UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
-------- --------
Commission File Number 0-27156
WESTERN FIDELITY FUNDING, INC.
(Exact name of small business issuer as specified in its charter)
Colorado 84-1148454
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
4704 Harlan Street, Suite 260
Denver, Colorado 80212
(Address of principal executive offices) (Zip Code)
(303) 477-8404
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date: As of November 12, 1996, there
were 2,637,500 outstanding shares of common stock, par value $0.001 per share.
Transitional/Small Business Issuer Yes [X] No [ ]
<PAGE>
WESTERN FIDELITY FUNDING, INC.
FORM 10-QSB
INDEX
Page
PART I. Financial Information: No.
Consolidated Balance Sheets - September 30, 1996
and December 31, 1995.......................................1
Consolidated Statements of Operations - three and nine months
ended September 30, 1996 and 1995 ..........................2
Consolidated Statements of Cash Flows - nine months
ended September 30, 1996 and 1995...........................3
Notes to Financial Statements..................................4
Management's Discussion and Analysis or Plan of
Operation...................................................5
PART II. Other Information:
Item 6. Exhibits and Reports on Form 8-K .....................8
Signature .....................................................9
<PAGE>
<TABLE>
<CAPTION>
WESTERN FIDELITY FUNDING, INC. AND SUBSIDIARY
Consolidated Balance Sheets
September 30, December 31,
1996 1995
------------ -------------
[Unaudited]
Assets
<S> <C> <C>
Cash ................................................................... $ 2,686,289 $ 480,838
Restricted cash ........................................................ 1,248,428 891,065
Finance receivables - net .............................................. 18,712,237 21,319,223
Vehicles held for sale ................................................. 5,484,405 982,156
Other assets ........................................................... 2,669,975 1,440,601
------------ ------------
$ 30,801,334 $ 25,113,883
============ ============
Liabilities and Stockholders' Equity
Accounts payable ....................................................... 276,462 $ 3,147,430
Accrued liabilities .................................................... 560,470 445,572
Revolving Facilities ................................................... 4,311,180
Note payable - related party ........................................... 11,000 11,000
Notes payable - insurance companies .................................... 9,452,599 10,769,160
Master notes ........................................................... 2,978,075 4,157,993
Notes payable .......................................................... -- 1,772,946
Subordinated Debt ...................................................... 10,000,000
------------ ------------
27,589,786 20,304,101
------------ ------------
Stockholders' Equity
Perferred stock; 2,000,000 shares authorized
Series A, 10% convertible, $.0001 par value; 400,000
shares designated, 328,540 shares issued and
outstanding (liquidation preference of $1,642,700) .................. 33 33
Common Stock, $.0001 par value; 10,000,000 shares
authorized, 2,637,500 shares issued and outstanding ................. 264 264
Additional paid-in capital ............................................. 5,983,119 5,983,119
Accumulated deficit .................................................... (2,771,868) (1,173,634)
3,211,548 4,809,782
------------ ------------
$ 30,801,334 $ 25,113,883
============ ============
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
WESTERN FIDELITY FUNDING, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
----------------------- ---------------------
1996 1996 1995 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue
Interest and fee income .................................. $ 1,249,923 $ 465,716 $ 3,200,251 $ 1,398,404
Gain on sales of retail contracts ........................ (164,423) 978,576 674,492 1,839,350
Other income ............................................. 286,986 1,107 529,571 30,113
----------- ----------- ----------- -----------
Total revenues ......................................... 1,372,486 1,445,399 4,404,314 3,267,867
----------- ----------- ----------- -----------
Expenses
Interest and loan commission expense ..................... 1,055,088 470,161 2,211,060 1,286,750
Provision for credit losses .............................. 12,440 50,000 418,639 164,408
Salaries and employee benefits ........................... 562,497 332,002 1,527,870 780,301
Other expenses ........................................... 802,023 236,891 1,721,776 684,324
----------- ----------- ----------- -----------
Total expenses ......................................... 2,432,048 1,089,054 5,879,345 2,915,783
----------- ----------- ----------- -----------
Net income (loss) .......................................... (1,059,562) 356,345 (1,475,031) 352,084
Preferred stock dividends .................................. (41,068) (13,700) (123,203) (13,700)
----------- ----------- ----------- -----------
Net income (loss) applicable to common shareholders ........ ($1,100,630) $ 342,645 ($1,598,234) $ 338,384
=========== =========== =========== ===========
Net income (loss) per common share ......................... ($ 0.42) $ 0.20 ($ 0.61) $ 0.19
=========== =========== =========== ===========
Weighted average common shares outstanding ................. 2,637,500 1,750,000 2,637,500 1,750,000
=========== =========== =========== ===========
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
WESTERN FIDELITY FUNDING, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
--------------------------------------
September 30,
--------------------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income (loss) ............................................................ ($ 1,598,234) $ 338,384
------------ ------------
Adjustments to reconcile net income (loss) to
net cash provided (used)
Depreciation and amortization ........................................... 379,160 86,226
Provision for credit losses ............................................. 418,639 164,408
Interest Receivable on Portfolio sales .................................. -- (1,054,228)
Vehicles held for sale .................................................. (4,502,249) (552.919)
Restricted cash ......................................................... (363,745) (340,482)
Prepaid expenses ........................................................ (77,184) 9,951
Other assets ............................................................ (209,393) (111,867)
Accounts payable ........................................................ (2,870,968) 1,905,282
Accrued liabilities ..................................................... 114,892 59,713
------------ ------------
(7,110,848) 166,084
------------ ------------
Net cash (used) provided by operating activities .............................. (8,709,082) 504,468
------------ ------------
Cash flows from investing activities ........................................... (5,915,518) (6,663,204)
Contracts originated or purchased
Cashflows from Investing Activities
Contracts originated or purchased ........................................... (10,707,304) (14,973,989)
Contracts repaid ............................................................ 4,667,010 1,091,458
Contracts sold .............................................................. 8,219,070 7,689,071
Purchases of fixed assets ................................................... (167,567) (29,645)
------------ ------------
2,011,209 (6,223,105)
------------ ------------
Cash flows from financing activities
Expenditures for loan acquisition fees ...................................... (1,138,431) (305,445)
Proceeds from notes payable - insurance companies ........................... 1,101,765 7,441,218
Payments on notes payable - insurance companies ............................. (2,418,327) (585,178)
Payments on notes payable - related parties ................................. -- 165
Proceeds from issuance of master notes ...................................... -- 2,172,215
Payments on master notes .................................................... (1,179,917) (1,151,744)
Issuance of Series A perferred stock ........................................ -- 35,000
Proceeds from costs related to the issuance of
Series A preferred stock .................................................. -- (107,135)
Proceeds from notes payable ................................................. -- 587,657
Payments on notes payable ................................................... (1,772,946) (191,296)
Proceeds from issuance of subordinated debt ................................. 10,000,000 --
Proceeds from revolving facilities, net ..................................... 4,311,180 --
Distributions to Affiliates ................................................. (75,703)
------------ ------------
8,903,324 7,819,754
------------ ------------
Increase (decrease) in cash for the period ..................................... 2,205,451 2,101,117
Beginning cash balance ......................................................... 480,838 46,120
------------ ------------
Ending cash balance ............................................................ $ 2,686,289 $ 2,147,237
============ ===========
</TABLE>
3
<PAGE>
WESTERN FIDELITY FUNDING, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - General
The interim financial statements included herein are unaudited and have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and Securities and Exchange Commission rules and
regulations. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the interim financial statements
reflect all adjustments (all of which are of a normal and recurring nature)
which are necessary in order to make the interim financial statements not
misleading. These financial statements should be read in conjunction with the
annual report of Western Fidelity Funding, Inc. ("the Company") on Form 10-KSB
for the year ended December 31, 1995 (the "1995 Form 10-KSB"). The results for
the three and nine months ended September 30, 1996, are not necessarily
indicative of the results that may be expected for the year ended December 31,
1996.
Note 2 - Debt
In the first quarter of 1996, the Company entered into note arrangements with an
insurance company. The principal amount borrowed of $1,023,223 bears interest at
9.85% per annum and is repayable in monthly installments over approximately four
years.
In June, 1996, the Company entered into an agreement with a financial
institution for a $20,000,000 secured credit facility. Under the terms of the
facility, monthly interest is paid at a floating rate equivalent to LIBOR plus
3.25% or a specified bank alternative base rate plus 1%. The facility is secured
by automobile retail installment contracts and will mature on June 23, 1997.
Borrowings under the facility were initiated in July 1996.
In August, 1996, the Company obtained a $10,000,000 unsecured subordinated loan
from a financial institution. Under the terms of the loan, interest only is paid
quarterly during the first two years at a rate of 12% per annum, and thereafter
principal and interest are payable quarterly until maturity on July 31, 2001.
After payment of commissions and fees, the Company realized approximately
$9,400,000 of net proceeds from the loan. The Company also issued five year
warrants to purchase 263,750 shares of common stock at $3.93 per share to the
placement agent in connection with the loan.
Also in August, 1996, the Company entered into an agreement with another
financial institution for a $5,000,000 secured credit facility. The facility
bears interest at the prime rate plus 3.75%. The facility is secured by
automobile retail installment contracts and will mature on August 12, 1997.
4
<PAGE>
Management's Discussion and Analysis or Plan of Operation
Liquidity and Capital Resources
The components of the Company's cash flow are summarized below:
Nine months ended
September 30,
--------------------
1996 1995
---- ----
Cash (Used) Provided by Operating Activities ... $(8,709,082) $ 504,468
Cash Provided (Used) by Investing Activities ... 2,011,209 (6,223,105)
Cash Provided by Financing Activities .......... 8,903,324 7,819,754
----------- -----------
Net Increase in Cash ........................... $ 2,205,451 $ 2,101,117
=========== ===========
Total cash used by operating activities was $(8,709,082) for the nine months
ended September 30, 1996 as compared to cash provided of $504,468 for the nine
months ended September 30, 1995. The decreased cash flows from operating
activities resulted primarily from net losses from operations in 1996 as opposed
to net income in 1995, a decrease in accounts payable related to Contract
purchases in 1996 as opposed to 1995 and an increase in vehicles held for sale
in 1996.
Total cash provided by investing activities was $2,011,209 for the nine months
ended September 30, 1996 as opposed to cash used of $(6,223,105) for the same
period in 1995. The increase was due to decreased originations and increased
Contract principal retirements in 1996.
Total cash provided by financing activities was $8,903,324 for the nine months
ended September 30, 1996. Cash of $7,819,754 was provided by financing
activities in the same period in 1995. The variance is due primarily to higher
amounts of debt originations offset by larger principal payments made in
accordance with terms of outstanding debt arrangements in 1996.
As disclosed in Item 6, Management's Discussion and Analysis or Plan of
Operation in the Company's 1995 Form 10-KSB, the Company anticipated arranging
the availability of a $20 million credit facility with a financial institution
by year end, 1995. Because this credit facility was not obtained by year end,
the Company substantially decreased its Contract purchases in the first and
second quarters of 1996.
In June, 1996, the Company entered into an agreement with a financial
institution for a $20,000,000 secured credit facility. Under the terms of the
facility, monthly interest is paid at a floating rate equivalent to LIBOR plus
3.25% or a specified bank alternative base rate plus 1%. The facility is secured
by automobile retail installment contracts and will mature on June 23, 1997.
Borrowings under the facility were initiated in July, 1996.
In August, 1996, the Company obtained a $10,000,000 unsecured subordinated loan
from a financial institution. Under the terms of the loan, interest only is paid
quarterly during the first two years at a rate of 12% per annum, and thereafter
principal and interest are payable quarterly until maturity on July 31, 2001.
After payment of commissions and fees, the Company realized approximately
$9,400,000 of net proceeds from the loan. The Company also issued five year
warrants to purchase 263,750 shares of common stock at $3.93 per share to the
placement agent in connection with the loan.
5
<PAGE>
Also in August, 1996, the Company entered into an agreement with another
financial institution for a $5,000,000 secured credit facility. The facility
bears interest at the prime rate plus 3.75%. When used, the facility is to be
secured by automobile retail installment contracts and will mature on August 12,
1997.
As a result of obtaining these financing agreements, the Company has returned
and surpassed to the Contract purchase levels it experienced in late 1995, and
is expanding into additional geographic markets as well as pursuing additional
dealer relationships in existing markets.
The Company has begun preparing to sell interests in securitized pools of
Contracts owned by the Company. Although there are no assurances that it will
occur, management currently plans the initial securitization will occur in late
1996 or early 1997. In February, 1996, the Company entered into an agreement
with a financial institution giving the institution the first right of refusal
to purchase any Contracts offered for sale by the Company up to a total of
$50,000,000. Through November 12, 1996, the Company has sold approximately
$7,300,000 of Contracts under this agreement.
The Company continues to pursue additional sources of funds, including but not
limited to various forms of debt and equity. Failure to obtain additional
funding sources will materially restrict the Company's future business
activities.
Results of Operations
Net loss applicable to common shareholders for the nine months ended September
30, 1996 was $(1,598,234) as compared to net income of $338,384 for the same
period in 1995. Primary factors contributing to the variance were:
Interest Income. Interest income for the nine months ended September 30, 1996,
increased by $1,801,847 to $3,200,251 from $1,398,404 for the same period ended
in 1995. This increase is a result of a larger average Contract portfolio
balances held by the Company in 1996 as opposed to 1995.
Interest and Loan Commission Expense. Interest and loan commission expense
increased from $1,286,780 during the nine months ended September 30, 1995 to
$2,211,060 during the same period in 1996. Interest expense consists of interest
on capital and operating loans. This increase resulted primarily from an
increase in borrowings. Such increased borrowings were used to fund the growth
of the Company's Contract portfolio and the Company's operations.
Provision for Credit Losses. The provision for credit losses increased $254,234
from $164,408 for the nine months ended September 30, 1995 to $418,639 in the
same period in 1996. The Company determines the amount of the allowance for
credit losses based on the average loss per repossession and the default rate of
the Contracts. During the quarter ended September 30, 1996, management's
estimate of the allowance for credit losses decreased due to a change in
estimating the amount of the average loss recognized by year over the average
term of the Contracts. This change is reflected as a change in estimate in the
allowance for credit losses during the quarter ended September 30, 1996. The
increase for the nine months ended September 30, 1996, as opposed to the same
period in 1995 is attributable to a larger average portfolio balance in 1996 and
a $200,000 charge to operations for a reassessment of the collectibility of a
participation receivable related to Contracts sold in 1995.
6
<PAGE>
Gain on Sale. The gain on sale of Contracts decreased $1,164,958 from $1,839,350
in the nine months ended September 30, 1995 to $674,492 in the same period in
1996. The Company sold approximately $9,500,000 of Contracts in the nine months
ended September 30, 1996 at 88 to 90% of the principal balance at the date of
sale. In the same period in 1995, the Company sold about $9,000,000 of Contracts
at 96% of their principal balance, plus interest over the life of the loans. In
the third quarter of 1996, the Company repurchased $1,900,000 of Contracts which
were sold in the first and second quarters of 1996. The gain previously
recognized on the sale of these Contracts was reversed upon purchase in
accordance with FAS 77.
Employee Compensation. Employee compensation and related costs and benefits
increased for the nine months ended September 30, 1996 by $747,569 to $1,527,870
from $780,301 for the nine months ended September 30, 1995. This increase was
primarily due to an increase in sales and operations staff necessary to handle
growth and anticipated future growth of the Company's operations.
Other Expenses. Other expenses increased $1,037,452 from $684,324 for the nine
months ended September 30, 1995 to $1,721,776 for the nine months ended
September 30, 1996. The Company has invested significant resources in the nine
months ended September 30, 1996 in preparation for anticipated growth. Primary
contributors to the increase were office and sales facility cost and,
advertising, consulting, and operating costs relating to the credit decision and
collection processes.
Preferred Stock Dividends. Dividends in the amount of $123,203 on the
outstanding Series A Preferred Stock have been accrued in the nine months ended
September 30, 1996 as opposed to $13,700 in the same period in 1995. The
increase was due to the fact that the Series A Preferred Stock was not issued
until July and August, 1995.
The foregoing discussion contains certain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which
are intended to be covered by the safe harbors created thereby. These statements
include the plans and objectives of management for future operations, including
plans and objectives relating to the Contract purchase levels and market
expansion anticipated and the general development of the business of the
Company. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. Assumptions relating
to the foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could be inaccurate and, therefore, there can be no assurance that
the forward-looking statements included in this Quarterly Report on Form 10-QSB
will prove to be accurate. In light of the significant uncertainties inherent in
the forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.
7
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K,
(a) Exhibits
None
(b) Reports on Form 8-K,
On July 2, 1996, the Company filed a Current Report on Form 8-K, dated June 24,
1996, reporting under Item 5 thereof that the Company had entered into a
Revolving Credit and Security Agreement ("Credit Agreement") with BNY Financial
Corporation. The Credit Agreement was filed as an exhibit under Item 7.
On August 7, 1996, the Company filed a Current Report on Form 8-K, dated August
2, 1996, reporting under Item 5 thereof that the Company had obtained the net
proceeds of a $10 million unsecured subordinated loan from a financial
institution. The documents pertaining to the loan and the warrant issued in
connection therewith were filed as exhibits under Item 7.
8
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WESTERN FIDELITY FUNDING, INC.
Date: November 14, 1996 By: /s/ Gene E. Osborn
-----------------------------------
Gene E. Osborn, President,
Chief Executive Officer and Director
Date: November 14, 1996 By: /s/ Philip J. Bogema
----------------------------------
Philip J. Bogema
Chief Financial Officer
9
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,686,289
<SECURITIES> 0
<RECEIVABLES> 19,021,103
<ALLOWANCES> (308,865)
<INVENTORY> 5,484,405
<CURRENT-ASSETS> 0
<PP&E> 293,049
<DEPRECIATION> (66,398)
<TOTAL-ASSETS> 30,801,334
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
33
<COMMON> 264
<OTHER-SE> 3,211,251
<TOTAL-LIABILITY-AND-EQUITY> 30,801,334
<SALES> 0
<TOTAL-REVENUES> 4,404,314
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,249,646
<LOSS-PROVISION> 418,639
<INTEREST-EXPENSE> 2,211,060
<INCOME-PRETAX> (1,598,234)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,598,234)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,598,234)
<EPS-PRIMARY> (.61)
<EPS-DILUTED> (.61)
</TABLE>
