SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997 Commission file number 0-23484
STANDARD FUNDING CORP.
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(Exact Name of Small Business Issuer as Specified in its Charter)
New York 11-2523559
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
335 Crossways Park Drive, Woodbury, New York 11797
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(Address of Principal Executive Offices) (Zip code)
(516) 364-0200
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 |_|
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Common Stock, $.001 par value, outstanding as of May 9, 1997: 2,760,000 shares
Transitional Small Business Disclosure Format: Yes |_| No |x|
<PAGE>
STANDARD FUNDING CORP.
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Quarterly Report on Form 10-QSB
for the period ended March 31, 1997
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
BALANCE SHEETS AT MARCH 31, 1997 AND
DECEMBER 31, 1996........................................ 3
STATEMENTS OF INCOME FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1996 ................. 4
STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND MARCH 31, 1996 ................. 5
NOTES TO FINANCIAL STATEMENTS ............................. 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 8
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K............................ 12
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
STANDARD FUNDING CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
------------- -----------------
(unaudited)
ASSETS:
<S> <C> <C>
Cash............................................................. $ 236,005 $ 132,563
------------- -------------
Installment loans receivable
under premium finance agreements............................. 37,856,291 33,772,533
Less: Participation Program...................................... (1,217,675) (775,997)
Unearned Interest......................................... (912,337) (868,300)
Allowance for possible credit losses...................... (300,000) (300,000)
------------- -------------
Installment loans receivable
under premium finance agreements - net....................... 35,426,279 31,828,236
Due from officers................................................ 152,316 149,274
Property and equipment - net..................................... 276,771 263,800
Other assets..................................................... 254,021 260,729
------------- -------------
Total........................................................ $ 36,345,392 $ 32,634,602
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Notes payable to financial institutions.......................... $ 19,000,000 $ 17,600,000
Commercial paper issued.......................................... 2,382,222 2,253,668
Amounts due to insurance companies............................... 2,312,020 535,390
Accrued expenses and other....................................... 103,166 96,132
Funds Due-Participation Program.................................. 286,859 219,981
Deferred income taxes payable.................................... 384,405 287,728
------------- -------------
Total, exclusive of subordinated debt........................ 24,468,672 20,992,899
Subordinated debt................................................ 5,003,000 4,913,000
------------- -------------
Total Liabilities............................................ 29,471,672 25,905,899
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, par value $.001 per share:
1,000,000 authorized, none issued............................ -- --
Common stock, par value $.001 per share:
4,000,000 authorized, 2,760,000 shares issued and
outstanding ................................................... 2,760 2,760
Additional paid-in capital....................................... 3,991,501 3,991,501
Retained earnings................................................ 2,879,459 2,734,442
------------- -------------
Total Shareholders' Equity................................... 6,873,720 6,728,703
------------- -------------
Total................................................... $ 36,345,392 $ 32,634,602
============= =============
</TABLE>
See notes to financial statements.
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<PAGE>
STANDARD FUNDING CORP.
STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1997 March 31, 1996
--------------- --------------
<S> <C> <C>
NET INTEREST INCOME:
Finance charge income and other........................ $ 1,589,501 $ 1,319,024
Less: Interest and other expenses on borrowings........ 547,032 401,573
--------------- --------------
Net Interest Income.............................. 1,042,469 917,451
--------------- --------------
OTHER EXPENSES:
Operating expenses..................................... 499,202 455,118
Selling expenses....................................... 151,905 138,947
Provisions for possible credit losses (Note 2)......... 149,668 91,995
--------------- --------------
Total............................................. 800,775 686,060
--------------- --------------
INCOME BEFORE PROVISION FOR 241,694 231,391
INCOME TAXES............................................
PROVISION FOR INCOME TAXES................................. 96,677 92,557
--------------- --------------
NET INCOME................................................. $ 145,017 $ 138,834
=============== ==============
NET INCOME PER SHARE (Note 1).............................. $ .05 $ .05
--------------- --------------
AVERAGE NUMBER OF
SHARES OUTSTANDING....................................... 2,760,000 2,760,000
=============== ==============
</TABLE>
See notes to financial statements.
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<PAGE>
STANDARD FUNDING CORP.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................... $ 145,017 $ 138,834
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible credit losses......................... 149,668 91,995
Deferred income taxes........................................ 96,677 36,673
Depreciation and amortization................................ 18,737 11,160
Changes in assets and liabilities:
Due from officers and other assets......................... (3,666) 47,244
Accrued expenses and other amounts
due to insurance companies............................... 1,783,664 1,697,430
Funds due-accounts receivable participation program ....... 286,859 --
----------------- -----------------
Net cash provided by operating activities.................. 2,476,956 2,023,336
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Installment loans receivable originated........................ (25,188,385) (20,863,406)
Collections of installment loans receivable.................... 20,721,900 15,904,280
Purchase of equipment.......................................... (31,708) (10,829)
----------------- -----------------
Net cash used in investing activities...................... (4,498,193) (4,969,955)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from accounts receivable participation program........ 1,120,800 --
Payment of accounts receivable participation program........... (614,675) --
Proceeds from bank notes - net................................. 1,400,000 2,500,000
Proceeds (Repayment) of commercial paper issued - net.......... 128,554 (327,275)
Proceeds of subordinated debt.................................. 90,000 105,000
----------------- -----------------
Net cash provided by financing activities.................. 2,124,679 2,277,725
----------------- -----------------
INCREASE (DECREASE) IN CASH ................................... 103,442 (668,894)
CASH AT BEGINNING OF YEAR ................................... 132,563 939,869
----------------- -----------------
CASH AT END OF PERIOD ........................................... $ 236,005 $ 270,975
================= =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION:
Income taxes paid............................................ $ -- $ 39,963
================= =================
Interest paid ................................................ $ 417,372 $ 333,712
================= =================
</TABLE>
See notes to financial statements.
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<PAGE>
STANDARD FUNDING CORP.
NOTES TO FINANCIAL STATEMENTS
For the three months ended March 31, 1997 and 1996 (unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Business - Standard Funding Corp. (the "Company") provides loans to
finance substantially all forms of property and casualty insurance
premiums on policies which are written through independent insurance
agents and brokers. The insurance policies are primarily held by
commercial businesses.
Interim Financial Statements - The financial statements for the three
month periods ended March 31, 1997 and 1996 are unaudited. In the
opinion of management, the accompanying unaudited financial statements
contain all the adjustments necessary for a fair presentation of the
financial condition and results of operations for the three month
periods ended March 31, 1997 and 1996. The interim financial results
are not necessarily indicative of the results to be expected for a full
year.
Revenue Recognition - Unearned interest on installment loans receivable
under premium finance agreements is recognized as income using a method
which approximates the results which would be obtained using the
interest method.
The Company has entered into an agreement to sell, on a non-recourse
basis, interests in its installment loans receivable under premium
finance agreements to a financial institution. The differential of
stated interest to be recorded over the course of the finance period
and interest to be paid to the financial institution is recognized as
interest income at the time of sale.
Loan processing costs incurred are deferred and amortized on the
straight-line method over the term of the related installment loans
receivable under premium finance agreements. Cancellation fees and late
charges are recognized as income when received.
Allowance for Possible Credit Losses - The balance in the allowance for
possible credit losses is based on management's assessment of risk in
the installment loan portfolio. The Company writes off receivables upon
determination that no further collections are probable.
Property and Equipment - net - Property and equipment are stated at
cost. Depreciation is provided on the straight-line basis over such
assets' estimated useful service lives which range from three to five
years. Purchased computer software is amortized over longer periods.
Leasehold improvements are amortized over the shorter of their
estimated useful lives or the remaining term of the lease.
Revenue and Credit Concentration - The Company receives substantially
all of its revenues from financing arrangements made within the New
York, New Jersey, Connecticut and Pennsylvania. Accordingly, at March
31, 1997, substantially all of the Company's installment loans
outstanding were from this geographic region.
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<PAGE>
STANDARD FUNDING CORP.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Income Taxes - Deferred taxes provide for the tax effect of timing
differences between financial and tax reporting primarily arising from
the recognition of unearned interest income for tax purposes and from
the use of accelerated depreciation methods.
Net Income Per Share - Net income per share is based on the weighted
average number of shares outstanding during the period.
Reclassifications - Certain amounts in prior periods have been
reclassified to conform with the current period's presentations.
2. INSTALLMENT LOANS RECEIVABLE UNDER PREMIUM FINANCE AGREEMENTS
Substantially all installment loans receivable under premium finance
agreements are completely repayable in less than one year. In the event
of default by a borrower, the Company is entitled to cancel the
insurance policy financed and receive a refund for the unused term of
such policy from the insurance carrier. The proceeds of such refunds
are generally sufficient to cover the unpaid balance of the loan.
A summary of activity in the allowance for possible credit losses is as
follows:
<TABLE>
<CAPTION>
Three Months
Ended Year Ended
March 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
Balance, beginning of period .................. $ 300,000 $ 208,000
Provision........................................ 149,668 583,398
Charge-offs - net of recoveries of $8,266 and
$47,913, respectively ...................... (149,668) (491,398)
----------------- -----------------
Balance, end of period .......................... $ 300,000 $ 300,000
================= =================
</TABLE>
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<PAGE>
STANDARD FUNDING CORP.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Comparison of Three Months Ended March 31, 1997 to Three Months Ended
March 31, 1996
Finance charge income increased by 20.5% to $1,589,501 in the first
three months of 1997 from $1,319,024 in the first three months of 1996 primarily
because of an increase in total installment loans financed during the respective
periods. Total installment loans financed increased 20.7% to $25,188,385 from
$20,863,406. The Company's average receivables for the period ended March 31,
1997 increased 36.1% to $36,215,987 from $26,604,350 for the period ended March
31, 1996. This increase in installment loans receivable is consistent with the
increase in financing activity. Interest expense for the period ended March 31,
1997 increased 36.2% to $547,032 from $401,573 for the period ended March 31,
1996, an increase of $145,459, due to an increase in borrowings. Selling and
operating expenses increased during the period ended March 31, 1997 to $651,107
from $594,065 in the period ended March 31, 1996. This increase was primarily
attributable to staff additions and to a lesser extent, increases in salary
rates and expenses. Due to the 20.5% increase in finance charge income, compared
to a 36.2% increase in interest expense, there was a 13.6% increase in the
"spread" to 1,042,469 for the period ended March 31, 1997 from $917,451 for the
period ended March 31,1996.
The provision for possible credit losses increased to $149,668 for the
period ended March 31, 1997 from $91,995 for the period ended March 31, 1996.
This increase of $57,673 is due primarily to the increase in installment loan
receivables and a 28.8% increase in the allowance for possible credit losses,
which increased during the period end March 31, 1997 to $300,000 from $233,000
in the period ended March 31, 1996.
Liquidity and Capital Resources
The Company's operations are dependent upon the continued availability
of funds on satisfactory terms and rates. The Company uses such funds
principally to finance the origination of installment loans under premium
finance agreements. The Company obtains required funds from a variety of
sources, including internal generation of funds, unsecured borrowings under
lines of credit, direct issuance of commercial paper, placement of subordinated
debt, the sale of accounts receivable participation program and the sale of
common equity.
As the Company increases the size of its business, it originates more
installment loans receivable than it collects, resulting in a larger outstanding
balance of installment loans receivable. For the three month periods ended March
31, 1997 and 1996, the Company originated installment loans receivable of
$25,188,385 and $20,863,406, respectively, compared to installment loans
collected for each period of $20,721,900 and $15,904,280, respectively. The
result was an increase in outstanding installment loan receivables to
$35,426,279 from $28,078,094 at March 31, 1997 and 1996, respectively.
-8-
<PAGE>
The growth in the Company's loan portfolio has been the single largest
factor influencing the Company's cash flow from operations and its need for
financing. The determining factor influencing the growth in the loan portfolio
has been the extent to which the Company has been able to leverage its capital
into subordinated debt and then into short-term senior debt. For the three month
periods ended March 31, 1997 and 1996, net cash provided by operating activities
was $2,476,956 and $2,023,336, respectively, which amounts were comprised
primarily of net earnings, loss provisions, depreciation and amortization and
other changes in assets and liabilities. For the three month periods ended March
31, 1997 and 1996, net cash provided by financing activities was $2,124,679 and
$2,277,725 respectively, comprised primarily of proceeds from bank notes and
repayment of bank notes, net proceeds from sales and repayments of commercial
paper, proceeds of subordinated debt and the sale of accounts receivable
participation program.
The following table sets forth the amounts of installment loans
receivable originated and the collections of installment loans receivable for
the periods indicated.
<TABLE>
<CAPTION>
For the Three Month Period
Ended March 31,
-----------------------------
1997 1996
---- ----
<S> <C> <C>
Installment loans originated.............................. $25,188,385 $20,863,406
Installment loans collected................................. $20,721,900 $15,904,280
</TABLE>
The Company has no present plans related to significant capital
expenditures. The Company is not aware of any pending legislation that would
have a material effect on its capital requirements or business prospects.
State statutes and regulations impose minimum capital requirements,
govern the form and content of financing agreements and limit the interest and
service charges the Company may impose. The Commonwealth of Pennsylvania
requires a minimum net worth of $50,000. The State of New York requires that
equity capital be equal to at least 10% of outstanding and, in any event, not
less than $1,500.
The sources of funds (other than internal generation of funds and the
sale of common equity) which are presently available or being utilized by the
Company are described below. Management believes that the sources of funds
presently available to the Company are adequate for the conduct of its business
at its present level. To the extent that the Company in the future expands its
business and increases its total installment receivables outstanding beyond its
present levels of funding, the Company will need to obtain additional sources of
funds or expand existing sources of funds, which may not be available or, if
available, may not be on terms acceptable to the Company.
Lines of Credit
At March 31, 1997, the Company had unsecured short term lines of credit
aggregating $31,500,000 available through six commercial banks, under which
$19,000,000 was outstanding. Amounts outstanding under these lines bear interest
at prime or over LIBOR. The Company pays fees to some of these banks in
connection with these lines. These lines expire on various dates through June
30, 1997, although there can be no assurance that these lines will not be
revoked, suspended or reduced at any time. No bank is contractually obligated to
renew any such line. During the three month periods ended March 31, 1997 and
1996, the maximum aggregate amount outstanding under these lines at any time was
$19,000,000 and $12,800,000, respectively.
-9-
<PAGE>
Commercial Paper
The Company directly issues its own commercial paper with maturities of
up to 270 days, which is unsecured and is unrated by commercial paper rating
agencies. Commercial paper outstanding at March 31, 1997 bore interest at fixed
annual rates ranging from 5.88% to 6.66%. During the three month periods ended
March 31, 1997, the maximum outstanding commercial paper net of prepaid discount
at any month end was $2,481,337. Such commercial paper is generally sold to
officers of the Company and their affiliates and to non-affiliated investors.
The Company has obtained no commitments from any purchaser of its commercial
paper regarding additional or future purchases. It is the Company's policy to
maintain unused short-term bank lines of credit in an amount in excess of the
amount of commercial paper outstanding. The interest rate on the Company's
commercial paper has been and will continue to be determined by reference to
prevailing interest rates in the commercial paper market. The Company does not
anticipate any change in the level of financing provided by affiliates of the
Company or any changes in the costs of financing provided by such affiliates.
There can be no assurance, however, that such levels of financing will be
maintained in the future.
Subordinated Debt
The Company has obtained unsecured senior subordinated debt in the
amount of $4,100,000 from outside investors. The note bears interest at a fixed
rate of 10% and 14% and are due from November 1, 2000 to March 31, 2002. The
note restricts the Company's ability, among other things, to merge, pay
dividends and permit its business to be heavily concentrated with a single
broker or agency. Several of the underlying agreements also contains various
covenants requiring the Company to meet certain financial ratios and other
restrictions on acquisitions and investments. The Company may, at its option,
prepay the loan in whole or in part. However, with respect to several of the
notes, the Company must reimburse the investors for any loss of margin on
reemployment of the funds so repaid. The Company does not currently anticipate
prepaying or otherwise refinancing its existing senior subordinated debt prior
to its maturity.
In addition, the Company had obtained unsecured junior subordinated
debt in the amount of $903,000 from various investors. These notes bear interest
at a fixed rate of 11.25% and 14.25% and are due from February 16, 2001 to
September 30, 2001. The following table indicates amounts, rates and maturity
dates as of March 31, 1997.
Rate Due Date Amount
------------- ------------- -------------
14.25% 06/30/2001 $ 810,000
14.00% 11/01/2000 500,000
14.00% 12/27/2000 3,000,000
12.50% 03/31/2001 510,000
12.00% 02/16/2001 50,000
11.25% 09/30/2001 43,000
10.00% 03/31/2002 90,000
-------------
$ 5,003,000
=============
Subordinated debt is generally sold to officers of the Company and
their affiliates and to non-affiliated investors. The Company has obtained no
commitments from any holder of its subordinated debt regarding additional or
future purchases.
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<PAGE>
Other Sources
In addition to the sources of funds described above, the Company has
sold to various banks a participating interest in certain receivables. The
interest in these receivables have been sold on a pari passu basis without any
recourse to the Company.
The Company continually engages in discussions with both current and
prospective lenders regarding obtaining increases, in extensions of or additions
to, both its short-term lines of credit and its subordinated borrowings. The
Company is currently engaged in such discussions with several lenders, but can
give no assurance as to whether or when such discussions will be favorably
consummated.
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<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K
None.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
STANDARD FUNDING CORP.
Date: May 09, 1997 /s/ Alan J. Karp
-----------------
Alan J. Karp
President and Chief Executive Officer
Date: May 09, 1997 /s/ David E. Fisher
--------------------
David E. Fisher
Treasurer and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from 3-31-97 and
is qualified in it's entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 236,005
<SECURITIES> 0
<RECEIVABLES> 35,426,279
<ALLOWANCES> (300,000)
<INVENTORY> 0
<CURRENT-ASSETS> 36,068,621
<PP&E> 615,878
<DEPRECIATION> 339,107
<TOTAL-ASSETS> 36,345,392
<CURRENT-LIABILITIES> 29,471,672
<BONDS> 0
0
0
<COMMON> 2,760
<OTHER-SE> 6,870,960
<TOTAL-LIABILITY-AND-EQUITY> 36,345,392
<SALES> 0
<TOTAL-REVENUES> 1,589,501
<CGS> 0
<TOTAL-COSTS> 651,107
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 149,668
<INTEREST-EXPENSE> 547,032
<INCOME-PRETAX> 241,694
<INCOME-TAX> 96,677
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 145,017
<EPS-PRIMARY> .05
<EPS-DILUTED> 0
</TABLE>
