UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
--------- --------
Commission File Number 0-27156
WESTERN FIDELITY FUNDING, INC.
(Exact name of small business issuer as specified in its charter)
Colorado 84-1148454
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
4704 Harlan Street, Suite 260
Denver, Colorado 80212
(Address of principal executive offices) (Zip Code)
(303) 477-8404
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
State the number of shares of outstanding of each of the issuer's classes
of common equity, as of the latest practical date: As of August 15, 1996, there
were 2,637,500 outstanding shares of common stock, par value $0.001 per share.
WESTERN FIDELITY FUNDING, INC.
FORM 10-QSB
INDEX
Page
PART I. Financial Information: No.
Consolidated Balance Sheets - June 30, 1996
and December 31, 1995 . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations - three and six months
ended June 30, 1996 and 1995 . . . . . . . . .. . . . . . 2
Consolidated Statements of Cash Flows - six months
ended June 30, 1996 and 1995 . . . . . . . . .. . . . . . 3
Notes to Financial Statements . . . . . . . . . . .. . . . . . . 4
Management's Discussion and Analysis or Plan of
Operation . . . . . . . . . . . . . . . . . . . . . . . . . 5
PART II. Other Information:
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
WESTERN FIDELITY FUNDING, INC. AND SUBSIDIARY
Consolidated Balance Sheets
June 30, December 31,
1996 1995
--------- ------------
Assets [Unaudited]
Cash ............................................. $ 79,206 $ 480,838
Restricted cash .................................. 993,349 891,065
Finance receivables - net ........................ 14,022,129 21,319,223
Vehicles held for sale ........................... 2,591,744 982,156
Other assets ..................................... 1,630,814 1,440,601
------------ ------------
19,317,242 25,113,883
============ ============
Liabilities and Stockholders' Equity
Accounts payable ................................. 417,456 3,147,430
Accrued liabilities .............................. 484,682 445,572
Note payable - related party ..................... 11,000 11,000
Notes payable - insurance companies .............. 10,486,221 10,769,160
Master notes ..................................... 3,605,705 4,157,993
Notes payable .................................... -- 1,772,946
------------ ------------
15,005,064 20,304,101
------------ ------------
Stockholders' Equity
Preferred stock; 2,000,000 shares authorized
Series A, 10% convertible, $.0001
par value; 400,000 shares designated,
328,540 shares issued and outstanding
(liquidation preference of $1,642,700) ......... 33 33
Common Stock, $.0001 par value; 10,000,000
shares authorized, 2,637,500 shares issued
and outstanding ................................ 264 264
Additional paid-in capital ....................... 5,983,119 5,983,119
Accumulated deficit .............................. (1,671,238) (1,173,634)
------------ ------------
4,312,178 4,809,782
------------ ------------
$19,317,242 $ 25,113,883
============ ============
1
WESTERN FIDELITY FUNDING, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
Three months ended Six months ended
June 30, June 30,
-------------------------- --------------------------
1996 1995 1996 1995
Revenue
Interest and fee income ........................ $ 771,437 $ 497,080 $ 1,950,328 $ 932,688
Gain on sales of retail contracts .............. 377,784 685,609 838,915 860,774
Other income ................................... 121,913 (3,419) 242,585 29,006
----------- ----------- ----------- -----------
Total revenues ............................. 1,271,134 1,179,270 3,031,828 1,822,468
----------- ----------- ----------- -----------
Expenses
Interest and loan commission expense ........... 482,656 459,681 1,155,972 816,589
Provision for credit losses .................... 366,042 42,790 406,199 114,408
Salaries and employee benefits ................. 464,118 230,538 965,373 448,299
Other expenses ................................. 474,660 187,705 919,753 447,433
----------- ----------- ---------- -----------
Total expenses ............................. 1,787,476 920,714 3,447,297 1,826,729
----------- ----------- ---------- -----------
Net income (loss) ................................ (516,342) 258,556 (415,469) (4,261)
Preferred stock dividends ........................ (41,073) -- (82,135) --
----------- ----------- ---------- -----------
Net income (loss) applicable to common shareholders $ (557,415) $ 258,556 $ (497,604) $ (4,261)
=========== =========== ========== ===========
Net income (loss) per common share ............... $ (0.21) $ 0.15 $ (0.19) $ --
=========== =========== ========== ===========
Weighted average common shares outstanding ....... 2,637,500 1,750,000 2,637,500 1,750,000
=========== =========== ========== ===========
2
WESTERN FIDELITY FUNDING, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
June 30,
------------------------
1996 1995
---- ----
Cash flows from operating activities
Net income (loss) .................................... $ (497,604) $ (4,261)
----------- -----------
Adjustments to reconcile net (loss) to net cash (used)
provided by operating activities
Depreciation and amortization ...................... 175,214 41,129
Provision for credit losses ........................ 406,199 114,408
Vehicles held for sale ............................. (1,609,588) (315,512)
Restricted cash .................................... (102,284) (295,116)
Prepaid expenses ................................... (53,008) (49,109)
Other assets ....................................... (137,204) (65,902)
Accounts payable ................................... (2,037,358) 601,756
Accrued liabilities ................................ 39,110 120,104
----------- -----------
(3,318,919) 151,758
----------- -----------
(3,816,523) 147,497
----------- -----------
Cash flows from investing activities
Contracts originated or purchased .................... (5,915,518) (6,663,204)
Contracts repaid ..................................... 2,103,144 1,083,300
Contracts sold ....................................... 10,163,067 2,743,698
Purchases of fixed assets ............................ (76,931) (13,712)
----------- -----------
6,273,762 (2,849,918)
----------- -----------
Cash flows from financing activities
Expenditures for loan acquisition fees ............... (250,697) (79,999)
Proceeds from notes payable - insurance companies .... 1,023,223 2,201,114
Payments on notes payable - insurance companies ...... (1,306,162) (277,289)
Proceeds from issuance of master notes ............... -- 1,572,185
Payments on master notes ............................. (552,289) (444,981)
Proceeds from notes payable .......................... -- 797,710
Payments on notes payable ............................ (1,772,946) (495,345)
----------- -----------
(2,858,871) 3,273,395
----------- -----------
Increase (decrease) in cash for the period ............ (401,632) 570,974
Beginning cash balance ................................ 480,838 46,120
----------- -----------
Ending cash balance ................................... $ 79,206 $ 617,094
=========== ===========
Cash paid for interest was $798,840 and $398,058 for the six months ended
June 30, 1996 and 1995, respectively.
3
WESTERN FIDELITY FUNDING, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - General
The interim financial statements included herein are unaudited and have
been prepared in accordance with generally accepted accounting principles for
interim financial reporting and Securities and Exchange Commission rules and
regulations. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the interim financial statements
reflect all adjustments (all of which are of a normal and recurring nature)
which are necessary in order to make the interim financial statements not
misleading. These financial statements should be read in conjunction with the
annual report of Western Fidelity Funding, Inc. ("the Company") on Form 10-KSB
for the year ended December 31, 1995 (the "1995 Form 10-KSB"). The results for
the three and six months ended June 30, 1996, are not necessarily indicative of
the results that may be expected for the year ended December 31, 1996.
Note 2 - Debt
In the first quarter of 1996, the Company entered into note arrangements
with an insurance company. The principal amount borrowed of $1,023,223 bears
interest at 9.85% per annum and is repayable in monthly installments over
approximately four years.
In June, 1996, the Company entered into an agreement with a financial
institution for a $20,000,000 secured credit facility. Under the terms of the
facility, monthly interest is paid at a floating rate equivalent to LIBOR plus
3.25% or a specified bank alternative base rate plus 1%. The facility is secured
by automobile retail installment contracts and will mature on June 23, 1997.
Borrowings under the facility were initiated in July, 1996.
In August, 1996, the Company obtained a $10,000,000 unsecured subordinated
loan from a financial institution. Under the terms of the loan, interest only is
paid quarterly during the first two years at a rate of 12% per annum, and
thereafter principal and interest is payable quarterly until maturity on July
31, 2001. After payment of commissions and fees, the Company realized
approximately $9,400,000 of net proceeds from the loan. The Company also issued
five year warrants to purchase 263,750 shares of common stock at $3.93 per share
to the placement agent in connection with the loan.
Also in August, 1996, the Company entered into an agreement with another
financial institution for a $5,000,000 secured credit facility. The facility
bears interest at the prime rate plus 3.75%. The facility is secured by
automobile retail installment contracts and will mature on August 12, 1997. The
facility has not yet been utilized.
4
Management's Discussion and Analysis or Plan of Operation
Liquidity and Capital Resources
The components of the Company's cash flow are summarized below:
Six months ended
June 30,
---------------------------
1996 1995
Cash (Used) Provided by Operating Activities ... $(3,816,523) $ 147,497
Cash Provided (Used) by Investing Activities ... 6,273,762 (2,849,918)
Cash (Used) Provided by Financing Activities ... (2,858,871) 3,273,395
----------- -----------
Net (Decrease) Increase in Cash ................ $( 401,632) $ 570,974
=========== ===========
Total cash used by operating activities was $(3,816,523) for the six months
ended June 30, 1996 as compared to $147,497 provided for the six months ended
June 30, 1995. The decreased cash flows from operating activities resulted
primarily from a decrease in accounts payable related to Contract purchases in
1996 as opposed to 1995 and an increase in vehicles held for sale in 1996.
Total cash provided by investing activities was $6,273,762 for the six
months ended June 30, 1996 as opposed to cash used of $(2,849,918) for the same
period in 1995. The cash flows from sales of Contracts increased by $8,672,802
from $2,743,698 for the six months ended June 30, 1995 to $10,163,067 for the
same period in 1996.
Total cash used by financing activities was $(2,858,871) for the three
months ended June 30, 1996. Cash of $3,273,395 was provided by financing
activities in the same period in 1995. The variance is due primarily to larger
principal payments made in accordance with terms of outstanding debt
arrangements and decreased debt originations in 1996.
As disclosed in Item 6, Management's Discussion and Analysis or Plan of
Operation in the Company's 1995 Form 10-KSB, the Company anticipated arranging
the availability of a $20 million credit facility with a financial institution
by year end, 1995. Because this credit facility was not obtained by year end,
the Company substantially decreased its Contract purchases in the first and
second quarter of 1996.
The Company has begun preparing to sell interests in securitized pools of
Contracts owned by the Company. Management expects the initial securitization
will occur in late 1996 or early 1997. In February, 1996, the Company entered
into an agreement with a financial institution giving the institution the first
right of refusal to purchase any Contracts offered for sale by the Company up to
a total of $50,000,000. Through August 15, 1996, the Company has sold
approximately $9,300,000 Contracts under this agreement.
In June, 1996, the Company entered into an agreement with a financial
institution for a $20,000,000 secured credit facility. Under the terms of the
facility, monthly interest is paid at a floating rate equivalent to LIBOR plus
3.25% or a specified bank alternative base rate plus 1%. The facility is secured
by automobile retail installment contracts and will mature on June 23, 1997.
Borrowings under the facility were initiated in July, 1996.
In August, 1996, the Company obtained a $10,000,000 unsecured subordinated
loan from a financial institution. Under the terms of the loan, interest only is
paid quarterly during the first two years at a rate of 12% per annum, and
thereafter principal and interest is payable quarterly until maturity on July
31, 2001. After payment of commissions and fees, the Company realized
approximately $9,400,000 of net proceeds from the loan. The Company also issued
five year warrants to purchase 263,750 shares of common stock at $3.93 per share
to the placement agent in connection with the loan.
5
Also in August, 1996, the Company entered into an agreement with another
financial institution for a $5,000,000 secured credit facility. The facility
bears interest at the prime rate plus 3.75%. The facility is secured by
automobile retail installment contracts and will mature on August 12, 1997. The
facility has not yet been utilized.
As a result of obtaining these financing agreements, the Company
anticipates that it will be able to return to the Contract purchase levels it
experienced in late 1995, and expand into additional geographic markets as well
as pursue additional dealer relationships in existing markets.
The Company continues to pursue additional sources of funds, including but
not limited to various forms of debt and equity. Failure to obtain additional
funding sources will materially restrict the Company's future business
activities.
Results of Operations
Net loss applicable to common shareholders for the six months ended June
30, 1996 was $(497,604) as compared to a loss of $(4,261) for the same period in
1995. Primary factors contributing to the variance were:
Interest Income. Interest income for the six months ended June 30, 1996,
increased by $1,017,640 to $1,950,328 from $932,688 for the same period ended in
1995. This increase is a result of the volume of Contract purchases by the
Company.
Interest and Loan Commission Expense. Interest and loan commission expense
increased from $816,589 during the six months ended June 30, 1995 to $1,155,972
during the same period in 1996. Interest expense consists of interest on capital
and operating loans. This increase resulted primarily from an increase in
borrowings. Such increased borrowings were used to fund the growth of the
Company's Contract portfolio and the Company's operations.
Provision for Credit Losses. The provision for credit losses increased
$291,791 from $114,408 for the six months ended June 30, 1995 to $406,199 in the
same period in 1996. This increase was due primarily to changes in estimates of
average loss per repossession and increases in the estimate of future defaults.
Gain on Sale. The gain on sale of Contracts decreased $21,859 from $860,774
in the six months ended June 30, 1995 to $838,915 in the same period in 1996.
The Company sold approximately $11,400,000 of Contracts in the six months ended
June 30, 1996 at 88 to 90% of the principal balance at the date of sale. In the
same period in 1995, the Company sold about $2,700,000 of Contracts at 96% of
their principal balance, plus interest over the life of the loans.
Employee Compensation. Employee compensation and related costs and benefits
increased for the six months ended June 30, 1996 by $517,074 to $965,373 from
$448,299 for the six months ended June 30, 1995. This increase was primarily due
to an increase in sales and operations staff necessary to handle growth and
anticipated future growth of the Company's operations.
Other Expenses. Other expenses increased $472,320 from $447,433 for the six
months ended June 30, 1995 to $919,753 for the six months ended June 30, 1996.
This increase was primarily due to increases in accounting and legal costs as
well as increases in rent and utilities as a result of additional office space
utilized by the Company and additional advertising costs associated with the
Company's used car retail sales facility.
Preferred Stock Dividends. Dividends in the amount of $82,135 on the
outstanding Series A Preferred Stock have been accrued in the six months ended
June 30, 1996. No preferred stock dividends were accrued in the six months ended
June 30, 1995, because the Series A Preferred Stock was not issued until July
and August, 1995.
6
The foregoing discussion contains certain forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
which are intended to be covered by the safe harbors created thereby. These
statements include the plans and objectives of management for future operations,
including plans and objectives relating to the Contract purchase levels and
market expansion anticipated and the general development of the business of the
Company. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. Assumptions relating
to the foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could be inaccurate and, therefore, there can be no assurance that
the forward-looking statements included in this Quarterly Report on Form 10-QSB
will prove to be accurate. In light of the significant uncertainties inherent in
the forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.
7
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WESTERN FIDELITY FUNDING, INC.
Date: August 19, 1996 By: /s/ Gene E. Osborn
-------------------------------
Gene E. Osborn, President,
Chief Executive Officer and Director
Date: August 19, 1996 By: /s/ Philip J. Bogema
--------------------------------
Philip J. Bogema
Chief Financial Officer
8