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 March 31, 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 Number)
incorporation or organization)
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 of outstanding of each of the issuer's classes
of common equity, as of the latest practical date: As of May 3, 1996, there were
2,637,500 outstanding shares of common stock, par value $0.001 per share.
<PAGE>
WESTERN FIDELITY FUNDING, INC.
FORM 10-QSB
INDEX
Page
PART I. Financial Information: No.
Consolidated Balance Sheets - March 31, 1996
and December 31, 1995 . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations - three months
ended March 31, 1996 and 1995 . . . . . . . . .. . . . . . 2
Consolidated Statements of Cash Flows - three months
ended March 31, 1996 and 1995 . . . . . . . . .. . . . . . 3
Notes to Financial Statements . . . . . . . . . . .. . . . . . . 4
Management's Discussion and Analysis or Plan of
Operation . . . . . . . . . . . . . . . . . . . . . . . . . 5
PART II. Other Information:
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
<PAGE>
<TABLE>
<CAPTION>
WESTERN FIDELITY FUNDING, INC. AND SUBSIDIARY
Consolidated Balance Sheets
March 31, December 31,
1996 1995
--------- ------------
Assets [Unaudited]
<S> <C> <C>
Cash ............................................. $ 660,223 $ 480,838
Restricted cash .................................. 1,001,726 891,065
Finance receivables - net ........................ 16,943,350 21,319,223
Vehicles held for sale ........................... 1,558,162 982,156
Other assets ..................................... 1,652,797 1,440,601
------------ ------------
21,816,258 25,113,883
============ ============
Liabilities and Stockholders' Equity
Accounts payable ................................. 330,045 3,147,430
Accrued liabilities .............................. 549,922 445,572
Note payable - related party ..................... 11,000 11,000
Notes payable - insurance companies .............. 11,048,868 10,769,160
Master notes ..................................... 3,989,993 4,157,993
Notes payable .................................... 1,016,837 1,772,946
------------ ------------
16,946,665 20,304,101
------------ ------------
Stockholders' Equity
Preferred 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 .............................. (1,113,823) (1,173,634)
------------ ------------
4,869,593 4,809,782
------------ ------------
$21,816,258 $ 25,113,883
============ ============
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
WESTERN FIDELITY FUNDING, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
Three months ended
March 31,
--------------------------
1996 1995
<S> <C> <C>
Revenue
Interest and fee income ........................ $ 1,178,891 $ 435,608
Gain on sales of retail contracts .............. 461,131 175,165
Other income ................................... 120,672 32,425
----------- -----------
Total revenues ............................. 1,760,694 643,198
----------- -----------
Expenses
Interest and loan commission expense ........... 673,316 356,908
Provision for credit losses .................... 40,157 71,618
Salaries and employee benefits ................. 501,255 217,761
Other expenses ................................. 445,093 259,728
----------- -----------
Total expenses ............................. 1,659,821 906,015
----------- -----------
Net income (loss) ................................ 100,873 (262,817)
Preferred stock dividends ........................ (41,062) --
----------- -----------
Net income (loss) applicable to common shareholders $ 59,811 $ (262,817)
=========== ===========
Net income (loss) per common share ............... $ 0.02 $ (0.15)
=========== ===========
Weighted average common shares outstanding ....... 2,637,500 1,750,000
=========== ===========
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
WESTERN FIDELITY FUNDING, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
March 31,
------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income (loss) .................................... $ 59,811 $ (262,817)
----------- -----------
Adjustments to reconcile net income (loss) to net cash (used)
by operating activities
Depreciation and amortization ...................... 102,514 14,754
Provision for credit losses ........................ 40,157 71,618
Changes in operating assets and liabilities -
Vehicles held for sale ........................... (576,006) (264,855)
Restricted cash .................................. (110,661) 85,188
Prepaid expenses ................................. (103,955) (44,174)
Other assets ..................................... (170,793) 8,346
Accounts payable ................................. (2,817,385) 300,203
Accrued liabilities .............................. 104,350 85,808
----------- -----------
(3,531,779) 256,888
----------- -----------
Net cash (used) by operating activities ....... (3,471,968) (5,929)
----------- -----------
Cash flows from investing activities
Contracts originated or purchased .................... (2,971,226) (2,594,261)
Contracts repaid ..................................... 1,141,103 592,588
Contracts sold ....................................... 6,327,926 1,134,924
Purchases of fixed assets ............................ (31,351) (604)
----------- -----------
Net cash provided (used) by investing activities 4,466,452 (867,353)
----------- -----------
Cash flows from financing activities
Expenditures for loan acquisition fees ............... (170,697) (5,169)
Proceeds from notes payable - insurance companies .... 1,023,223 --
Payments on notes payable - insurance companies ...... (743,516) (103.958)
Proceeds from issuance of master notes ............... -- 877,062
Payments on master notes ............................. (168,000) --
Proceeds from notes payable .......................... -- 378,772
Payments on notes payable ............................ (756,109) (243,168)
----------- -----------
Net cash (used) provided by financing activities . (815,099) 903,539
----------- -----------
Increase in cash for the period ....................... 179,385 30,257
Beginning cash balance ................................ 480,838 46,120
----------- -----------
Ending cash balance ................................... $ 660,223 $ 76,377
=========== ===========
</TABLE>
Cash paid for interest was $443,689 and $272,706 for the three months ended
March 31, 1996 and 1995, respectively.
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 months ended March 31, 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.
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:
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------
1996 1995
<S> <C> <C>
Cash (Used) by Operating Activities ............ $(3,471,968) $ (5,929)
Cash Provided (Used) by Investing Activities ... 4,466,452 (867,353)
Cash Provided (Used) by Financing Activities ... (815,099) 903,539
----------- -----------
Net Increase in Cash ........................... $ 179,385 $ 30,257
=========== ===========
</TABLE>
Total cash used by operating activities was $(3,471,968) for the three months
ended March 31, 1996 as compared to $(5,929) for the three months ended March
31, 1995. The decreased cash flows from operating activities resulted primarily
from a decrease in accounts payable related to Contract purchases in 1996 as
opposed to 1995, offset partially by net income from operations in 1996 as
opposed to a net loss in 1995.
Total cash provided by investing activities was $4,466,452 for the three months
ended March 31, 1996 as opposed to cash used of $(867,353) for the same period
in 1995. The cash flows from sales of Contracts increased by $5,193,002 from
$1,134,924 for the three months ended March 31, 1995 to $6,327,926 for the same
period in 1996.
Total cash used by financing activities was $(815,099) for the three months
ended March 31, 1996. Cash of $903,539 was provided by financing activities in
the same period in 1995. The variance is due primarily to larger principal
payments made in accordance with terms of outstanding debt arrangements.
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 quarter
of 1996. The Company received a commitment for the credit facility in March
1996. The credit facility, subject to certain contingencies, is scheduled to
close no later than June 1, 1996.
The Company has begun preparing to sell interests in securitized pools of
Contracts owned by the Company. Management expects 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 May 10, 1996, the Company has sold approximately
$9,300,000 Contracts under this agreement.
5
<PAGE>
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 income applicable to common shareholders for the quarter ended March 31,
1996 was $59,811 as opposed to a loss of ($262,817) for the same period in 1995.
Primary factors contributing to the variance were:
Interest Income. Interest income for the quarter ended March 31, 1996, increased
by $743,283 to $1,178,891 from $435,608 for the same period ended in 1995. This
increase is a result of the volume of Contract purchases by the Company.
Interest and Loan Commission Expense. Interest and loan commission expense
increased from $356,908 during the three months ended March 31, 1995 to $673,316
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 decreased $31,461
from $71,618 in the quarter ended March 31, 1995 to $40,157 in the same period
in 1996. This decrease was due primarily to changes in estimates of average loss
per repossession and sales of contracts in 1996 without recourse.
Gain on Sale. The gain on sale of Contracts increased $285,966 from $175,165 in
the quarter ended March 31, 1995 to $461,131 in the same quarter in 1996. The
Company sold approximately $7,100,000 of Contracts in the quarter ended March
31, 1996 at 88 to 90% of the principal balance at the date of sale. In the same
period in 1995, the Company sold about $1,200,000 of Contracts at 96% of their
principal balance, plus interest over the life of the loans.
Employee Compensation. Employee compensation and related costs and benefits
increased for the quarter ended March 31, 1996 by $283,494 to $501,255 from
$217,761 for the quarter ended March 31, 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 $185,365 from $259,728 for the quarter
ended March 31, 1995 to $445,093 for the quarter ended March 31, 1996. This
increase was primarily due to increases in accounting and legal costs as well as
increase in rent and utilities as a result of additional office space utilized
by the Company.
Preferred Stock Dividends. Dividends in the amount of $41,062 on the outstanding
Series A Preferred Stock have been accrued in the quarter ended March 31, 1996.
No preferred stock dividends were accrued in the quarter ended March 31, 1995,
because the Series A Preferred Stock was not issued until July and August, 1995.
6
<PAGE>
The Company's portfolio decreased in the first quarter of 1996 as a result of
the decrease in Contract purchases and Contract sales. Subsequent to March 31,
1996, the Company sold approximately $5,000,000 of additional Contracts. As a
result, the Company anticipates that revenues from interest and fee income will
be adversely impacted in the quarter ending June 30, 1996.
During the second half of 1996, the Company anticipates that, if the Company
closes the $20 million credit facility by June 1, 1996, the Company will be able
to return to the Contract purchase levels it experienced in late 1995, and
expand into additional geographic markets as well as pursue additional dealer
relationships in existing markets.
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 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>
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: May 14, 1996 By: /s/ Gene E. Osborn
-------------------------------
Gene E. Osborn, President,
Chief Executive Officer and Director
Date: May 14, 1996 By: /s/ Philip J. Bogema
--------------------------------
Philip J. Bogema
Chief Financial Officer
8
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> MAR-31-1996 MAR-31-1995
<CASH> 1,661,949 0
<SECURITIES> 0 0
<RECEIVABLES> 20,024,750 0
<ALLOWANCES> (3,081,400) 0
<INVENTORY> 1,558,162 0
<CURRENT-ASSETS> 3,220,111 0
<PP&E> 156,832 0
<DEPRECIATION> (43,589) 0
<TOTAL-ASSETS> 21,816,258 0
<CURRENT-LIABILITIES> 890,967 0
<BONDS> 0 0
0 0
33 0
<COMMON> 264 0
<OTHER-SE> 4,869,296 0
<TOTAL-LIABILITY-AND-EQUITY> 21,816,258 0
<SALES> 0 0
<TOTAL-REVENUES> 1,760,694 643,198
<CGS> 0 0
<TOTAL-COSTS> 673,316 356,908
<OTHER-EXPENSES> 946,348 477,489
<LOSS-PROVISION> 40,157 71,618
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 100,873 (262,817)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 100,873 (262,817)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 100,873 (262,817)
<EPS-PRIMARY> .02 (.15)
<EPS-DILUTED> 0 0
</TABLE>
