UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECITON 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 333-2856
American Equities Income Fund, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-3429295
(State of Incorporation) (IRS Employer Identification No.)
East 80 Route 4, Suite 202, Paramus, New Jersey 07652
(Address of principal executive offices) (zip code)
(201) 368-5900
(Registrant's telephone number, including area code)
Check 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
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court.
Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of September 30, 1999, the
Company had 1,000 shares of common stock, $1.00 par value, issued and
outstanding.
AMERICAN EQUITIES INCOME FUND, INC.
INDEX
Page(s)
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheet as at September 30, 1999 3
Statement of Cash flows as at September 30, 1999 4
Statement of Operations as at September 30, 1999 5
Statement of Stockholder's Equity as at September 30, 1999 6
Notes to Financial Statements 7-8
Item 2. Management's discussion and analysis of financial condition and
results of operations 9-10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
2
AMERICAN EQUITIES INCOME FUND, INC.
BALANCE SHEET
(UNAUDITED)
AS OF SEPTEMBER 30,
ASSETS 1999 1998
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Cash in bank $ 147,301 $ 1,071,007
Finance receivables, net 8,961,643 9,190,688
Note origination costs, net 1,063,888 1,595,239
Due from affiliates 679,013 884,114
Other assets 135,540 116,818
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Total Assets $ 10,987,385 $ 12,857,866
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LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Accounts payable and accrued expenses $ 13,034 $ 13,457
Notes payable 13,196,141 12,929,008
Due to affiliates 151,383 523,634
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13,360,558 13,466,099
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STOCKHOLDER'S EQUITY:
Common stock, $1.00 par value, authorized, issued
and outstanding 1000 shares 1,000 1,000
Additional paid in capital 39,000 39,000
Accumulated Deficit (2,413,173) (648,233)
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(2,373,173) (608,233)
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Total Liabilities and Stockholder's Equity $ 10,987,385 $ 12,857,866
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3
AMERICAN EQUITIES INCOME FUND, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (971,153) $ (262,353)
Adjustments to reconcile net loss to net cash used
by operating activities:
Amortization 414,857 349,487
Provision for credit losses 276,902 52,565
Interest expense capitalized into notes payable 201,814 167,007
Changes in:
Finance receivables (772,093) (3,076,253)
Other assets (135,540) (75,034)
Accounts payable and accrued expenses 10,198 (7,544)
Due to/from affiliates 667,702 (228,479)
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Net cash used by operating activities (307,313) (3,080,604)
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CASH FLOWS FROM INVESTING ACTIVITIES
Payment of note costs -- (431,680)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of notes payable -- 4,361,000
Escrow payable -- (411,000)
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Net cash provided by financing activities -- 3,950,000
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Net increase (decrease) in cash (307,313) 437,716
Cash - beginning of period 454,614 633,291
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Cash - end of period $ 147,301 $ 1,071,007
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4
AMERICAN EQUITIES INCOME FUND, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
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Financing income $ 1,784,509 $ 2,255,541
Management fees 891,819 1,127,770
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Net financing income 892,690 1,127,771
General and administrative expenses 5,466 4,590
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Income before interest, amortization, and provision
for credit losses 887,224 1,123,181
Interest expense 1,176,175 972,821
Amortization 414,857 349,487
Provision for credit losses 276,902 52,565
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Net loss before other income (980,710) (251,692)
Other income 9,557 (10,661)
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Net loss $ (971,153) $ (262,353)
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AMERICAN EQUITIES INCOME FUND, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
(UNAUDITED)
Additional Net
Number Paid Profit/
of shares Value In Capital (Loss) Total
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Date of incorporation 0 $ 0 $ 0 $ 0 $ 0
(March 11, 1996)
Shares issued for cash
March 22, 1996 1,000 $ 1,000 $ 39,000 $ 0 $ 40,000
Accumulated profits
as of 12/31/98 $ (1,442,020) $ (1,442,020)
Net loss for the nine months
ended 9/30/99 $ (971,153) $ (971,153)
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1,000 $ 1,000 $ 39,000 $ (2,413,173) $ (2,373,173)
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AMERICAN EQUITIES INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - FORMATION AND OPERATION OF THE COMPANY
American Equities Income Fund, Inc. (the "Company") was incorporated under the
laws of the State of Delaware on March 11, 1996.
The Company is in the business of factoring accounts receivable (the
"Receivables") and providing other financial services to client companies.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
Accounting records of the Company and financial statements are maintained and
prepared on the accrual basis of accounting.
YEAR END
The Company's year end for financial reporting and tax purposes is December 31.
CASH EQUIVALENTS
For financial statement purposes, with respect to the Statement of Cash Flows,
cash equivalents include time deposits and all highly liquid investments with
original maturities of three months or less. The amount included on the
Company's Statement of Cash Flows is comprised exclusively of cash.
NOTE C - STOCKHOLDERS' EQUITY
The Company is authorized to issue 1,000 shares of common stock at $1.00 par
value. On September 30, 1999, there were 1,000 shares of common stock issued and
outstanding.
The holders of the common stock are entitled to one vote per share on all
matters to be voted on by shareholders.
NOTE D - SECURED NOTE OFFERING
On August 26, 1996, the Company commenced offering subscriptions for up to $15
million aggregate principal amount of its 12% Notes in denominations of $1,000
each, or any integral multiple thereof. The Notes bear simple interest at 12%
per annum, payable interest only monthly, annually, or upon maturity, at the
option of the investor, with all principal and accrued interest, if any, due on
September 30, 2006. Accrued but unpaid interest will be compounded monthly at a
rate of 12% per annum. The Notes may be accelerated by the Note Holders on the
first day of the fifth, sixth, seventh, eighth, and ninth years upon six months
written notice to the Company. The Notes will be secured by the Receivables
acquired with the proceeds of the offering or funds obtained from the repayment
of such Receivables or any after acquired Receivables. The Notes are prepayable
in whole or in part at any time without premium or penalty.
The offering terminated on August 26, 1998. An aggregate of $ 13,196,141
principal amount of Notes, including reinvested interest, were issued as of
September 30, 1999.
NOTE E - RELATED PARTY TRANSACTIONS
The Company and American Equities Group, Inc. will share the fees charged, 50%
to the Company, and 50% to American Equities Group, Inc. American Equities
Group, Inc. will pay overhead expenses including
7
salaries of the Company from its portion of the fees as relates to the ongoing
business of the Company, except for legal, accounting, filing fees, taxes, and
other administrative expenses directly related to the Company.
NOTE F - FINANCED RECEIVABLES
The Company's policy is to record the accounts receivable it purchases from
borrowers at the face amount, less the portion held back by the Company as a
provision for credit losses.
At September 30, 1999, the financed receivables are as follows:
Face Amount $ 9,918,661
Less: Reserve (957,018)
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Finance receivables, net $ 8,961,643
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8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Financial Statements and Notes appearing elsewhere in this Form 10-QSB.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain forward-looking statements as defined in
the Private Securities Litigation Reform Act of 1995. Such statements relating
to future events and financial performance are forward-looking statements that
involve risks and uncertainties, detailed from time-to-time in the Company's
various Securities and Exchange Commission filings. No assurance can be given
that any such matters will be realized.
For the nine months ended September 30, 1999 compared to the nine
months ended September 30, 1998, the Results of Operations for American Equities
Income Fund, Inc (AEIF or "the Company") are:
Net Financing Income decreased over the prior year, to $892,690 or
by 20.8%, over the $1,127,771 earned for the nine months ended September 30,
1998. This represents income earned from financing activities net of a 50%
management fee paid to the parent company for overhead and operational
expenses. General and Administrative Expenses paid directly by the Company
were $5,466 versus $4,590 for the first nine months of 1998. Income before
interest, amortization and provision for credit losses was $887,224, an
increase of 21.0%, over $1,123,181 for the same period in 1998. While some
additional capital was available due to increased borrowings from promissory
notes, this increase was offset by the unavailability of certain working
capital for financing activity. At the end of 1998, a financing client filed
a voluntary Chapter 11 bankruptcy petition, leaving certain AEIF funds
unavailable for reinvestment activity. AEIF has established a provision for
credit losses that is an estimate of financial exposure in the situation. It
should be noted that the Company has taken an active role in the orderly
liquidation of the assets in order to preserve the maximum value of the
collateral. If additional funds are realized, their recovery will have a
positive impact on AEIF's results of operations in the period that such
recovery takes place. If the funds realized are less than the current
projected amount, a sum greater than the current provision will be written
off and additional losses will be recorded in the time period in which they
occur.
Interest expense to investors was $1,176,175, an increase of
$203,354 or 20.9% over 1998 levels of $972,821. This increase is the result
of noteholder obligations for investments received until the close of the
program during third quarter 1998. A portion of the interest expense,
$201,914 or 17.2%, is considered reinvested interest where investors selected
the option to have their interest payment retained until the maturity of the
instrument. Non-cash charges of $414,857 for Amortization and $276,902 as a
Provision for Credit Losses and Other Income of $9,557 totalled $682,202, an
increase of $269,498 or 65.3% over the 1998 level of $412,713. The Company
reported a Net Loss of $971,153, an increase of $708,800 over the loss for
the first nine months of 1998, of $262,353.
Liquidity and Capital Resources
The Company's principal sources of liquidity have been through the public
offering of its 12% promissory notes and through internally-generated funds
provided through the financing operation. It is anticipated that funds from
operations will provide the Company with sufficient liquidity to meet its debt
service and operating requirements for at least the next twelve months.
Losses are projected during the early years of the AEIF investment program
because the cost of raising capital is paid at the beginning of a program,
leaving a reduced base of working capital yet incurring investor payments based
on the full investment amount. In addition, the impact of an accelerated
amortization schedule to parallel the option of an accelerated maturity date
records this expense during the early years instead of spreading it over the
life of a program. The projection of a deficit in the initial years has been
anticipated and Company's projections include the recovery of the cost of
raising the capital during the term of the program.
9
Year 2000 Compliance
AEIF is a wholly-owned subsidiary of American Equities Group, Inc. (AEG)
which has established an overall plan to address the Y2K compliance issue
within the operations of the organization. The Y2K Compliance Plan focuses on
several strategic concerns related to Y2K compliance: the ability to deliver
services to customers and investors, the corporate legal liabilities, and
concerns related to computer or mechanical systems failure within the
organization. Appropriate resources have been applied to the project
including the allocation of staff time and the hiring of an outside systems
consultant. Progress is reported regularly to the senior management of the
company.
AEG uses computerized technology to process information throughout the company.
The company uses computerized record-keeping of accounts receivable invoices,
client account reporting and collections; financing delivered through an on-line
banking system interface; investor distributions generated from a computerized
system; and general office and accounting systems. In addition to an overall
strategic focus, AEG has implemented a Y2K Compliance Project with the goal to
assure uninterrupted service delivery to AEG's clients and investors.
The Y2K Compliance Project is being managed within the Technology Task Force.
This Task Force is staffed with members from all major departments and includes
the Manager of Information Technology and the company's General Counsel. Two
additional members have joined the Y2K Project: the Chief Financial Officer and
an outside systems consultant who is familiar with both AEG systems and Y2K
compliance issues. The committee meets regularly, at least monthly, with interim
written communication, to assess and limit the impact of potential Y2K failures
and to prepare for the consequences of the internal and external failures that
could occur. The outside consultant retained by the company is writing the Y2K
Compliance Plan document based on overall and company-specific issues.
The Y2K Compliance Project for all AEG companies recognizes that verification of
compliance must be addressed on several levels: the readiness of computer
hardware systems, software systems and equipment containing embedded chips, the
impact of third-parties related to vendors and clients, the legal issues, the
Company's financial exposure and contingency plans for failure. All systems
development and purchases within the last year have been evaluated for Y2K
compliance. Y2K indemnification and protection clauses are incorporated into
contracts for new clients and client renewals. Company exposure has been
risk-assessed and ranked, and significant risks with important business partners
may require additional verification. The Y2K Compliance Plan includes a
timetable for implementation and an estimate of any associated costs. Issues
related to financial exposure will also be addressed. A test of all systems,
both partition testing and fully integrated testing, has been completed
successfully. Other IT projects have not been delayed because additional
resources and staff hours have been assigned to address the issue.
American Equities Group has committed additional financial resources to
implement the Y2K Compliance Project. A separate budget, in addition to the
regular operating budget, has been identified to implement the Plan. Incremental
amounts include the cost of the outside systems consultant and an amount for the
verification of readiness for significant AEG business partners. At this time,
the incremental cost is estimated to be $25,000, with the cost will be born by
the parent company, American Equities Group, Inc.
AEIF and all AEG companies bear some risk related to the unreadiness of third
parties which would expose the Company to the potential for loss and impairment
of business processes and activities. The Y2K Compliance Project has developed a
business contingency plan to address the possibility of the failure of systems
or processes and will continue to assess the level and magnitude of these risks.
10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A financing client owes AEIF $3,221,149 as of September 30, 1999.
The client filed for protection under Chapter 11 in November 1998 and a
Trustee was appointed to oversee the sale of the assets and continuation of
the client's business. An agreed Final Secured Financing Order was entered
by the Bankruptcy Courts on January 7, 1999 that decreed, among other things,
that the American Equities Group (AEG) companies will allow the use of their
cash collateral and provide debtor-in-possession financing to enable the
Trustee to sell the client's plant and equipment and to outsource the
client's brands. AEG has a first priority security interest in the client's
inventory, accounts receivable and brands, a secondary lien on the client's
equipment and a third priority lien on the client's real estate.
Additionally, AEG has a personal guaranty from a principal of the client and
certain of his affiliates and a stock pledge of a minority interest in
another company as collateral. AEG has taken an active role in the orderly
liquidation of the assets of the company in order to preserve the maximum
value of the collateral. AEIF has established a provision for credit losses
that is an estimate of financial exposure in the situation. If additional
funds are realized, their recovery will have a positive impact on operations
in the year that such recovery takes place. If the funds realized are less
than the current projected amount, a sum greater than the current provision
will be writen off and additional losses will be recorded.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None.
(b) REPORTS ON FORM 8-K
None.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly cause this to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: December 27, 1999 By: s/s DAVID S. GOLDBERG
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David S. Goldberg
Chief Executive Officer