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 February 28, 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 2-88333
AMERICAN SOUTHWEST FINANCE CO., INC.
(Exact name of registrant as specified in its charter)
Arizona 86-0461972
(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 April 11,
1994:
Class A - 18,000 Class B - 35,000
AMERICAN SOUTHWEST FINANCE CO., INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - February 28, 1994
(Unaudited) and August 31, 1993 3
Statements of Income - For the three months
and the six months ended February 28, 1994
and 1993 (Unaudited) 4
Statements of Cash Flows - For the six
months ended February 28, 1994 and 1993
(Unaudited) 5
Notes to Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
2
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements.
AMERICAN SOUTHWEST FINANCE CO., INC.
BALANCE SHEETS
ASSETS
February 28 August 31
1994 1993
----------------- -----------------
(Unaudited)
Cash and Cash Equivalents $ 395,345 $ 722,092
Receivables Pursuant to Funding
Agreements - Notes 3 and 4
Principal - (Net of issue discount of
$119,688 at August 31, 1993) 8,860,887
Interest 92,612
Receivables from Affiliate - Note 5
Principal 1,600,000 979,704
Interest 10,521 6,531
Other Receivables 294 55,420
----------------- -----------------
Total Assets $ 2,006,160 $ 10,717,246
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Bonds Payable - Notes 3 and 4
Principal - (Net of issue discount of
$119,688 at August 31, 1993) $ $ 8,860,887
Interest 92,612
Accounts Payable, primarily income taxes 104,623 499
----------------- -----------------
Total Liabilities 104,623 8,953,998
----------------- -----------------
Shareholders' Equity
Class A Common Stock, $.10 par value;
100,000 shares authorized; 25,000 shares
issued and 18,000 shares outstanding at
February 28, 1994 (19,000 shares at
August 31, 1993) 2,500 2,500
Class B Common Stock, $.10 par value;
50,000 shares authorized; 36,000 shares
issued and outstanding 3,600 3,600
Capital in excess of par value 100,200 100,200
Retained earnings 1,846,144 1,670,666
----------------- -----------------
1,952,444 1,776,966
Less: Treasury Stock - at cost,
Class A Common Stock, 7,000 shares
at February 28, 1994 and 6,000
shares at August 31, 1993 50,907 13,718
----------------- -----------------
Total Shareholders' Equity 1,901,537 1,763,248
----------------- -----------------
Total Liabilities and
Shareholders' Equity $ 2,006,160 $ 10,717,246
================= =================
The accompanying notes are an integral part of these financial statements.
3
AMERICAN SOUTHWEST FINANCE CO., INC.
STATEMENTS OF INCOME
(Unaudited)
For the For the For the For the
three months three months six months six months
ended ended ended ended
February 28 February 28 February 28 February 28
1994 1993 1994 1993
------------- ------------ ------------- ------------
REVENUES
Interest
Pursuant to Funding
Agreements $ 294,519 $ 1,303,109 $ 582,749 $ 3,512,426
Other 22,351 15,867 48,110 23,513
Administrative Fees 420 1,497 971 3,482
Redemption Income -
Note 4 261,462 621,508 261,462 1,408,398
------------- ------------ ------------- ------------
578,752 1,941,981 893,292 4,947,819
------------- ------------ ------------- ------------
COSTS AND EXPENSES
Interest on Bonds 294,519 1,303,109 582,749 3,512,426
Other Expenses 5,218 5,182 21,065 18,996
------------- ------------ ------------- ------------
299,737 1,308,291 603,814 3,531,422
------------- ------------ ------------- ------------
INCOME BEFORE TAXES 279,015 633,690 289,478 1,416,397
Provision for Income
Taxes 112,000 250,000 114,000 564,000
------------- ------------ ------------- ------------
NET INCOME $ 167,015 $ 383,690 $ 175,478 $ 852,397
============= ============ ============= ============
EARNINGS PER SHARE OF
CLASS A COMMON STOCK -
Note 6 $ 9.11 $ 18.18 $ 9.40 $ 39.34
============= ============ ============= ============
Weighted average
number of Class A
shares outstanding 18,333 21,099 18,669 21,669
============= ============ ============= ============
The accompanying notes are an integral part of these financial statements.
4
AMERICAN SOUTHWEST FINANCE CO., INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the For the
six months six months
ended ended
February 28 February 28
1994 1993
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 175,478 $ 852,397
---------------- ----------------
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:
Amortization of discount on Receivables
Pursuant to Funding Agreements (119,688) (23,158)
Amortization of discount on Bonds Payable 119,688 23,158
Decrease in Interest Receivable
Pursuant to Funding Agreements 92,612 598,438
Increase in Receivables from Affiliate (624,286)
Decrease in Other Receivables 55,126 36,979
Decrease in Interest Payable (92,612) (598,438)
Increase in Accounts Payable 104,124 952,428
---------------- ----------------
Total Adjustments (465,036) 989,407
---------------- ----------------
Net cash (used in) provided by
operating activities (289,558) 1,841,804
---------------- ----------------
The accompanying notes are an integral part of these financial statements.
5
AMERICAN SOUTHWEST FINANCE CO., INC.
STATEMENTS OF CASH FLOWS (CONT'D)
(Unaudited)
For the For the
six months six months
ended ended
February 28 February 28
1994 1993
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Collection of Receivables Pursuant to
Funding Agreements 8,980,574 83,939,495
---------------- ----------------
Net cash provided by investing
activities 8,980,574 83,939,495
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal Reduction of Bonds Payable (8,980,574) (83,939,495)
Acquisition of Class A Treasury Stock (37,189) (929)
Acquisition and Retirement of Class B
Treasury Stock (100)
---------------- ----------------
Net cash used in financing activities (9,017,763) (83,940,524)
---------------- ----------------
Net (decrease) increase in Cash and
Cash Equivalents (326,747) 1,840,775
Cash and Cash Equivalents at
beginning of period 722,092 542,568
---------------- ----------------
Cash and Cash Equivalents at end of
period $ 395,345 $ 2,383,343
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for income taxes $ 5,503 $ 2,500
================ ================
Cash paid for interest $ 555,673 $ 4,110,864
================ ================
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 FINANCE CO., INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - 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 August 31, 1993. In the opinion
of Management, all adjustments considered necessary for a fair presentation
have been included. Operating results for the three and six-month periods
ended February 28, 1994 are not necessarily indicative of the results that may
be expected for the year ending August 31, 1994.
NOTE 2 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
American Southwest Finance Co., Inc. (the "Company") was organized for
the purpose of issuing mortgage-collateralized bonds ("Bonds") in series
("Series") to facilitate the financing of long-term residential mortgage loans
secured by single-family residences. 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"). 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 nor the
7
participating finance companies ("Finance Companies") 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.
NOTE 3 - FUNDING AGREEMENTS
The Company and each Finance Company participating in a Series of Bonds
enter into a funding agreement with respect to each Series of Bonds
(collectively the "Funding Agreements") pursuant to which the Company lends a
portion of the proceeds from the sale of the Bonds of such Series. Each
Finance Company agrees to repay its loan from the Company by causing payments
on its Mortgage Collateral 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
made from the Company as it becomes due, and each Finance Company pledges to
the Company Collateral as security for its loan. The Company assigns to the
Trustee its entire right, title and interest in the Collateral and all
proceeds are pledged under the Funding Agreements as security for such Series
of Bonds.
Funds generated by principal and interest payments on the Funding
Agreements securing a Series of Bonds are held by the Trustee until the
payment dates for the Bonds. Amounts not required to make principal and
interest payments on the Bonds of a Series are used to pay current fees and
expenses, held in reserve funds for future fees and expenses (see Note 6),
held in special reserve funds securing the Bonds or paid to the Finance
Companies pursuant to the Funding Agreements.
8
NOTE 4 - BONDS PAYABLE
The indenture supplements relating to each Series of Bonds issued by the
Company have provisions which give the Company the option of redeeming such
Bonds in whole or in part when specific criteria are met. At the time of a
redemption, with the consent of each participating Finance Company and the
Trustee, the Company sells the underlying Mortgage Collateral and cancels the
appropriate Funding Agreements. The Company simultaneously applies the
proceeds from such sales to redeem the Bonds and remits the remainder to the
participating Finance Companies after charging each a prepayment penalty.
Prepayment penalties, recorded as Redemption Income, are assessed in
accordance with specific policies established by the Company. As of
February 28, 1994, all Series of Bonds issued by the Company have been
redeemed. Series 1984-1 was redeemed February 1, 1994, resulting in
Redemption Income of $261,462.
NOTE 5 - RELATED PARTY TRANSACTIONS
At February 28, 1994, Receivables from Affiliate consisted of a loan to
American Southwest Affiliated Companies ("ASAC"). The loan earns interest at
the prime rate of interest as published in the Wall Street Journal. At August
31, 1993, Receivables from Affiliate consisted primarily of loans to American
Southwest Financial Corporation ("ASFC"), who utilized the funds to effect
optional class redemptions on certain of its Bonds.
NOTE 6 - 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,
9
upon dissolution, provided such profits were not paid to Class A shareholders
as dividends prior to such dissolution.
NOTE 7 - ESCROWED RESERVE FUNDS
While there were Series of Bonds outstanding, the Company maintained and
invested, on behalf of participating Finance Companies, certain funds
("Escrowed Reserve Funds") held primarily for future Bond administration
expenses. After the final Series of Bonds was redeemed February 1, 1994 all
excess Escrowed Reserve Funds were returned to the Finance Companies. The
Escrowed Reserve Funds are not included in the Company's assets or liabilities
on the accompanying balance sheets as of February 28, 1994 and August 31,
1993.
NOTE 8 - SUBSEQUENT EVENTS
On March 30, 1994 the Company acquired 1,000 shares of its Class B
common stock and placed the shares in Treasury.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Company was organized for the purpose of issuing various Series of
Bonds to facilitate the financing of long-term residential mortgage loans
secured by single-family residences. 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
participating Finance Companies pursuant to Funding Agreements. The Company
last issued a Series of Bonds in July 1987. Issuance fees ("Bond Issuance
Fees") charged for each Series of Bonds issued by the Company are used to pay
Bond offering expenses.
Results of Operations
The Company's net income for the three-month and six-month periods
ended February 28, 1994 was significantly lower when compared to the same
periods in 1993. This decrease is primarily due to lower Redemption Income in
the current periods.
The Company's principal source of revenue was Interest Pursuant to
Funding Agreements which was completely offset by Interest Expense on Bonds.
See Notes 2 and 3 of the accompanying Financial Statements. Interest Income
and related Interest Expense have declined significantly due to (i) regular
payments and prepayments on the Mortgage Collateral securing the various
Series of Bonds, and (ii) the sale of Mortgage Collateral in conjunction with
Bond redemptions. The Company will no longer receive Interest Income pursuant
to Funding Agreements, nor incur the related Interest Expense subsequent to
the current period due to the February 1, 1994 redemption of the Company's
final outstanding Series of Bonds. Future operations, if any, will depend
upon the Company's ability to issue new
11
Series of Bonds or engage in other business activities deemed appropriate by
the Company's Board of Directors.
Other Interest Income consists primarily of interest earned on the
Company's Cash, Cash Equivalents and Receivables from Affiliate. The
Company's increase in Other Interest Income for the three-month and six-month
periods ended February 28, 1994 as compared to the same periods in 1993 is due
to greater amounts of cash generated from net income and available for
investment.
While there were outstanding Series of Bonds, the Company derived
Administrative Fees by charging Finance Companies for administration of
current Bond administration funds. Fees varied depending on investment
returns on these funds held by the Company specifically for payment of current
Bond administration expenses. At the time of each full redemption of a Series
of Bonds, excess current Bond administration funds were returned to the
participating Finance Companies. Consequently, because of such redemptions,
there is a reduction of Administrative Fees for the three-month and six-month
periods ended February 28, 1994 as compared to the same periods in 1993 and
the Company will no longer receive Administration Fees unless new Series of
Bonds are issued. Current Bond administration funds were included in the
Escrowed Reserve Funds administered and invested by the Company on behalf of
the Finance Companies. See Note 6 of the accompanying financial statements.
Liquidity and Capital Resources
During the six-month period ended February 28, 1994, the Company
collected the loan to ASFC of $979,704 with interest. In January, 1994 the
Company loaned American Southwest Affiliated Companies ("ASAC") $1,600,000.
This loan
12
earns interest at the prime rate of interest as published in the Wall Street
Journal. The increase in Receivables from Affiliate was the primary use of
capital during the 1994 periods presented.
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 issuances
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 expected maturity of Collateral. This in turn will affect the Company's
ability to issue new Series of Bonds and earn Bond Issuance Fees. 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.
13
AMERICAN SOUTHWEST FINANCE CO., INC.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: None.
(b) Reports on Form 8-K: None.
14
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 FINANCE CO., INC.
Date: April 13, 1994 /s/ G. Thomas Eggebrecht
G. Thomas Eggebrecht
President and Chief Executive Officer
Date: April 13, 1994 /s/ Richard H. Hackett
Richard H. Hackett
Executive Vice President, Treasurer and
Chief Financial and Accounting Officer
Date: April 13, 1994 /s/ Michael H. Feinstein
Michael H. Feinstein
Executive Vice President and Chief Operating
Officer
15