
KELLER FINANCIAL SERVICES OF FLORIDA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. STATEMENT OF INFORMATION FURNISHED
The financial information included herein is unaudited, such information
reflects all normal and recurring adjustments, which are, in the opinion of
management, necessary for a fair presentation of the results of operations and
cash flows for the interim periods.
These unaudited financial statements should be read in conjunction with the most
recent audited financial statements, for the period ended December 31, 1995, of
the Company and the affiliates consolidated with the Company under the exchange
of shares transaction described in Note 4, below.
The results of operations for the nine months and three months ended September
30, 1996 are not necessarily indicative of the results to be expected for the
full year.
2. FINANCE CHARGES -- REVENUE RECOGNITION METHOD
Revenue from Finance Charges is recognized using procedures that approximate
the interest (actuarial) method.
3. RECALCULATION OF FINANCE CHARGE REVENUE RECOGNITION AND RESTATEMENT OF 1995
FINANCIAL STATEMENTS
Following the January 1997 installation of a reporting module in the Company's
recently installed new loan servicing system, which provided information not
previously known, the Company reviewed and revised its procedures for
calculating finance charge revenue on the interest (actuarial) method. Based
upon a recalculation, the Company determined that the December 1995 and
September 1995 financial statements, based on the old procedures and under the
old system, overstated finance charge revenue recognition by a cumulative
$1,825,238 as of December 1995, of which $309,286 and $974,621 applied to the
three months and nine months ended September 30, 1995, respectively. The
December 1995 and September 1995 financial statements have been so restated.
4. PRINCIPLES OF CONSOLIDATION
Effective April 29, 1996, the Company's Board adopted a plan to exchange shares
of the Company for all the shares of several of its affiliates; Keller Financial
Services of Tampa Bay, Inc., Keller Financial Services of St. Petersburg, Inc.,
Keller Financial Services of Clearwater, Inc., Keller Financial Services of
Pinellas, Inc., Keller Financial Services of Central Florida, Inc., Keller
Financial Services of West Florida, Inc., Keller Financial Services of the Sun
Coast, Inc., Keller Financial Services of North Florida, Inc., Keller Financial
Services of Mid-Florida, Inc., related entities by common ownership and
control. The transaction was accounted for as a combination of interests in a
manner similar to a pooling-of-interest. No company recognized a gain or loss as
a result of the transaction.
The consolidated financial statements of the Company include the accounts of its
wholly-owned subsidiaries. All significant inter-company transactions have been
eliminated in consolidation.
5. FINANCE RECEIVABLES ALLOWANCE FOR CREDIT LOSSES; NON-REFUNDABLE ACQUISITION
DISCOUNTS
Finance receivables as of September 30, 1996 and December 31, 1995 consist of
the following:
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- -------------
Finance receivables, gross $ 132,126,088 $ 131,772,130
Less unearned finance charges (32,186,094) (28,723,722)
------------- -------------
Finance receivables, principal $ 99,939,994 $ 103,048,408
============= =============
6
<PAGE>
Changes in the allowance for credit losses and the non-refundable acquisition
discount for the nine months ended September 30, 1996 and 1995 were as follows:
ALLOWANCE FOR CREDIT LOSSES:
1996 1995
------------ ------------
Beginning balance $ 10,945,525 $ -0-
Provision for credit losses 17,991,569 1,275,000
Finance receivables charged off (17,385,388) (58,812)
------------ ------------
Ending balance $ 11,551,706 $ 1,216,188
============ ============
NON-REFUNDABLE ACQUISITION DISCOUNT:
Beginning balance $ 2,108,093 3,466,430
Discounts acquired 4,430,634 8,787,349
Discounts accreted to income -0- -0-
Finance receivables charged off (5,142,263) (5,966,642)
------------ ------------
Ending balance $ 1,396,464 $ 6,287,137
============ ============
During the First Quarter of 1996 and the Third Quarter of 1995, the Company
increased its provision for credit losses through a charge to earnings, by
$17,773,265 and $1,275,000, respectively, in response to increasing levels of
finance receivables delinquencies and significantly higher losses on the
disposition of repossessed assets than previously experienced.
6. CAPITAL STOCK On January 22, 1996, the Company registered and began receiving
subscriptions for 1,500,000 shares of 9% Cumulative Convertible Preferred Stock
- - Class A. The Shares are redeemable for cash at any time after December 31,
1996, in whole or in part, at the option of the Company at redemption prices
declining to par on December 31, 2001. They are convertible into shares of the
Company's common stock twelve months after the completion of an initial public
offering of the Company's common stock. The Company has closed the offering
after selling 1,490,700 shares.
7. BUSINESS RESTRUCTURING
Keller Financial Services, Inc. ("KFS"), the Company's loan servicing and
origination agent, has embarked upon a process reengineering program, see
"Process Reengineering." As a part of this program, KFS announced on September
16, 1996 the closing of all branch origination offices and the displacement of
approximately 80 employees. The branch closings were completed on November 15,
1996. Accordingly, KFS accrued expenses relating to future rents due under the
branch office leases and severance costs related to the displacement of
employees. Under the terms of the agency agreement between the Company and KFS,
the Company paid to KFS $643,885 to cover such costs recognized as
"restructuring costs" in the Third Quarter 1996.
8. RELATED PARTY TRANSACTIONS
KFS is an affiliate of the Company and manages the operations of the Company.
Direct operating and overhead costs are allocated monthly to the Company and its
subsidiaries. Administration and marketing costs associated with servicing
finance receivables and obtaining additional funds are allocated prorata on the
number of finance receivables outstanding and prorata based on the amount of
monthly funds obtained. Loan origination costs are allocated prorata on the
number of finance receivables originated. Deferred issuance costs related to the
issuance of debt and certain taxes are directly allocated to the Company and its
subsidiaries. Total general and administrative and marketing reimbursements of
$6,151,417 and $3,424,467 were paid to KFS during the nine months ended
September 30, 1996 and 1995. KFS entered into a marketing agreement with
Peerless Financial
7
<PAGE>
Services, Inc. ("Peerless") pursuant to which Peerless will market products and
services for KFS and the Company. Although the majority stockholder of Peerless
and the Stockholder with the right to vote the majority of stock of KFS and the
Company are not the same, there is connnon stock ownership of the three
companies. On September 30, 1996, advances by the Company to Peerless totaled
$195,000 and advances to KFS totaled $54,500. On December 31, 1995, $80,000 was
outstanding on a note to an individual related to the Chairman of the Company.
The note was unsecured, paid interest monthly at a 12% annual interest rate and
was callable at any time. The note was repaid in the Second Quarter of 1996.
9. LIQUIDITY AND CAPITAL RESOURCES
The Company believes that its capital resources are sufficient to fund its
day-to-day operations and to make all interest payments on the secured notes and
dividend payments on the Convertible Preferred Stock when due and payable for
the foreseeable future. Management believes that with the implementation of its
new business plan and the continued improvements resulting from its process
reengineering program, if the Company can obtain the funds necessary to acquire
approximately $6.5 million in finance receivables per month under its new
operating program, the Company will return to a level of profitability
sufficient to meet all other obligations. This belief is consistent with the
results of a financial model. Management believes the Company, through the
acquisition of such volume of finance receivables or other options which
management is continuing to explore, can meet its objectives. Among others,
management is exploring the options of securitizing part of its existing
portfolio (a form of refinancing at a lower effective rate of interest) and
securing a line of credit. The Company is also exploring earning origination
fees by originating contracts for acquisition by other lenders and selling whole
loan pools while retaining servicing and/or origination fees.
8
<PAGE>
ITEM II - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCLAL CONDITION AND RESULTS OF OPERATION
Keller Financial Services of Florida, Inc. and subsidiaries (the "Company") are
in the business of purchasing retail motor vehicle installment sales contracts
("finance receivables" or "loans") originated in connection with the financing
of new and used automobiles and light-duty trucks, including the right to
receive payments thereunder and security interests in vehicles, and to collect
the principal and interest payments due on such contracts.
The Company transacts business primarily in the State of Florida and operations
are managed by KFS. The Company's loans range from 12 to 60 months at annual
interest rates of 15% to 30%. All loans are currently repayable in monthly
installments. The majority of loans are purchased at a discount from principal
amount owed and the discount is held as a reserve for possible future loan
losses.
The Company also intends to extend, from time to time, limited amounts of dealer
floor plan financing to finance automobiles and motorcycles offered for retail
sale by certain dealers that are a source of significant amounts of finance
receivables to the Company.
GENERAL
Management of KFS has recognized that, due to the extremely competitive nature
of the industry, successful companies in the sub-prime lending industry will be
those which are best able to do the following: (i) Hire and retain a
professional operations management team which is capable of recruiting,
training, leading and motivating their respective units, (ii) Deliver a product
that is consistently superior in both loan underwriting and service quality,
(iii) Accurately measure operational and fmancial performance and make timely,
responsive changes to plans or programs as necessary, and (iv) Leverage current
and evolving technologies to achieve a competitive advantage.
KFS embarked upon a process reengineering program accomplish the foregoing.
Process reengineering involves reviewing, at a significant level of detail, the
basic businesses and work flows of a company to determine the most efficient use
of human and fmancial resources, and to restructure, or "reengincer," the
organization and its business processes to assure efficiency, consistency,
control, profitability, financial stability and the future health of the
organization.
In order to effect process reengineering to achieve these desired performance
standards, Greg Stiff, Executive Vice President - Operations, and Michael
Nixon, President, were hired by the Company and charged with the following
responsibilities: (i) Assure that formal, written communications within the
Company, including management reporting, bulletins, policies and procedures are
in place, current and under constant review and scrutiny for improvement, (ii)
Assure that all KFS branch offices were necessary and that operational units are
in compliance with current KFS policies and procedures by means of periodic
reviews and audits, (iii) Assure that appropriate performance goals are set for
each KFS operational unit and associates, (iv) Implement consistent, accurate
control tools and reporting to assure the stated objectives are achieved, (v)
Assure that each KFS associate clearly understands his or her job assignments,
has been properly trained, knows the expected level of their performance, and
understands their personal responsibility for achieving their performance
objectives, and (vi) Assure that the operations organization is efficiently
structured and that the flow of work within and between each unit and other KFS
departments facilitates the ultimate objective of booking quality, profitable
automobile finance receivables.
Under the process reengineering program, KFS successfully commenced the
implementation of a new business plan in the Second and Third quarters of 1996
by: (i) Centralizing certain operations, (ii) Introducing, in the Third Quarter,
a new three tiered loan acquisition program, (iii) Implementing new credit
underwriting guidelines, including a computerized borrower scoring analysis,
(iv) Installing new computer hardware and software utilized for contract
servicing, including collections and repossessions, and for accounting, (v)
Reviewing Dealer
9
<PAGE>
relationships, and (vi) Implementing a revised marketing program. As an
extension of the reengineering program, the Company announced the closing of all
twenty-one KFS branch offices and the complete centralization of operations in
the Third Quarter 1996. The closings were completed in the Fourth Quarter 1996
and resulted the displacement of approximately eighty employees.
RESULTS OF OPERATIONS
The Company acquired 4,350 contracts through its twenty-one branch network in
the First Quarter 1996, the highest volume ever acquired by the Company in any
fiscal quarter. Many of the contracts were originated through non-franchised
auto dealers who sold primarily older model high-mileage vehicles. Management
now realizes that unlike the First Quarter of 1995, when losses began to abate
late in the quarter, the loss trend continued throughout the entire First
Quarter 1996, and thereafter. Management believes a significant portion of the
unanticipated losses relates to loan activity in the First Quarter 1996. Based
upon the results of the previously reported financial model prepared under the
direction of Mr. Nixon, and previously unavailable data from the Company's new
loan servicing computer system installed in April, 1996, management became able,
in January 1997, to estimate that as of March 31, 1996 the future credit losses
on the loan portfolio would be $28.4 million.
Based upon the foregoing, the Company increased its Allowance for Credit Losses
by $17.8 million through the Provision for Losses as a charge to earnings in the
First Quarter 1996. As of March 31, 1996, the Company had $28.4 million total
reserves for future credit losses comprised of a $25.4 million Allowance for
Credit Losses reserve and $3.0 million of Non-refundable Acquisition Discounts.
The Allowance for Credit Losses declined to $11.6 million and Non-refundable
Acquisition discounts declined to $1.4 million as of September 30, 1996,
primarily as a result of credit losses recognized upon the disposition of
repossessed vehicles since the First Quarter of 1996.
Following the January 1997 installation of a reporting module in the Company's
recently installed new loan servicing system, which provided information not
previously known, the Company reviewed and revised its procedures for
calculating finance charge revenue on the interest (actuarial) method. Based
upon a recalculation, the Company determined that the December 1995 and
September 1995 financial statements, based on the old procedures and under the
old system, overstated finance charge revenue recognition by a cumulative
$1,825,238 as of December 1995, of which $309,286 and $974,621 applied to the
three months and nine months ended September 30, 1995, respectively. The
December 1995 and September 1995 financial statements have been so restated.
The changes implemented as a result of the process reengineering program
resulted in significantly fewer contracts being acquired commencing the Second
Quarter of 1996. Although the number of Contracts acquired thereafter has
continued to increase, the volume of contracts acquired in 1996 continues to
remain lower than the comparable periods for 1995.
The Company purchased $15,640,342 of gross finance receivables in the Third
Quarter which represented 971 contracts. For the year, the Company has purchased
the following:
<TABLE>
<CAPTION>
1996 1995
----------------------------- ----------------------------
$ Units $ Units
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
First Quarter 59,001,821 4,350 39,338,705 3,361
Second Quarter 6,759,666 550 50,404,273 4,029
Third Quarter 15,640,342 971 22,730,266 1,888
---------- ---------- ----------- ----------
Year-to-Date 81,401,829 5,871 112,473,244 9,278
========== ========== =========== ==========
</TABLE>
At the end of the Third Quarter of 1996 the Company had extended $134,896 floor
plan advances to motorcycle and automobile dealers, $195,000 to Peerless under
the marketing agreement and $54,500 to KFS.
10
<PAGE>
As a result of the foregoing, the Company's net interest income before provision
for loan losses decreased 29.1% for the nine months and 13.8% for the three
months ended September 30, 1996 to $3,464,061 and $1,559,770 from $4,883,654 and
$1,809,294 during the same period ended 1995. The Company charged earnings in
the Second and Third Quarters of 1996 with $35,860 and $182,444 to provide
reserves for future losses on loans generated in those periods. In addition, the
Company charged the First Quarter of 1996 earnings $17,773,265 and Third Quarter
1995 $1,275,000 to provide for additional credit loss reserves. See "Credit Loss
and Delinquency Experience."
Interest expense increased to $12,587,987 from $9,959,200 during the period
ended September 30, 1996 on the secured notes which bear interest at rates
ranging from 9% to 12% per annum. These increases are a result of the issuance
of additional secured notes and subsequent purchase of additional installment
sales contracts, throughout 1995 and 1996. The installment sales contracts bear
interest at rates ranging from 15% to 30%.
Expenses, excluding restructuring costs, increased 81% during the nine months
and 38% for three months ended September 30, 1995 to $6,660,132 and $2,303,079
from $3,685,725 and $1,674,227 for the same periods ended in 1995. This is a
result of increased servicing costs associated with increased delinquencies and
defaults.
As a part of the process reengineering program, KFS announced on September 16,
1996 the closing of all branch origination offices and the displacement of
approximately 80 employees. The plan was completed on November 15, 1996.
Accordingly, the KFS accrued expenses related to future rents due under the
branch office leases and severance costs related to the displacement of
employees. Under the terms of the agency agreement between the Company and KFS,
the Company has paid $643,885 to cover such costs and have recognized them as
"restructuring costs" in the Third Quarter 1996.
As a result of the foregoing and those factors described in "Industry Trends"
and "Credit Loss and Delinquency," below, net income for the nine month period
ended September 30, 1996 decreased to a net loss of $21,831,525 compared to a
net loss of $77,071 for the same period in 1995. For the three month period
ended September 30, 1996 the Company had a net loss, including restructuring
costs, of $1,569,638 compared to a net loss of $1,139,933 for the same period in
1995.
INDUSTRY TRENDS
Over the past several years, lenders in the sub-prime market have experienced
increased rates of delinquency, default and credit losses. Management believes
this is due in part to the maturation of the young sub-prime lending industry,
the current weakening trend of the consumer credit market, attempts by lenders
which lack effective knowledgeable management to determine the correct balance
between risk and reward, and the effect of additional competition on the
marketplace. If these trends continue, the Company may experience credit losses.
The automobile finance business is highly competitive. The Company believes that
there are numerous competitors providing, or capable of providing, financing
through Dealers to purchasers of Vehicles. Because the Company purchases finance
receivables from Dealers that provide financing to borrowers who do not qualify
for traditional financing, the Company does not believe that it competes with
most commercial banks, savings and loans, credit unions and other consumer
lenders that apply more traditional lending criteria to the credit approval
process. Historically, these traditional sources of automobile financing (some
of which are larger, have significantly greater financial resources and have
relationships with captive dealer networks) have not consistently served the
Company's sub-prime market segment. If such a competitor were to enter the
Company's market segment, the Company could be materially adversely affected.
The sub-prime market is highly fragmented and is served by many non-traditional
consumer finance sources. During the past few years, numerous other finance
companies operating in the sub-prime have completed public offerings of
securities to enable them to finance lending activities in the sub-prime market.
To the extent that these and other companies expand or continue to expand their
activities in the market served by the Company, the competition for dealer
relationships and suitable finance receivables in that market will continue to
intensify, which could have an adverse effect on the Company.
11
<PAGE>
CREDIT LOSS AND DELINQUENCY EXPERIENCE
In conjunction with the financing of installment sales contracts, agreements are
entered into with dealers, whereby non-refundable acquisition discounts are
established. These discounts represent the difference between the amount
financed and the amount advanced to the dealer. All or a portion of these
negotiated discounts are available to absorb credit losses, or to be taken into
income at the term of the contract. Conversely, if the Company determines that
the amount of non-refundable acquisition discount is not sufficient to offset
potential credit losses, the Company may seek to increase the amount of
non-refundable acquisition discount on future finance receivables purchases. The
Allowance for Credit Losses reserve may also be increased to cover future
expected credit losses by a charge to current earnings through the Provision for
Credit Losses. Credit loss experience, contractual delinquency of loans
receivable, the value of underlying collateral, and current economic conditions
are factors management use in negotiating the discounts and assessing the
overall adequacy of the discounts to absorb losses.
<TABLE>
<CAPTION>
AS OF AND FOR THE PERIOD ENDED
SEPTEMBER 30,
------------------------------
1996 1995
---- ----
<S> <C> <C>
Gross finance receivables $ 132,066,733 131,171,933
Number of contracts 14,222 13,851
Monthly delinquent Contracts
31-60 Days 1,116 7.9% 1,525 11.0%
61-90 Days 281 2.0% 571 4.1%
91 Days or more 450 3.2% 470 3.4%
Repossessions $6,087,970 4.6% $5,966,642 4.5%
Non-refundable acquisition
discounts & Allowance for
credit losses $12,948,170 9.8% $7,503,385 5.7%
Net charge-offs 22,527,651 17.1% 5,620,335 4.3%
<FN>
- ----------
(1) Gross finance receivables includes the total of all future payments due
under the Contracts.
(2) Net charge-offs includes the remaining principal balance, after the
application of the net proceeds from the liquidation of the vehicle, excluding
accrued and unpaid interest. Also included are post liquidation recoveries on
previously charged off accounts.
</FN>
</TABLE>
As a result of trends discussed above, the delinquency ratio at month-end
September 1996 was 13.1%, down from 18.5% in the corresponding period in 1995.
However, net charge-offs for the nine months ending September 1996 increased to
$22.5 million, or 17.1% of gross finance receivables, compared to $5.6 million,
or 4.3%, in the corresponding period for 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that its capital resources are sufficient to fund its
day-to-day operations and to make all interest payments on the secured notes and
dividend payments on the Convertible Preferred Stock when due and payable for
the foreseeable future. Management believes that with the implementation of its
new business plan and the continued improvements resulting from the process
reengineering program, if the Company can obtain the funds necessary to acquire
approximately $6.5 million in finance receivables per month under its new
operating program, the Company will return to a level of profitability
sufficient to meet all other obligations. This belief is consistent with the
results of the financial model. Management believes the Company, through the
acquisition of such volume of finance receivables or other options which
management is continuing to explore, can meet its objectives. Among others,
management is exploring the options of securitizing part of its existing
portfolio (a form of refinancing at a lower effective rate of interest) and
securing a line of credit.
12
<PAGE>
The Company is also exploring earning origination fees by originating contracts
for acquisition by other lenders and selling whole loan pools while retaining
servicing and/or origination fees.
During the nine months ending September 30, 1996, net proceeds of approximately
$13,548,129 of new issue Convertible Preferred Stock and $43,109,122 finance
receivables repayments were used to purchase $57,386,685 new finance
receivables. Cash flow from operations was ($4,454,749) due primarily to credit
losses and vehicle repossessions previously discussed. Cash and equivalents were
reduced $7,479,788 during the period primarily to fund this operating cash
requirement, a $1,149,879 increase in fixed assets and $859,431 preferred
dividends. Cash and equivalents were $10,496,689 at September 30, 1996.
BUSINESS COMBINATION
Effective April 29, 1996, the Company's Board adopted a plan to exchange shares
of the Company for all the shares of several of its affiliates; Keller Financial
Services of Tampa Bay, Inc., Keller Financial Services of St. Petersburg, Inc.,
Keller Financial Services of Clearwater, Inc., Keller Financial Services of
Pinellas, Inc., Keller Financial Services of Central Florida, Inc., Keller
Financial Services of West Florida, Inc., Keller Financial Services of the Sun
Coast, Inc., Keller Financial Services of North Florida, Inc., Keller Financial
Services of Mid-Florida, Inc., related entities by common ownership and control.
The transaction was accounted for as a combination of interests in a manner
similar to a pooling-of-interest. No company recognized a gain or loss as a
result of the transaction.
13
<PAGE>
KELLER FINANCIAL SERVICES OF FLORIDA, INC.
PART II - OTHER INFORMATION
Item I - Legal Proceedings
None.
Item 11 - Changes in Securities
None.
Item III - Default upon Senior Securities
None.
Item IV - Submission of Matters to a Vote of Security Holders
None.
Item V - Other information
None.
Item VI - Exhibits and Reports on Form 8-K
EXHIBIT 27 - Financial Data Schedule (for SEC use only)
Form 8-K, Resignation of Director, dated June 18, 1996
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly report to be signed on its behalf by
the undersigned, thereto duly authorized.
Date: By: /s/ Michael Nixon
JANUARY 23, 1997 ------------------------------
Michael Nixon
President and Chief Executive
Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-01-1996
<CASH> 10,496,689
<SECURITIES> 0
<RECEIVABLES> 99,939,994
<ALLOWANCES> 12,948,170
<INVENTORY> 0
<CURRENT-ASSETS> 97,488,513
<PP&E> 1,827,119
<DEPRECIATION> 225,000
<TOTAL-ASSETS> 114,140,089
<CURRENT-LIABILITIES> 1,300,113
<BONDS> 0
0
13,548,129
<COMMON> 1,000
<OTHER-SE> (32,247,165)
<TOTAL-LIABILITY-AND-EQUITY> 114,140,089
<SALES> 0
<TOTAL-REVENUES> 16,052,048
<CGS> 0
<TOTAL-COSTS> 6,660,132
<OTHER-EXPENSES> 643,885
<LOSS-PROVISION> 17,991,569
<INTEREST-EXPENSE> 12,587,987
<INCOME-PRETAX> (21,831,525)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,690,956)
<EPS-PRIMARY> (11.87)
<EPS-DILUTED> 0
</TABLE>
