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 June 30, 1997 Commission file number 0-23484
STANDARD FUNDING CORP.
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
New York 11-2523559
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
335 Crossways Park Drive, Woodbury, New York 11797
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip code)
(516) 364-0200
- --------------------------------------------------------------------------------
(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 |_|
Common Stock, $.001 par value,
outstanding as of August 12, 1997: 2,760,000 shares
Transitional Small Business Disclosure Format: Yes |_| No |X|
<PAGE>
STANDARD FUNDING CORP.
- --------------------------------------------------------------------------------
Quarterly Report on Form 10-QSB
for the period ended June 30, 1997
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION Page
----
Item 1 Financial Statements
BALANCE SHEETS AT JUNE 30, 1997 AND
DECEMBER 31, 1996......................................... 3
STATEMENTS OF INCOME FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND JUNE 30, 1996 ................ 4
STATEMENTS OF INCOME FOR THE THREE MONTHS
ENDED JUNE 30, 1997 AND JUNE 30, 1996 ................ 5
STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND JUNE 30, 1996 .................. 6
NOTES TO FINANCIAL STATEMENTS ....................... 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 9
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K............................ 13
- --------------------------------------------------------------------------------
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
STANDARD FUNDING CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
(unaudited)
<S> <C> <C>
Cash .............................................. $ 123,825 $ 132,563
------------ ------------
Installment loans receivable
under premium finance agreements ................ 42,532,183 33,772,533
Less: Participation program ...................... (1,683,217) (775,997)
Unearned interest ........................... (977,491) (868,300)
Allowance for possible credit losses (Note 2) (310,000) (300,000)
------------ ------------
Installment loans receivable
under premium finance agreements - net .......... 39,561,475 31,828,236
Due from officers ................................. 158,729 149,274
Property and equipment - net ...................... 300,353 263,800
Other assets ...................................... 436,371 260,729
------------ ------------
Total ....................................... $ 40,580,753 $ 32,634,602
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Notes payable to financial institutions ........... $ 23,600,000 $ 17,600,000
Commercial paper issued ........................... 2,393,408 2,253,668
Amounts due to insurance companies ................ 1,495,166 535,390
Accrued expenses and other ........................ 113,227 96,132
Funds due - participation program ................. 461,948 219,981
Deferred income taxes payable ..................... 486,757 287,728
------------ ------------
Total, exclusive of subordinated debt ....... 28,550,506 20,992,899
Subordinated debt ................................. 5,003,000 4,913,000
------------ ------------
Total Liabilities ........................... 33,553,506 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 ................................. 3,032,986 2,734,442
------------ ------------
Total Shareholders' Equity .................. 7,027,247 6,728,703
------------ ------------
Total .................................. $ 40,580,753 $ 32,634,602
============ ============
</TABLE>
See notes to financial statements.
-3-
<PAGE>
STANDARD FUNDING CORP.
STATEMENTS OF INCOME (UNAUDITED)
Six Months Six Months
Ended Ended
June 30, 1997 June 30, 1996
------------- -------------
NET INTEREST INCOME:
Finance charge income and other ............... $3,195,346 $2,714,973
Less: Interest and other expenses on borrowings 1,120,764 862,207
---------- ----------
Net Interest Income ...................... 2,074,582 1,852,766
---------- ----------
OTHER EXPENSES:
Operating expenses ............................ 965,434 914,248
Selling expenses .............................. 308,367 279,611
Provisions for possible credit losses (Note 2) 303,207 191,785
---------- ----------
Total .................................... 1,577,008 1,385,644
---------- ----------
INCOME BEFORE PROVISION FOR
INCOME TAXES .................................. 497,574 467,122
PROVISION FOR INCOME TAXES ........................ 199,030 186,849
---------- ----------
NET INCOME ........................................ $ 298,544 $ 280,273
---------- ----------
NET INCOME PER SHARE (Note 1) ..................... $ .11 $ .10
---------- ----------
AVERAGE NUMBER OF
SHARES OUTSTANDING ............................ 2,760,000 2,760,000
---------- ----------
See notes to financial statements.
-4-
<PAGE>
STANDARD FUNDING CORP.
STATEMENTS OF INCOME (UNAUDITED)
Three Months Three Months
Ended Ended
June 30, 1997 June 30, 1996
------------- -------------
NET INTEREST INCOME:
Finance charge income and other ............... $1,605,845 $1,395,949
Less: Interest and other expenses on borrowings 573,732 460,634
---------- ----------
Net Interest Income ...................... 1,032,113 935,315
---------- ----------
OTHER EXPENSES:
Operating expenses ............................ 466,232 459,130
Selling expenses .............................. 156,462 140,664
Provisions for possible credit losses (Note 2) 153,539 99,790
---------- ----------
Total .................................... 776,233 699,584
---------- ----------
INCOME BEFORE PROVISION FOR
INCOME TAXES .................................. 255,880 235,731
PROVISION FOR INCOME TAXES ........................ 102,353 94,292
---------- ----------
NET INCOME ........................................ $ 153,527 $ 141,439
---------- ----------
NET INCOME PER SHARE (Note 1) ..................... $ .06 $ .05
---------- ----------
AVERAGE NUMBER OF
SHARES OUTSTANDING ............................ 2,760,000 2,760,000
---------- ----------
See notes to financial statements.
-5-
<PAGE>
STANDARD FUNDING CORP.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................ $ 298,544 $ 280,273
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible credit losses ................ 303,207 197,785
Deferred income taxes ............................... 486,757 66,216
Depreciation and amortization ....................... 39,701 23,663
Changes in assets and liabilities:
Other assets ...................................... 185,097 227,290
Accrued expenses and other amounts due to
insurance companies ............................. 1,608,393 1,478,444
Funds due-accounts receivable participation program 461,948 --
------------ ------------
Net cash provided by operating activities ......... 3,383,647 2,273,671
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Installment loans receivable originated ............... (52,406,884) (43,227,788)
Collections of installment loans receivable ........... 41,715,424 34,114,720
Purchase of equipment ................................. (76,253) (52,206)
------------ ------------
Net cash used in investing activities ............... (10,767,713) (9,165,274)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from accounts receivable participation program 2,697,356 --
Payment of accounts receivable participation program .. (1,551,768) --
Proceeds from bank notes - net ........................ 6,000,000 6,600,000
Proceeds (Repayment) of commercial paper issued - net . 139,740
(561,171)
Proceeds (Repayment) of subordinated debt ............. 90,000 105,000
------------ ------------
Net cash provided by financing activities ........... 7,375,328 6,143,829
------------ ------------
INCREASE (DECREASE) IN CASH ............................. (8,738) (747,774)
CASH AT BEGINNING OF YEAR ............................... 132,563 939,869
------------ ------------
CASH AT END OF PERIOD ................................... $ 123,825 $ 192,095
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOWS INFORMATION
Income taxes paid ..................................... $ 164,702 $ 239,178
============ ============
Interest paid ......................................... $ 955,249 $ 830,348
============ ============
</TABLE>
See notes to financial statements.
-6-
<PAGE>
STANDARD FUNDING CORP.
NOTES TO FINANCIAL STATEMENTS
For the six months ended June 30, 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 and six month periods ended June 30, 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 and six
month periods ended June 30, 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 various financial institutions.
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 and Pennsylvania area. Accordingly, at June 30, 1997, substantially
all of the Company's installment loans outstanding were from this
geographic region.
-7-
<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:
Six Months
Ended Year Ended
June 30, 1997 December 31, 1996
------------- -----------------
Balance, beginning of period ........... $ 300,000 $ 208,000
Provision .............................. 303,207 583,398
Charge-offs - net of recovers of $11,857
and $47,913, respectively ............ (293,207) (491,398)
--------- ---------
Balance, end of period ................. $ 310,000 $ 300,000
========= =========
-8-
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Comparison of Six Months Ended June 30, 1997 to Six Months Ended
June 30, 1996
Finance charge income increased by 17.7% to $3,195,346 in the first six
months of 1997 from $2,714,973 in the first six months of 1996 primarily because
of an increase in total installment loans financed during the respective
periods. Total installment loans originated increased 21.2% to $52,406,884 from
$43,227,788. The Company's average receivables for the period ended June 30,
1997 increased 29.8% to $38,057,590 from $29,318,317 for the period ended June
30, 1996. Interest expense for the period ended June 30, 1997 increased 30% to
$1,120,764 from $862,207 for the period ended June 30, 1996, an increase of
$258,557, due to an increase in borrowings. Selling and operating expenses
increased during the period ended June 30, 1997 to $1,273,801 from $1,193,859 in
the period ended June 30, 1996. This increase was primarily attributable to
increases in salary rates and expenses.
The provision for possible credit losses increased to $303,207 for the
period ended June 30, 1997 from $191,785 for the period ended June 30, 1996.
This increase of $111,422 consists primarily in the assigned risk accounts.
Accounts receivable balances on the assigned risk portfolio continues to
decrease. The allowance for possible credit losses increased to $310,000 at June
30, 1997 from $251,000 at June 30, 1996.
Comparison of Three Months Ended June 30, 1997 to Three Months Ended
June 30, 1996
Finance charge income increased by 15% to $1,605,845 in the second
quarter of 1997 from $1,395,949 in the second quarter of 1996 primarily because
of an increase in total installment loans financed during the respective
periods. Total installment loans originated increased 21.7% to $27,218,499 from
$22,364,382. The Company's average receivables for the second quarter of 1997
increased 24.6% to $39,899,192 from $32,031,884 for the second quarter of 1996.
Interest expense for the second quarter of 1997 increased 24.6% to $573,732 from
$460,634 for the second quarter of 1996, an increase of $113,098, due to an
increase in borrowings. Selling and operating expenses increased during the
second quarter of 1997 to $622,694 from $599,794 in the second quarter of 1996.
This increase was primarily attributable to increases in salary rates and
expenses.
The provision for possible credit losses increased to $153,539 for the
second quarter of 1997 from $99,790 for the second quarter of 1996. This
increase of $53,749 consists primarily in the assigned risk accounts. Accounts
receivable balances on the assigned risk portfolio continues to decrease.
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 common
equity.
-9-
<PAGE>
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 six month periods ended June
30, 1997 and 1996, the Company originated installment loans receivable of
$52,406,884 and $43,227,788, respectively, compared to installment loans
collected for each period of $41,715,424 and $34,114,720, respectively. The
result was an increase in outstanding installment loan receivables to
$40,848,966 from $32,888,913 at June 30, 1997 and 1996, respectively.
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 six month
periods ended June 30, 1997 and 1996, net cash provided by operating activities
was $3,383,647 and $2,273,671, respectively, which amounts were comprised
primarily of net earnings, loss provisions, depreciation and amortization and
other changes in assets and liabilities. For the six month periods ended June
30, 1997 and 1996, net cash provided by financing activities was $7,375,328 and
$6,143,829, respectively, comprised of proceeds from bank notes and repayment of
bank notes, 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.
For the Six Month
Periods Ended June 30,
----------------------
1997 1996
---- ----
Installment loans originated ................. $ 52,406,884 $ 43,227,788
Installment loans collected .................. $ 41,715,424 $ 34,114,720
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.
-10-
<PAGE>
Lines of Credit
At June 30, 1997, the Company had unsecured short term lines of credit
aggregating $33,500,000 available through six commercial banks, under which
$23,600,000 was outstanding. Amounts outstanding under these lines bear interest
at variable rates 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, 1998, 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 six month periods ended June 30, 1997 and 1996,
the maximum aggregate amount outstanding under these lines at any time was
$23,600,000 and $16,900,000, respectively.
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 June 30, 1997 bore interest at fixed
annual rates ranging from 6.19% to 7.12%. During the six month periods ended
June 30, 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 notes bear interest at a fixed
rate of 10%, 12.50% and 14% and are due from November 1, 2000 to March 31, 2002.
Some of the 14% senior subordinated debt notes restrict 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%, 12% and 14.25% and are due from February 16, 2001 to September
30, 2001.
-11-
<PAGE>
The following table indicates amounts, rates and maturity dates as of June 30,
1997 of all senior and junior subordinated debt of the Company.
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.
Participation Program
In addition to the sources of funds described above, 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 various
financial institutions.
Other Potential Sources
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.
-12-
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K
None.
-13-
<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: August 12, 1997 /s/ Alan J. Karp
Alan J. Karp ----------------
President and Chief Executive Officer
Date: August 12, 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 06-30-97 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 123,825
<SECURITIES> 0
<RECEIVABLES> 39,561,475
<ALLOWANCES> (310,000)
<INVENTORY> 0
<CURRENT-ASSETS> 40,280,400
<PP&E> 660,424
<DEPRECIATION> 360,071
<TOTAL-ASSETS> 40,580,753
<CURRENT-LIABILITIES> 33,553,506
<BONDS> 0
0
0
<COMMON> 2,760
<OTHER-SE> 7,024,487
<TOTAL-LIABILITY-AND-EQUITY> 40,580,753
<SALES> 0
<TOTAL-REVENUES> 3,195,346
<CGS> 0
<TOTAL-COSTS> 1,273,801
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 303,207
<INTEREST-EXPENSE> 1,120,764
<INCOME-PRETAX> 497,574
<INCOME-TAX> 199,030
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 298,544
<EPS-PRIMARY> .11
<EPS-DILUTED> 0
</TABLE>
