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 December 31, 1993
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 February 10, 1994:
Class A - 18,000 Class B - 36,200
AMERICAN SOUTHWEST FINANCIAL CORPORATION
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Balance Sheets - December 31, 1993 (Unaudited)
and June 30, 1993 3
Statements of Operations - For the three months
ended December 31, 1993 and 1992 (Unaudited) and
for the six months ended December 31, 1993 and
1992 (Unaudited) 5
Statements of Cash Flows - For the six months
ended December 31, 1993 and 1992 (Unaudited) 6
Notes to Financial Statements
(Unaudited) 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 22
2
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements.
AMERICAN SOUTHWEST FINANCIAL CORPORATION
BALANCE SHEETS
ASSETS
December 31 June 30
1993 1993
----------------- -----------------
(Unaudited)
Cash and cash equivalents $ 15,819 $ 3,989,969
Receivables pursuant to Funding
Agreements - Notes 2 and 3
Principal - (Net of issue discount of
$16,203,809 and $22,885,638, respectively) 577,821,183 904,618,248
Interest 13,413,126 20,100,416
Mortgage Securities - Notes 2 and 3
Principal - (Net of purchase discount of
$40,017,119 and $52,776,968, respectively) 872,070,422 1,146,695,390
Interest 9,863,831 12,683,480
Other receivables, primarily interest and prepaid
income taxes 646,860 431,685
Advances to affiliates 660,000
----------------- -----------------
Total Assets $ 1,473,831,241 $ 2,089,179,188
================= =================
The accompanying notes are an integral part of these financial statements.
3
AMERICAN SOUTHWEST FINANCIAL CORPORATION
BALANCE SHEETS (CONT'D)
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31 June 30
1993 1993
----------------- -----------------
(Unaudited)
Liabilities
Bonds Payable - Notes 2 and 3
Principal - (Net of issue discount of
$56,220,928 and $75,662,606, respectively) $ 1,441,965,752 $ 2,050,490,494
Interest 23,139,798 32,771,892
Accounts payable - Note 3 77,752 229,316
Payable to affiliates - Notes 3 and 4
Loan principal 1,100,000
Other 920,439 400,000
----------------- -----------------
Total Liabilities 1,467,203,741 2,083,891,702
----------------- -----------------
Shareholders' Equity
Class A Common Stock, $.10 par value; 100,000
shares authorized, 25,000 shares issued;
18,000 shares outstanding at December 31, 1993
and 19,000 shares outstanding at June 30, 1993 2,500 2,500
Class B Common Stock, $.10 par value; 50,000
shares authorized, 36,200 shares issued and
outstanding 3,620 3,620
Capital in excess of par value 99,480 99,480
Retained earnings 6,736,059 5,250,606
----------------- -----------------
6,841,659 5,356,206
Less: Treasury stock - at cost, Class A Common
Stock, 7,000 shares at December 31, 1993 and
6,000 shares at June 30, 1993 - Note 4 214,159 68,720
----------------- -----------------
Total Shareholders' Equity 6,627,500 5,287,486
----------------- -----------------
Total Liabilities and Shareholders' Equity $ 1,473,831,241 $ 2,089,179,188
================= =================
The accompanying notes are an integral part of these financial statements.
4
AMERICAN SOUTHWEST FINANCIAL CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
For the For the For the For the
three months three months six months six months
ended ended ended ended
December 31 December 31 December 31 December 31
1993 1992 1993 1992
------------- ------------ ------------- ------------
REVENUES
Interest
Pursuant to Funding
Agreements - Notes 2
and 3 $ 17,096,514 $ 32,529,696 $ 39,010,358 $ 68,440,393
Mortgage Securities-
Notes 2 and 3 24,227,736 34,266,887 51,765,988 69,632,398
Other 300,154 499,474 647,484 908,560
Management fees 18,257 19,307 35,703 39,610
Redemption income -
Note 3 874,728 57 2,627,328 856,708
------------- ------------ ------------- ------------
42,517,389 67,315,421 94,086,861 139,877,669
------------- ------------ ------------- ------------
COSTS AND EXPENSES
Interest on Bonds -
Note 3 41,144,004 66,655,033 90,523,962 137,855,028
Interest on other
obligations - Notes 2
and 3 93,288 114,555
Interest on loan from
affiliates - Note 3 29,573 43,467
Management fees - Note 4 775,000 525,000 975,000 625,000
Other expenses 49,738 391,885 84,979 1,483,867
------------- ------------ ------------- ------------
41,998,315 67,665,206 91,627,408 140,078,450
------------- ------------ ------------- ------------
INCOME (LOSS) BEFORE TAXES 519,074 (349,785) 2,459,453 (200,781)
Provision (Benefit)
for Income Taxes 205,000 (125,000) 974,000 (70,000)
------------- ------------ ------------- ------------
NET INCOME (LOSS) $ 314,074 $ (224,785) $ 1,485,453 $ (130,781)
============= ============ ============= ============
EARNINGS (LOSS) PER
SHARE - Note 5 $ 16.54 $ (10.22) $ 78.20 $ (5.95)
============= ============ ============= ============
Weighted average number of
Class A shares
outstanding 18,989 21,989 18,995 21,994
============= ============ ============= ============
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
six months six months
ended ended
December 31 December 31
1993 1992
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,485,453 $ (130,781)
---------------- -----------------
Adjustments to reconcile net income
to net cash provided by (used in) operating
activities:
Principal accretion on receivables
pursuant to Funding Agreements (10,128,006) (12,771,260)
Principal accretion on Mortgage
Securities (3,837,628) (5,273,536)
Principal accretion on Bonds Payable 13,965,634 18,044,796
Amortization of discount on
receivables pursuant to Funding Agreements (6,681,829) (6,761,005)
Amortization of discount on Mortgage
Securities (12,759,849) (10,015,483)
Amortization of discount on Bonds
Payable 19,441,678 16,776,488
Decrease in interest receivable
pursuant to Funding Agreements 6,687,290 6,931,249
Decrease in interest receivable on
Mortgage Securities 2,819,649 2,325,025
Increase in other receivables (215,176) (293,805)
Decrease (increase) in advances to
affiliates 660,000 (407,498)
Decrease in interest payable - Bonds (9,632,094) (9,250,736)
Decrease in interest payable on
other obligations (23,075)
Decrease in accounts payable (151,564) (2,537,903)
Increase (decrease) in payable
to affiliates 520,439 (302,387)
---------------- ----------------
Total Adjustments 688,544 (3,559,130)
---------------- ----------------
Net cash provided by (used in)
operating activities 2,173,997 (3,689,911)
---------------- ----------------
The accompanying notes are an integral part of these financial statements.
6
AMERICAN SOUTHWEST FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS (CONT'D)
(Unaudited)
For the For the
six months six months
ended ended
December 31 December 31
1993 1992
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Collection of receivables pursuant to
Funding Agreements 343,606,900 324,697,252
Principal payments on Mortgage
Securities 291,222,445 275,615,632
---------------- ----------------
Net cash provided by investing
activities 634,829,345 600,312,884
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal reduction of Bonds Payable (641,932,053) (599,975,287)
Reduction in other obligations (801,854)
Loan from affiliate 1,100,000
Acquisition of Class A Treasury Stock (145,439) (8,311)
Acquisition of Class B Treasury Stock (100)
---------------- ----------------
Net cash used in financing activities (640,977,492) (600,785,552)
---------------- ----------------
Net decrease in cash and cash
equivalents (3,974,150) (4,162,579)
Cash and cash equivalents at beginning of
period 3,989,969 4,203,830
---------------- ----------------
Cash and cash equivalents at end of period $ 15,819 $ 41,251
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for income taxes $ 1,195,000 $ 2,031,172
================ ================
Cash paid for interest $ 80,757,846 $ 130,474,508
================ ================
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.
7
AMERICAN SOUTHWEST FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
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 arrangement 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
8
and payment of administrative expenses on Bonds) are owned by persons other
than the Company.
NOTE 2 - MORTGAGE COLLATERAL
As a result of the elections by the Company to treat the arrangement 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 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
9
assigns 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.
Funds generated by principal and interest payments on the Mortgage
Collateral securing a Series of Bonds are held by the Trustee until the
payment dates for the Bonds of such Series. 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,
held in special reserve funds securing the 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.
NOTE 3 - BOND REDEMPTIONS
The indenture supplements (the "Series Supplements") relating to certain
Series of Bonds issued by the Company provide that the Company has the option
to redeem such Bonds in whole or in part when specific criteria are met. The
following table sets forth the redemptions that occurred during the six-month
period ended December 31, 1993:
Series Principal Portion
Date (Class) of Bonds Redeemed Description
-------- --------- ----------------- -------------------
07/01/93 N $ 16,369,983 Redemption in whole
07/15/93 2 274,000 Redemption in whole
07/15/93 7 774,000 Redemption in whole
08/01/93 D 8,062,895 Redemption in whole
09/01/93 F(4) 1,641,897 Redemption in part
09/01/93 42(D) 454,000 Redemption in part
09/20/93 F 650,708 Redemption in whole
09/23/93 52 20,969,000 Redemption in whole
09/27/93 45(B&C) 26,762,767 Redemption in part
09/30/93 54 3,336,000 Redemption in part
10/08/93 E 2,474,732 Redemption in whole
11/01/93 O 11,606,038 Redemption in whole
11/01/93 47 13,585,000 Redemption in whole
12/30/93 59 10,639,000 Redemption in whole
10
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
utilizes 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, 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 the approval of the
Company's Board of Directors, including a majority of the Directors who have
no financial or other interest in the matter. Included in accounts payable at
June 30, 1993 is a liability of $212,983 due to Finance Companies that
participated in the Series E partial redemptions. Expenses related to the
redemptions are included in other expenses. Although redemption opportunities
are favorable in the current interest rate environment, 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.
Additionally, during the six-month periods ended December 31, 1993 and
1992, the Company exercised its right (pursuant to the indenture and the
applicable Series Supplements) to effect the optional Class redemptions (known
as "clean-up calls") of the remaining outstanding amounts of certain Classes
of Bonds, utilizing corporate cash, funds owned by Finance Companies
("Escrowed Reserve Funds" - see Note 6) and funds borrowed from affiliates.
Pursuant to the clean-up calls, payments of principal and interest that would
otherwise be payable to the holders
11
of Bonds so redeemed are paid by the Trustee to the Company. To the extent
corporate cash was utilized to effect clean-up calls of Classes of Bonds, the
Company did not record any interest expense on the Bonds, and retained the
associated portion of interest income pursuant to Funding Agreements. To the
extent Escrowed Reserve Funds were utilized to effect the clean-up calls of
Classes of Bonds during the 1992 periods presented, the Company credited all
principal and interest (presented as interest on other obligations) to the
Escrowed Reserve Funds. In 1993, the Company borrowed funds from affiliates
to effect certain clean-up calls, paying interest to such affiliates at the
prime interest rate (6.00% at December 31, 1993). All interest was paid on
the loans from affiliates through December 31, 1993. Interest expense on
Bonds is less than interest income related to Funding Agreements and Mortgage
Securities due to these clean-up calls.
NOTE 4 - 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 Issuance and Administration Agreement") between
the Company and ASFS. The Mortgage 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 December 31, 1993 and June 30, 1993 are $775,000 and
$400,000, respectively, and are included in payable to affiliates. For each
Series of Bonds, ASFS also receives administration fees
12
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., an affiliate, own 100%
of the Class A Stock of American Southwest Affiliated Companies ("ASAC"),
parent company of ASFS and various other affiliates. Included in payable to
affiliates is $145,439 due to a subsidiary of ASAC for the acquisition of
1,000 shares of Class A Treasury Stock on December 31, 1993.
Related party transactions involving the Company and Escrowed Reserve
Funds are discussed in Notes 3 and 6.
NOTE 5 - 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 6 - ESCROWED RESERVE FUNDS
The Company maintains, and invests on behalf of participating Finance
Companies, Escrowed Reserve Funds held for current and future Bond
administration expenses. These funds are not included in the Company's assets
or liabilities on the accompanying balance sheets as of December 31, 1993 and
June 30, 1993.
The Company believes that the Escrowed Reserve Funds at December 31,
1993, if needed, as well as ongoing fees charged to participating Finance
Companies, are sufficient to meet the future Bond administration obligations,
13
including the obligation to ASFS under the Mortgage Securities Issuance and
Administration Agreement.
NOTE 7 - RECLASSIFICATIONS
Certain amounts previously reported for 1992 have been reclassified to
conform with the 1993 presentation.
NOTE 8 - MANAGEMENT REPRESENTATION
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly the financial
results for the interim periods presented.
14
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 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 ("Bond 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 arrangement by which the Collateral securing certain Series of Bonds
is held as REMICs for federal income tax purposes.
Results of Operations
The Company's net income for the three and six-month periods ended
December 31, 1993 resulted primarily from redemption income and other interest
income. During the three and six-month periods ended December 31, 1992, the
Company incurred one-time professional fees and other costs associated with a
litigation settlement disclosed in the Company's Annual Report on Form 10-K
for
15
June 30, 1993, and as a result incurred net losses for the 1992
periods. The increases in redemption income in the three and six-month
periods ended December 31, 1993 over redemption income for the same periods in
1992 were primarily due to an unprecedented volume of prepayments on the
Mortgage Collateral underlying the Company's Funding Agreements and Mortgage
Securities as homeowners nationwide refinanced their mortgages to lower their
payments. The increase in prepayments is a direct result of significantly
lower mortgage interest rates which have fallen to their lowest levels in over
20 years.
Prepayments due to lower interest rates generally affect the Company
positively since they may accelerate redemptions made by the Company as
provided in certain Series Supplements. See Note 3 of the Financial
Statements. Additionally, greater proceeds may result in a low interest rate
environment from the higher sales price received upon the sale of Mortgage
Collateral underlying each Series which has met the criteria for redemption.
During the six-month period ended December 31, 1993 the Company redeemed or
partially redeemed 13 Series totaling $117,600,020 of Bond principal, as
compared to three Series totaling $31,431,637 of Bond principal during the
same period in 1992. 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. The prepayment penalties are presented as
redemption income. Although redemption opportunities have been favorable in
the current interest rate environment, the benefits of redemptions are not
predictable due to a variety of factors including uncertainty of the time at
16
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.
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 Notes 2 and 3 of the
accompanying Financial Statements. The interest income and related interest
expense has declined for the three and six-month periods ended December 31,
1993 as compared to the three and six-month periods ended December 31, 1992
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 clean-up calls on certain
Classes of Bonds. These same factors caused the reductions in the amounts of
Collateral and Bonds outstanding.
The Company anticipates that interest income and related interest
expense from these sources will continue to decline due to the current low
interest rate environment which encourages prepayments of residential
mortgages with higher than current market interest rates, future redemptions,
clean-up 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) to a much
lesser degree, interest earned on the Company's cash and cash equivalents.
The Company's other interest income is primarily affected by changes in
prepayments on the Mortgage Collateral which result in an increase or decrease
in the amount of
17
monthly payments available for reinvestment by the Trustee prior to the
assumed deposit date. Such prepayments have caused a reduction in the
Collateral securing the Company's non-REMIC Bonds and, consequently, a
decrease in the amount of the monthly payments on the Collateral which may be
reinvested by the Trustee prior to the assumed deposit date, resulting in
reduced other interest income for the three and six-month periods ended
December 31, 1993 as compared to the three and six-month periods ended
December 31, 1992. In the long-term, other interest income attributable to
reinvested payments is expected to continue to decrease 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 cash and cash
equivalents, the interest rates payable by the Company on certain Classes of
Bonds issued by it, and the amounts ("Surplus") distributed to the Finance
Companies or to the holders of the residual interests in the REMICs 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.
18
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 payment of current Bond administration expenses. At the time
of a full redemption of a Series of Bonds, excess current Bond administration
funds are returned to the Finance Companies. This reduction of funds, and to
a lesser extent the low short-term interest rate environment, account for the
reduced management fee revenue for the three and six-month periods ended
December 31, 1993 as compared to the same periods in 1992. Current Bond
administration funds are a portion of the Escrowed Reserve Funds administered
and invested on behalf of the Finance Companies by the Company. See Note 6 of
the Financial Statements.
Primary expenditures of the Company consist of management fees paid to
ASFS 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 4 of the Financial Statements). Management fees increased in the three
and six-month periods ended December 31, 1993 as compared to the three and
six-month periods ended December 31, 1992. These variances are a function of
the timing of the issuance fees and Bond Administration fees earned by ASFS
from other issuing entities and the operating overhead of ASFS, both of which
directly affect the amount of management fees as explained in Note 4 of the
Financial Statements.
19
Professional fees, comprising substantially all of the Company's other
expenses, fluctuate depending on the activities of the Company. During the
three and six-month periods ended December 31, 1992, the Company incurred
increased professional fees, included in other expenses, related to a
litigation settlement disclosed in the Company's Annual Report on Form 10-K
for June 30, 1993.
Liquidity and Capital Resources
During the six-month period ended December 31, 1993 the Company utilized
cash generated by earnings, reductions in other receivables, reductions in
advances to affiliates and increases in payable to affiliates to invest in
clean-up calls as described in Note 3 of the Financial Statements. The
Company had $7,925,852 invested in clean-up calls at December 31, 1993.
During the six-month period ended December 31, 1992 the Company used cash from
operating activities to reduce accounts payable including $1,903,172 which was
paid for income taxes for the fiscal year ended June 30, 1992. At
December 31, 1992 the Company had $6,913,327 invested in clean-up calls.
The Company anticipates that funds to meet its current and future
operating needs will be provided from current cash and future operations.
Each Series of Bonds that has been issued is a non-recourse obligation
of the Company payable solely from the Collateral pledged to secure such
Series of Bonds. The Company is not obligated to pay the Bonds of a Series
from other than the proceeds of the Collateral securing such Series of Bonds.
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
20
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.
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 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: February 11, 1994 /s/ G. Thomas Eggebrecht
G. Thomas Eggebrecht
President and Chief Executive Officer
Date: February 11, 1994 /s/ Richard H. Hackett
Richard H. Hackett
Executive Vice President, Treasurer
and Chief Financial and Accounting Officer
23