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 November 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 2-88333 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 January 8, 1995: Class A - 15,000 Class B - 34,000 AMERICAN SOUTHWEST FINANCE CO., INC. INDEX Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets - November 30, 1994 (Unaudited) and August 31, 1994 3 Statements of Income - For the three-months ended November 30, 1994 and 1993 (Unaudited) 4 Statements of Cash Flows - For the three- months ended November 30, 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 12 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. AMERICAN SOUTHWEST FINANCE CO., INC. BALANCE SHEETS ASSETS November 30 August 31 1994 1994 (Unaudited) Cash and Cash Equivalents $ 16,646 $ 637,473 Receivables Pursuant to Funding Agreements - Notes 2 and 3 Principal 2,333,721 Interest 19,184 Receivables from Affiliate - Note 5 Principal 1,270,000 Interest 14,657 Other Receivables, primarily refundable income taxes 5,783 Total Assets $ 2,369,551 $ 1,927,913 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Accounts Payable $ 8,317 $ Payable to Affiliate - Notes 3 and 5 759,620 Total Liabilities $ 767,937 $ Shareholders' Equity Class A Common Stock, $.10 par value; 100,000 shares authorized; 15,000 shares issued and outstanding at November 30, 1994; 25,000 shares issued and 18,000 shares outstanding at August 31, 1994. 1,500 2,500 Class B Common Stock, $.10 par value; 50,000 shares authorized; 34,000 shares issued and outstanding at November 30, 1994; 36,000 shares issued and 35,000 shares outstanding at August 31, 1994 3,400 3,600 Capital in excess of par value 88,100 100,200 Retained earnings 1,508,614 1,872,620 1,601,614 1,978,920 Less: Treasury Stock - at cost, Class A Common Stock, 7,000 shares and Class B Common Stock 1,000 shares at August 31, 1994 51,007 Total Shareholders' Equity 1,601,614 1,927,913 Total Liabilities and Shareholders' Equity $ 2,369,551 $ 1,927,913 The accompanying notes are an integral part of these financial statements. AMERICAN SOUTHWEST FINANCE CO., INC. STATEMENTS OF INCOME (Unaudited) For the For the three months three months ended ended November 30 November 30 1994 1993 REVENUES Interest Pursuant to Funding Agreements $ 22,066 $ 288,230 Other - Note 3 19,368 25,759 Other Income 103 551 41,537 314,540 COSTS AND EXPENSES Interest on Bonds 288,230 Interest on loan from Affiliates - Note 5 5,451 Other Expenses 8,512 15,847 13,963 304,077 INCOME BEFORE TAXES 27,574 10,463 Provision for Income Taxes 6,100 2,000 NET INCOME $ 21,474 $ 8,463 EARNINGS PER SHARE OF CLASS A COMMON STOCK - Note 6 $ 1.23 $ .44 Weighted average number of Class A shares outstanding 17,440 19,000 The accompanying notes are an integral part of these financial statements. AMERICAN SOUTHWEST FINANCE CO., INC. STATEMENTS OF CASH FLOWS (Unaudited) For the For the three months three months ended ended November 30 November 30 1994 1993 CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 21,474 $ 8,463 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization of discount on Receivables Pursuant to Funding Agreements (10,393) Amortization of discount on Bonds Payable 10,393 Increase in Interest Receivable Pursuant to Funding Agreements (19,184) (277,837) Decrease (Increase) in Receivables from Affiliate 1,284,657 (705,703) Decrease in Other Receivables 5,783 2,567 Increase in Interest Payable 277,837 Increase in Accounts Payable 8,317 8,626 Total Adjustments 1,279,573 (694,510) Net cash provided by (used in) operating activities 1,301,047 (686,047) The accompanying notes are an integral part of these financial statements. AMERICAN SOUTHWEST FINANCE CO., INC. STATEMENTS OF CASH FLOWS (CONT'D) (Unaudited) For the For the three months three months ended ended November 30 November 30 1994 1993 CASH FLOWS FROM INVESTING ACTIVITIES Investment in Receivables Pursuant to Funding Agreements (2,342,221) Principal Collection of Funding Agreements 8,500 Net cash used in investing activities (2,333,721) CASH FLOWS FROM FINANCING ACTIVITIES Loan from Affiliate 759,620 Acquisition of Class A Treasury Stock (347,673) Acquisition of Class B Treasury Stock (100) Net cash used in financing activities (411,847) Net decrease in Cash and Cash Equivalents (620,827) (686,047) Cash and Cash Equivalents at beginning of period 637,473 722,092 Cash and Cash Equivalents at end of period $ 16,646 $ 36,045 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for income taxes $ $ Cash paid for interest $ 597 $ 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. 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, 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 November 30, 1994 are not necessarily indicative of the results that may be expected in future periods. NOTE 2 - ORGANIZATION AND OTHER MATTERS 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 Company last issued a Series of Bonds in July 1987 and redeemed all of its then outstanding Bonds in February 1994. The Bonds were 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's Articles of Incorporation limit the Company's business activities to those related to the issuance of Bonds. On the closing of a Series of Bonds issued by the Company, the Company applied the net proceeds of the Bonds toward the simultaneous purchase or the repayment of indebtedness with respect to the securing such Series of Bonds or to fund loans to participating finance companies ("Finance Companies") pursuant to funding agreements ("Funding Agreements") (defined in Note 3). NOTE 3 - FUNDING AGREEMENTS The Company and each participating Finance Company entered into a Funding Agreement with respect to each Series of Bonds pursuant to which the Finance Company borrowed and the Company loaned all or a portion of the proceeds from the sale of the Bonds of such Series. All Funding Agreement receivables were collected in February 1994. However, on October 26, 1994, the Company purchased as an investment from its affiliate, American Southwest Financial Corporation ("ASFC"), ASFC's rights and obligations in and to certain Funding Agreements that ASFC owned free and clear of any Bond obligations. The purchase price, which was equal to ASFC's carrying amount (par value of the Funding Agreements), included principal of $2,342,221 and accrued interest of $26,440. The Company paid $607,153 in cash, eliminated its receivable from ASFC in the amount of $1,276,741 including accrued interest to October 26, 1994 (included in other interest income) and signed an unsecured note to ASFC in the amount of $484,767 which bears interest at prime as published in the Wall Street Journal. The weighted average rate of the Funding Agreements at the purchase date was 9.715%. NOTE 4 - TREASURY STOCK The Company acquired 3,000 shares of Class A Common Stock from three shareholders during the three-month period ended November 30, 1994, and retired those shares along with 7,000 Class A shares held at August 31, 1994. The Company also acquired 1,000 shares of Class B Common Stock from another shareholder, and retired those shares along with 1,000 Class B shares held at August 31, 1994. At November 30, 1994, the Company had no treasury stock holdings. NOTE 5 - RELATED PARTY TRANSACTIONS During the three-month period ended November 30, 1994, advances to affiliates were eliminated as part of the Company's acquisition of Funding Agreements from ASFC (see Note 3). As part of that transaction, however, the Company signed an unsecured note to ASFC which bears interest at prime as published in the Wall Street Journal. Additional funds were borrowed from ASFC pursuant to unsecured notes bearing interest at prime as published in the Wall Street Journal for the Company's treasury stock acquisitions. At November 30, 1994, the principal balance owed to ASFC was $754,767 plus accrued interest of $4,853. The prime rate at November 30, 1994, was 8.5%. On November 30, 1994 the Company was acquired by American Southwest Holdings, Inc. ("Holdings") in conjunction with a tax free exchange by the Company's Class A shareholders of 100% of the Company's Class A Common Stock, together with 100% of Class A Common Stock of ASFC and American Southwest Affiliated Companies, for shares of Class A Common Stock of Holdings. As a result of the change in shareholder ownership the Company changed from an August 31 fiscal year end to a December 31 calendar year end. The change will facilitate both financial and tax reporting in the future. 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 the Class A shareholder. 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 the Class A shareholder as dividends prior to such dissolution. NOTE 7 - SUBSEQUENT EVENTS On December 30, 1994, the Company sold its investment in Funding Agreements (see Notes 3 and 5) for cash. The Company acquired a 100% interest in two corporations which previously were owned by an affiliate. These two entities, Westam Mortgage Financial Corporation and American Southwest Financial Securities Corporation are both issuers of mortgage backed securities. 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. The Company's Articles of Incorporation limit the Company's business activities to those related to the issuance of Bonds. The Company last issued a Series of Bonds in July 1987 and redeemed all of its then outstanding Bonds in February 1994. Results of Operations The Company's net income for the three-month period ended November 30, 1994, increased compared to the three-month period ended November 30, 1993. Net income for the current period resulted primarily from interest income pursuant to the Funding Agreements acquired during the quarter. Net income for the 1993 period presented resulted primarily from other interest since the interest income pursuant to Funding Agreements was completely offset by the interest expense on the Bonds. Included in other interest income is interest earned on the Company's cash and cash equivalents and advances to affiliates. Income from these sources dropped slightly as a result of the Company's investment in the Funding Agreements, as well as the collection of receivables from affiliates. Other expenses are primarily professional fees resulting from normal business operations. Liquidity and Capital Resources At November 30, 1994, the Company had cash and cash equivalents of $16,646. The Company utilized its cash during the quarter to purchase its investment in Funding Agreements. 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: The Company filed reports on Form 8-K on the following date: 1. Form 8-K filed on December 9, 1994 reporting pursuant to Item 5 of the Form 8-K the change in fiscal year from August 31 to December 31. 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: January 12, 1995 /s/ Jeffrey A. Newman Jeffrey A. Newman Senior Vice President Date: January 12, 1995 /s/ Richard H. Hackett Richard H. Hackett Executive Vice President, Treasurer and Chief Financial and Accounting Officer