FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 2-81457
AMERICAN SOUTHWEST FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Arizona 86-0439495
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2390 East Camelback Road, Suite 225, Phoenix, AZ 85016
(Address of principal executive offices) (Zip Code)
(602) 381-8960
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares of common stock outstanding as of November 9, 1994:
Class A - 18,000 Class B - 35,200
AMERICAN SOUTHWEST FINANCIAL CORPORATION
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Balance Sheets - September 30, 1994 (Unaudited)
and June 30, 1994 3
Statements of Operations - For the three months
ended September 30, 1994 and 1993 (Unaudited) 5
Statements of Cash Flows - For the three months
ended September 30, 1994 and 1993 (Unaudited) 6
Notes to Financial Statements
(Unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 23
2
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements.
AMERICAN SOUTHWEST FINANCIAL CORPORATION
BALANCE SHEETS
ASSETS
September 30 June 30
1994 1994
(Unaudited)
Cash and cash equivalents $ 1,676 $ 1,434,442
Receivables pursuant to Funding
Agreements - Note 2
Principal - (Net of issue discount of
$10,367,920 and $11,431,310, respectively) 301,310,846 345,427,233
Interest 7,188,875 8,196,380
Mortgage Securities - Note 2
Principal - (Net of purchase discount
of $26,010,389 and $28,199,384,
respectively) 557,000,062 615,850,786
Interest 6,623,616 7,108,709
Other receivables, primarily interest
and prepaid income taxes 78,997 54,170
Advances to affiliates - Note 3 1,753,824
Total Assets $ 872,204,072 $ 979,825,544
The accompanying notes are an integral part of these financial statements.
3
AMERICAN SOUTHWEST FINANCIAL CORPORATION
BALANCE SHEETS (CONT'D)
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30 June 30
1994 1994
(Unaudited)
Liabilities
Bonds Payable - Note 2
Principal - (Net of issue discount of
$36,378,309 and $39,630,694, respectively) $ 847,872,754 $ 956,979,605
Interest 13,656,718 15,265,766
Accounts payable 32,371
Payable to affiliates - Notes 2 and 3 3,430,000 225,000
Total Liabilities 864,959,472 972,502,742
Commitments and Contingencies - Note 3
Shareholders' Equity
Class A Common Stock, $.10 par value;
100,000 shares authorized, 25,000
shares issued; 18,000 shares outstanding 2,500 2,500
Class B Common Stock, $.10 par value;
50,000 shares authorized, 36,200 shares
issued; 35,200 shares outstanding 3,620 3,620
Capital in excess of par value 99,480 99,480
Retained earnings 7,353,259 7,431,461
7,458,859 7,537,061
Less: Treasury stock - at cost,
Class A Common Stock, 7,000 shares and
Class B Common Stock, 1,000 shares 214,259 214,259
Total Shareholders' Equity 7,244,600 7,322,802
Total Liabilities and
Shareholders' Equity $ 872,204,072 $ 979,825,544
The accompanying notes are an integral part of these financial statements.
4
AMERICAN SOUTHWEST FINANCIAL CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
For the For the
three months three months
ended ended
September 30 September 30
1994 1993
REVENUES
Interest
Pursuant to Funding Agreements - Note 2 $ 8,350,477 $ 21,913,844
Mortgage Securities - Note 2 14,692,306 27,538,252
Other 79,249 347,330
Management fees 10,054 17,446
Redemption income - Note 2 377,555 1,752,600
23,509,641 51,569,472
COSTS AND EXPENSES
Interest on Bonds - Note 2 22,840,647 49,379,958
Interest on loan from affiliates - Note 2 41,019 13,894
Management fees - Note 3 725,000 200,000
Other expenses 13,176 35,241
23,619,842 49,629,093
(LOSS) INCOME BEFORE TAXES (110,201) 1,940,379
(Benefit) Provision for Income Taxes (32,000) 769,000
NET (LOSS) INCOME $ (78,201) $ 1,171,379
(LOSS) EARNINGS PER SHARE - Note 4 $ (4.34) $ 61.65
Weighted average number of Class A
shares outstanding 18,000 19,000
The accompanying notes are an integral part of these financial statements.
5
AMERICAN SOUTHWEST FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
For the For the
three months three months
ended ended
September 30 September 30
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (78,201) $ 1,171,379
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Decrease in interest receivable on
Mortgage Collateral 1,492,598 4,882,510
(Increase) decrease in other receivables (24,827) 160,413
Decrease in advances to affiliates 1,753,824 660,000
Decrease in interest payable - Bonds (1,609,049) (4,946,817)
(Decrease) increase in accounts payable (32,371) 579,672
Decrease in payable to affiliates (186,106)
Total Adjustments 1,580,175 1,149,672
Net cash provided by operating activities 1,501,974 2,321,051
CASH FLOWS FROM INVESTING ACTIVITIES
Collection of Mortgage Collateral 108,175,862 354,034,503
Net cash provided by investing activities 108,175,862 354,034,503
CASH FLOWS FROM FINANCING ACTIVITIES
Principal reduction of Bonds Payable (114,315,602) (357,791,287)
Loan from affiliates 3,205,000 979,704
Net cash used in financing activities (111,110,602) (356,811,583)
Net decrease in cash and cash equivalents (1,432,766) (456,029)
Cash and cash equivalents at beginning of period 1,434,442 3,989,969
Cash and cash equivalents at end of period $ 1,676 $ 3,533,940
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes $ $
Cash paid for interest $ 21,238,329 $ 43,976,713
Disclosure of accounting policy:
For purposes of the statements of cash flows, the Company considers all highly
liquid investments purchased with maturities of three months or less to be
cash equivalents.
The accompanying notes are an integral part of these financial statements.
6
AMERICAN SOUTHWEST FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Organization
American Southwest Financial Corporation (the "Company") was
organized for the purpose of issuing mortgage-collateralized bonds ("Bonds")
in series ("Series") consisting of one or more classes (each a "Class") to
facilitate the financing of long-term residential mortgage loans secured by
single-family residences. The Company last issued a Series of Bonds in
September 1988. The Bonds are collateralized by certificates of the
Government National Mortgage Association, the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation (collectively, all
such certificates are referred to as "Mortgage Certificates") and by
conventional mortgage loans (together with Mortgage Certificates referred to
as "Mortgage Collateral"). The Company does not have and is not expected to
have any significant assets other than cash and the assets pledged to secure
specific Series of Bonds.
Each Series of Bonds that has been issued is a nonrecourse
obligation of the Company payable solely from the Mortgage Collateral and
other collateral (together the "Collateral") pledged to secure such Series of
Bonds. Neither the Company, the participating finance companies ("Finance
Companies") nor the holders of the residual interest in the REMICs (defined
below), as applicable, have guaranteed, or otherwise are obligated to pay the
Bonds of a Series except from the proceeds of the Collateral securing such
Series of Bonds. The Company has made elections to treat the arrangements by
which the Collateral securing certain Series of Bonds is held as "real estate
mortgage investment conduits" ("REMICs") for federal income tax purposes. The
residual interests in the REMICs (generally, the right to receive the
remaining cash flow available on Collateral after debt service
7
and payment of administrative expenses on Bonds) are owned by persons other
than the Company.
Basis of Presentation
The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. They do not include all information and notes
required by generally accepted accounting principles for complete financial
statements. However, except as disclosed herein, there has been no material
change in the information disclosed in the notes to the financial statements
included in the Annual Report on Form 10-K for the year ended June 30, 1994.
In the opinion of Management, all adjustments considered necessary for a fair
presentation have been included. Operating results for the three month period
ended September 30, 1994 are not necessarily indicative of the results that
may be expected for the year ending June 30, 1995.
NOTE 2 - MORTGAGE COLLATERAL AND BONDS PAYABLE
As a result of the elections by the Company to treat the
arrangements by which the Collateral securing certain Series of Bonds is held
as REMICs, the related income and expense of each such Series is reported as a
separate entity for federal income tax purposes. For financial statement
purposes, the Mortgage Collateral securing the Bonds of a Series, including
the REMICs, is presented on the balance sheets as (i) "Receivables Pursuant to
Funding Agreements" (defined below) if the Mortgage Collateral securing such
Series is owned by Finance Companies and pledged by such Finance Companies to
the Company pursuant to funding agreements, or (ii) "Mortgage Securities" if
the Mortgage Collateral securing such
8
Series is owned by the Company. The Bonds secured by the Mortgage Collateral
are presented as "Bonds Payable".
With respect to a Series of Bonds for which the Mortgage
Collateral securing such Series is owned by the Finance Companies and pledged
to the Company, the Company and each Finance Company participating in such
Series enter into a funding agreement ("Funding Agreement") with respect to
such Series pursuant to which the Company lends and such Finance Company
borrows all or a portion of the proceeds from the sale of the Bonds of such
Series. Each participating Finance Company agrees to repay its loan from the
Company by causing payments to be made to the trustee (the "Trustee") for the
related Series of Bonds on behalf of the Company in such amounts as are
necessary to pay the principal of and interest on the Finance Company's loan
from the Company as it becomes due, and each Finance Company pledges to the
Company Collateral as security for its loan. The Company Yassigns to the
Trustee its entire right, title and interest in the Collateral and all
proceeds thereof pledged under the Funding Agreements as security for such
Series of Bonds. At September 30, 1994, the Company had $2,343,778 in
Receivables Pursuant to Funding Agreements that were not pledged as security
for Series of Bonds, having paid off the related Series of Bonds utilizing
corporate cash (see below).
Funds generated by principal and interest payments on the
Mortgage Collateral securing a Series of Bonds are held by the Trustee. If
Bonds are outstanding, the Trustee holds the funds until the payment dates for
the Bonds of such Series, makes the payments to the bondholders and remits the
surplus cash to the Company. The surplus is used to pay current fees and
expenses, held in reserve funds for future fees and expenses, held in special
reserve funds securing the
9
Bonds, paid to the Finance Companies pursuant to the Funding Agreements, if
any, or paid to the purchaser of the residual interest in the REMIC, if any,
with respect to such Series.
In the case where the Company has paid off the Bonds of a
Series and has retained the Receivable Pursuant to Funding Agreements, the
Trustee, through a separate custodial agreement, acts only as a custodian of
the principal and interest payments on the Mortgage Collateral and remits the
entire amount to the Company monthly. The Company, in turn, holds these funds
as escrowed reserve funds (see Note 5) and applies the funds to principal and
interest payments on the Finance Company's Funding Agreements as they become
due and pays administration costs. The Company periodically remits any
surplus funds to the Finance Company pursuant to the Funding Agreements.
The indenture supplements (the "Series Supplements")
relating to certain Series of Bonds issued by the Company contain redemption
provisions which give the Company the option to redeem such Bonds in whole or
in part when specific criteria are met. With respect to other Series of
Bonds, the Company may effect a redemption only at the direction of the
holders of the residual interests. The following table sets forth the
redemptions that occurred during the three-month period ended September 30,
1994:
Series Principal Portion
Date (Class) of Bonds Redeemed Description
07/01/94 Q $ 6,723,215 Redemption in whole
08/01/94 R 7,907,243 Redemption in whole
09/20/94 58 12,252,614 Redemption in whole
At the time of a redemption the underlying collateral is
sold and the proceeds from the sale are used to redeem the Bonds. The Company
remits the
10
remainder of such proceeds either (i) to the participating Finance Companies
after charging each a prepayment fee (included in redemption income) or (ii)
to the holder of the residual interest in the REMIC, as applicable.
Prepayment fees, including those charged to affiliates, are assessed in
accordance with specific policies established by the Company. Any deviation
from these policies necessary to address unique Bond structures, Collateral
or other factors requires approval of the Company's Board of Directors,
including a majority of the Directors who have no financial or other interest
in the matter. Expenses related to the redemptions are included in other
expenses. Although redemption opportunities were favorable in the past few
years, the benefits of redemptions are not predictable due to a variety of
factors including uncertainty of the time at which the Company may effect
redemptions of the outstanding Bonds, prevailing interest rates, other similar
market factors and, in certain circumstances, limitations under agreements
entered into by the Company.
During the three-month period ended September 30, 1994, as
well as during the prior fiscal year, a certain Finance Company elected not to
sell its collateral and participate in certain redemptions. The Company
nevertheless effected the full redemption of these related Series of Bonds,
and utilized corporate cash to redeem the non-participating Finance Company's
proportionate share of the Bonds. Subsequent to these redemptions the Company
earns all interest income and receives all principal payments owed on the
Funding Agrements from the non-participating Finance Company without
offsetting liabilities or interest expense on the Bonds.
Additionally, during the three-month periods ended
September 30, 1994 and 1993, the Company exercised its right (pursuant to the
indenture and the applicable Series Supplements) to effect optional Class
redemptions (known as
11
"time-out calls") of the remaining outstanding amounts of certain Classes of
Bonds, utilizing corporate cash and funds borrowed from affiliates. Pursuant
to the time-out calls, payments of principal and interest that would otherwise
be payable to the holders of Bonds so redeemed are paid by the Trustee to the
Company. In 1994 and 1993, the Company borrowed funds from affiliates at
various times to effect certain time-out calls, paying interest to such
affiliates at the prime rate of interest as published in the Wall Street
Journal. At September 30, 1994, the Company had paid all interest due on such
borrowings and owed a balance of $2,815,000. At June 30, 1994, there was no
liability to affiliates related to these borrowings. Interest expense on
Bonds is less than interest income related to Funding Agreements and Mortgage
Securities due to these time-out calls and the Funding Agreements that
remained in place after certain redemptions of Series of Bonds.
NOTE 3 - RELATED PARTY TRANSACTIONS
The Company receives the use of office space, equipment, and
certain managerial, administrative, financial and other services from an
affiliate, American Southwest Financial Services, Inc. ("ASFS") pursuant to
the terms of an agreement (the "Mortgage Securities Issuance and
Administration Agreement") between the Company and ASFS. The Mortgage
Securities Issuance and Administration Agreement generally provides for the
Company to pay ASFS, on a quarterly basis, the shortfall between the total
fees earned for both the securities issuance services and the securities
administration services ASFS performs, and 110% of the overhead of ASFS,
subject to scheduled adjustments. Management fees payable to ASFS at
September 30, 1994 and June 30, 1994 are $615,000 and $225,000, respectively,
and are included in payable to affiliates. For each outstanding Series of
Bonds, ASFS
12
also receives administration fees which are paid from the cash held as
Escrowed Reserve Funds or by the Trustee and are not expenses of the Company.
The holders of Class A Stock of the Company and of American Southwest Finance
Co., Inc., ("ASFCI") an affiliate, own 100% of the Class A Stock of American
Southwest Affiliated Companies ("ASAC"), parent company of ASFS and various
other affiliates. The Company made advances to ASAC during the fiscal year
ended June 30, 1994. The advances were collectible upon demand and the amount
presented on the balance sheet at June 30, 1994 includes interest accrued at
the prime rate of interest as published in the Wall Street Journal. Interest
income of $8,880 was earned on the advances during the three-month period
ended September 30, 1994 and is included in other interest income. The
advances were paid in full with interest during the three-month period ended
September 30, 1994.
In July 1994, and as amended and restated in September 1994,
the Company entered into a Letter of Understanding with one of its Class A
shareholders pursuant to which the Company, ASFCI and ASAC each agreed to
purchase, upon such shareholder's request made at any time prior to
December 1, 1994, all of such shareholder's shares of Class A stock in the
Company, ASFCI and ASAC (or any stock issued in exchange for such stock) at a
price equal to the higher of (i) $1,000,000 or, (ii) in the event the Company
has purchased Class A stock from another shareholder prior to December 1,
1994, at a purchase price higher than $1,000,000, such higher price. On
November 10, 1994 the Company, ASFCI and ASAC purchased the stock at the price
of $1,000,000. The Company's allocated amount was $231,922 (based on the
relative book value of the three companies).
13
NOTE 4 - EARNINGS PER SHARE
Earnings per share calculations are based on the weighted
average number of Class A common shares outstanding since voting and dividend
rights are limited to Class A shareholders. Class B shareholders' rights are
limited to a return of capital upon dissolution together with a share of the
Company's profits, if any, upon dissolution, provided such profits were not
paid to Class A shareholders as dividends prior to such dissolution.
NOTE 5 - ESCROWED RESERVE FUNDS
Escrowed Reserve Funds are (i) funds owned by participating
Finance Companies and held for payment of current and future Bond
administration expenses and (ii) funds of approximately $268,000 held and
invested for a Finance Company who elected not to participate in certain
redemptions (see Note 2). None of these funds are included in the Company's
assets or liabilities on the accompanying balance sheets as of September 30,
1994 and June 30, 1994.
The Company believes that the Escrowed Reserve Funds at
September 30, 1994, as well as ongoing fees charged to participating Finance
Companies, are sufficient to meet the future Bond administration obligations,
including the obligation to ASFS under the Mortgage Securities Issuance and
Administration Agreement.
NOTE 6 - SUBSEQUENT EVENTS
On October 26, 1994, the Company sold to its affiliate,
ASFCI, its rights and obligations in and to the Funding Agreements with the
Finance Company which elected not to participate in certain redemptions (see
Note 2). The sales price included principal of $2,342,221 (par) and accrued
interest of $26,440. The Company received $607,153 in cash from ASFCI,
eliminated its liability to ASFCI by the amount of $1,276,741 including
accrued interest to October 26, 1994 and
14
accepted an unsecured note from ASFCI in the amount of $484,767 which bears
interest at prime as published in the Wall Street Journal.
15
AMERICAN SOUTHWEST FINANCIAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Company was organized for the purpose of issuing
mortgage-collateralized Bonds in Series to facilitate the financing of long-
term residential mortgage loans secured by single-family residences. The
Company does not have and is not expected to have any significant assets other
than cash, Mortgage Collateral and the assets pledged to secure specific
Series of Bonds. On the closing of a Series of Bonds issued by the Company,
the Company applies the net proceeds of the Bonds toward the simultaneous
purchase or the repayment of indebtedness with respect to the Mortgage
Collateral securing such Series of Bonds or to fund loans to Finance Companies
pursuant to Funding Agreements (see Note 2 of the Financial Statements). The
Company last issued a Series of Bonds in September 1988. Issuance fees
charged for each Series of Bonds issued by the Company are used to pay Bond
offering expenses.
Each Series of Bonds that has been issued is a nonrecourse
obligation of the Company, payable solely from the Collateral pledged to
secure such Series of Bonds. Neither the Company nor the Finance Companies
guarantee or are obligated to pay the Bonds of a Series except from the
proceeds of the Collateral securing such Series of Bonds. The Company has
made elections to treat the arrangements by which the Collateral securing
certain Series of Bonds is held as REMICs for federal income tax purposes.
Results of Operations
The Company incurred a net loss for the three-month period
ended September 30, 1994. The loss is primarily due to a significant
reduction in redemption income, a reduction in other interest income and an
increase in management fees as compared to the same period in 1993. In the
recent past the Company has earned substantially all of its net income from
redemptions of its
16
outstanding Bonds and from other interest income. In the three-month period
ended September 30, 1994, the time-out calls and the Funding Agreements that
remained in place after certain redemptions mitigated the Company's net loss
from increased management fees.
During the three-month period ended September 30, 1994 the
Company redeemed or partially redeemed three Series totaling $26,883,072 of
Bond principal, as compared to nine Series totaling $77,652,815 of Bond
principal during the same period in 1993. At the time of a redemption the
underlying collateral is sold and the proceeds from the sale are used to
redeem the Bonds. The Company remits the remainder of such proceeds either
(i) to the participating Finance Companies after charging each a prepayment
fee (included in redemption income) or (ii) to the holder of the residual
interest in the REMIC, as applicable. During the three-month period ended
September 30, 1994, as well as during the prior fiscal year, the Company
effected certain full redemptions in which a Finance Company elected not to
participate. The Company utilized its own cash to redeem the non-
participating Finance Company's proportionate share of the Bonds. Subsequent
to these redemptions the Company earns all interest income and receives all
principal payments owed on the Funding Agreements from the non-participating
Finance Company without offsetting liabilities on the Bonds. Although
redemption opportunities have been favorable in the past few years, the
benefits of redemptions are not predictable due to a variety of factors
including uncertainty of the time at which the Company may effect redemptions
of the outstanding Bonds, prevailing interest rates, other similar market
factors and, in certain circumstances, limitations under agreements entered
into by the Company.
17
The Company's principal sources of revenue are interest
pursuant to Funding Agreements and interest from Mortgage Securities, both of
which are substantially offset by interest expense on Bonds. See Note 2 of
the accompanying Financial Statements. The interest income and related
interest expense have declined for the three-month period ended September 30,
1994 as compared to the three-month period ended September 30, 1993 due to (i)
regular payments and prepayments on the Mortgage Collateral securing the
various series of Bonds, (ii) the sale of Mortgage Collateral in conjunction
with Bond redemptions, and (iii) the time-out calls on certain Classes of
Bonds. See Note 2 of the Financial Statements. These same factors caused the
reductions in the amounts of Collateral and Bonds outstanding. The Company
anticipates that its interest income from Mortgage Collateral and related
interest expense on Bonds will continue to decline due to future redemptions,
time-out calls, and the fact that the Company has not issued a new Series of
Bonds since 1988.
Other interest income consists primarily of (i) interest
earned on the reinvestment of the monthly payments on the Collateral (for
certain non-REMIC Series of Bonds issued by the Company) prior to the assumed
deposit date for such Series as defined in the related Series Supplements and
(ii) interest earned from investing the Company's cash. Other interest income
earned as a result of reinvestment of the monthly payments on the Collateral
is significantly lower in the three month period ended September 30, 1994 as
compared to the same period in 1993 primarily due to the lower balances of
Collateral securing the Company's non-REMIC Bonds earning reinvestment income
and a slow down in prepayments. Prepayments on the Mortgage Collateral were
considerably higher in the prior fiscal year due to individuals refinancing
into lower rate mortgages. In the long term,
18
other interest income attributable to reinvested payments is expected to
continue to decrease as the Collateral securing the Company's non-REMIC Bonds
is reduced over time and the amount of the monthly payments which may be
reinvested by the Trustee prior to the assumed deposit date also decreases.
It is not likely the Collateral will increase since the Company is not likely
to issue additional non-REMIC Series of Bonds as a result of changes in the
Internal Revenue Code.
The amount of interest income received on the Collateral
securing the various Series of Bonds issued by the Company, the rate at which
principal prepayments are made on such Collateral, the amount of other
interest income earned from the reinvestment of monthly payments on such
Collateral, the amount of other interest income earned on the Company's
corporate cash, the interest rates payable by the Company on certain Classes
of Bonds issued by it, and the amounts ("Surplus") distributed to the Finance
Companies pursuant to Funding Agreements or to the holders of the residual
interests in the REMICs, as applicable, depend upon prevailing interest rates
and are significantly affected by interest rate fluctuations. However, since
Surplus (generally, the right to receive the remaining cash flow available on
Collateral after debt service and payment of administrative expenses on Bonds)
is payable to the Finance Companies or to the holders of the residual
interests in the REMICs, the risks associated with fluctuations in interest
rates are borne primarily by the Finance Companies, the holders of certain
Classes of Bonds and the holders of the residual interests in the REMICs
rather than by the Company.
The Company derives management fee revenue from fees charged
to the Finance Companies for management of current Bond administration funds.
Fees vary depending on investment returns on these funds held by the Company
specifically for
19
payment of current Bond administration expenses. Bond administration funds
have been returned to the Finance Companies as Series of Bonds have been
redeemed and, as a result, management fee revenue for the three-month period
ended September 30, 1994 is reduced as compared to the same period in 1993.
Current Bond administration funds are a portion of the Escrowed Reserve Funds.
See Note 5 of the Financial Statements.
Primary expenditures of the Company consist of management
fees paid to ASFS, interest paid to affiliates and professional fees. The
Company receives the use of office space, equipment, and certain managerial,
administrative, financial and other services pursuant to the terms of the
Mortgage Securities Issuance and Administration Agreement between the Company
and ASFS. The Mortgage Securities Issuance and Administration Agreement
generally provides for the Company to pay ASFS management fees for certain
services it performs (see Note 3 of the Financial Statements). Management
fees significantly increased in the three-month period ended September 30,
1994 as compared to the same period in 1993. The increase is a function of an
increase in operating overhead of ASFS as well as a decrease in issuance fees
and other revenues earned by ASFS, both of which directly affect the amount of
management fees as explained in Note 3 of the Financial Statements.
Professional fees, comprising substantially all of the
Company's other expenses, fluctuate depending on the activities of the
Company. During the three-month period ended September 30, 1994, the Company
incurred fewer professional fees as compared to the same period in 1993.
Liquidity and Capital Resources
At September 30, 1994, the Company had cash of $1,676 as
compared to $1,434,442 at June 30, 1994. The Company had $8,094,376 and
$2,343,778 invested
20
in time-out calls and Funding Agreements, respectively, at September 30, 1994
as compared to $2,076,963 and $2,221,452 invested in time-out calls and
Funding Agreements, respectively, at June 30, 1994. Funds used for time-out
calls and Funding Agreements earned interest at rates ranging from 8.75% to
10.2% per annum for various periods of time during the three-month periods
ended September 30, 1994 and 1993.
The Company believes that scheduled payments of principal
and interest on the Collateral pledged to secure each Series of Bonds,
together with amounts available from reserve funds established for such Bonds
and any reinvestment income on such amounts, will provide sufficient funds (i)
to pay principal and interest on such Bonds when due and to retire such Bonds
not later than their respective stated maturities and (ii) to pay related Bond
administration expenses.
The Company anticipates that funds to meet its current and
future operating needs will be provided from current cash and future
operations.
Impact of Inflation and Changing Prices
The primary revenue producing activities of the Company
(Bond issuance and redemptions) are impacted by interest rates, which in turn
are affected by numerous factors. These factors include conditions in
financial markets, the fiscal and monetary policies of the United States
government and the Board of Governors of the Federal Reserve System,
international economic and financial conditions and other factors, none of
which can be predicted with any certainty.
Virtually all of the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a more significant
impact on the performance of the Company than the effects of general levels of
inflation since changes in prevailing interest rates will affect the
availability, cost and
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expected maturity of Collateral. This in turn will affect the Company's
ability to issue new Series of Bonds and earn Bond issuance fees. Changes in
interest rates (particularly long-term interest rates) also affect the timing
and profit potential of Bond redemptions, with lower rates being a positive
factor and higher rates being a negative factor. Interest rates do not
necessarily move in the same direction or in the same magnitude as the price
of goods and services, since such prices are affected by inflation while
interest rates generally are not affected to the same degree. Nevertheless,
neither changes in interest rates nor inflationary pressures are expected to
significantly affect the ability of the Company to meet its obligations as
they become due because (i) each Series of Bonds is secured by Collateral
paying interest at fixed rates, and (ii) interest on each Class of Bonds is
paid at fixed rates, or at rates based on specified formulas subject to
specific maximum limitations.
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AMERICAN SOUTHWEST FINANCIAL CORPORATION
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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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this Report to be signed on its behalf
by the undersigned thereunto duly authorized.
AMERICAN SOUTHWEST FINANCIAL CORPORATION
Date: November 10, 1994 /s/ Michael H. Feinstein
Michael H. Feinstein
Acting President, Executive Vice President and
Chief Operating Officer
Date: November 10, 1994 /s/ Richard H. Hackett
Richard H. Hackett
Executive Vice President, Treasurer and
Chief Financial and Accounting Officer
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