2
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the quarterly period ended December 31, 1997
Transition report under Section 13 or 15(d) of the Exchange Act.
For the transition period from ___________ to ___________
FIRST NATIONS FINANCIAL SERVICES COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
333-1612 76-0481583
(Commission File Number) (IRS Employer Identification Number)
C/O WILLIAM T. JULIANO
CHRISTIANA EXECUTIVE CAMPUS
220 CONTINENTAL DRIVE, SUITE 310
NEWARK, DELAWARE 19713-4314
(Address of principal executive offices)
(800) 790-2474
(Registrant's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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.
X Yes No
-
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: February 13, 1998 -- 1,000
shares of Common Stock
Transitional Small Business Disclosure Format (check one):
Yes X No
-
FORM 10-QSB
FIRST NATIONS FINANCIAL SERVICES COMPANY
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Accountant's Compilation Report
- ---------------------------------
To the Board of Directors
First Nations Financial Services Company
Newark, Delaware
We have compiled the accompanying balance sheet of First Nations Financial
Services Company (a development stage company) as of December 31, 1997, and
the related statements of operations, changes in stockholders' equity and cash
flows for the period October 16, 1995 (Date of Inception) through December 31,
1997 and the three months ended December 31, 1997 and 1996, in accordance with
Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. We have not audited or
reviewed the accompanying financial statements and, accordingly, do not
express an opinion or any other form of assurance on them.
As more fully discussed in the notes to the financial statements, the Company
has significant transactions with a shareholder and related interests.
/s/HARPER & PEARSON COMPANY
Houston, Texas
February 4, 1998
See accountants' compilation report and accompanying notes.
- -----------------------------------------------------------------
3
FIRST NATIONS FINANCIAL SERVICES COMPANY
----------------------------------------
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
- ---------------------------------------------------------------------------
CURRENT ASSETS
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,430
Interest receivable, related parties. . . . . . . . . . . . . . . . . . . 50,978
Due from related party. . . . . . . . . . . . . . . . . . . . . . . . . . 4,934
-----------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . 65,342
-----------
PROPERTY AND EQUIPMENT
Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . 29,837
Computer equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,017
-----------
56,854
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . (9,138)
-----------
47,716
-----------
OTHER ASSETS
Notes receivable, related parties . . . . . . . . . . . . . . . . . . . . 834,490
Security deposit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,898
Trademarks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,196
Organization costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . 169,006
-----------
1,011,590
-----------
$1,124,648
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------
CURRENT LIABILITIES
Note payable, shareholder . . . . . . . . . . . . . . . . . . . . . . . . $ 3,000
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,715
Accrued payroll taxes payable . . . . . . . . . . . . . . . . . . . . . . 1,026
-----------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . 37,741
-----------
NOTE PAYABLE, RELATED PARTY . . . . . . . . . . . . . . . . . . . . . . . . 55,000
-----------
CERTIFICATE OF DEPOSIT. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,697
-----------
COMMITMENT
SHAREHOLDERS' EQUITY
6% Series A, cumulative, nonvoting, preferred shares, $.001 par value,
1,000 shares authorized, issued and outstanding; liquidation preference
of $1,000,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Common stock, $.001 par value, 2,000 shares authorized, and 1,000
shares issued and outstanding . . . . . . . . . . . . . . . . . . . . . 1
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . 1,132,178
Deficit accumulated during the development stage. . . . . . . . . . . . . (102,970)
-----------
1,029,210
-----------
$1,124,648
===========
See accountants' compilation report and accompanying notes.
4
FIRST NATIONS FINANCIAL SERVICES COMPANY
----------------------------------------
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED DECEMBER 31, 1997 AND 1996
Inception to
3 Months ended December 31, December 31,
- -----------------------------------
1997 1996 1997
-------------- ------------ ------------
INTEREST INCOME,
RELATED PARTIES . . . . . . . . . $ 27,885 $ 9,603 $ 186,262
-------------- ------------ ------------
EXPENSES
Advertising. . . . . . . . . . . -0- -0- 44,625
Bank charges . . . . . . . . . . 176 78 1,557
Depreciation . . . . . . . . . . 3,427 -0- 9,138
Equipment rental . . . . . . . . 892 -0- 3,402
Insurance expense. . . . . . . . -0- -0- 1,822
Interest expense, related party. -0- -0- 10,170
Legal fees . . . . . . . . . . . 3,948 -0- 9,722
License and fees . . . . . . . . 455 -0- 3,481
Miscellaneous. . . . . . . . . . -0- -0- 560
Payroll expense. . . . . . . . . -0- -0- 10,662
Supplies . . . . . . . . . . . . 877 534 4,016
Payroll taxes. . . . . . . . . . -0- -0- 1,178
Postage. . . . . . . . . . . . . 3,073 1,368 15,132
Printing . . . . . . . . . . . . 4,910 -0- 20,988
Professional fees. . . . . . . . 7,045 -0- 18,041
Recruitment. . . . . . . . . . . -0- -0- 2,096
Rent, related party. . . . . . . -0- 15,000 107,965
Rent, third party. . . . . . . . 6,161 -0- 18,391
Telephone expense. . . . . . . . 888 19 4,863
Travel expense . . . . . . . . . -0- 145 1,423
-------------- ------------ ------------
31,852 17,144 289,232
-------------- ------------ ------------
NET LOSS. . . . . . . . . . . . . . $ (3,967) $ (7,541) $ (102,970)
============== ============ ============
LOSS PER COMMON SHARE . . . . . . . $ (3.97) $ (7.54) $ (102.97)
============== ============ ============
SHARES USED IN COMPUTING
LOSS PER COMMON SHARE . . . . . . 1,000 1,000 1,000
============== ============ ============
See accountants' compilation report and accompanying notes.
5
FIRST NATIONS FINANCIAL SERVICES COMPANY
----------------------------------------
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIODS OCTOBER 16, 1995 (INCEPTION) THROUGH DECEMBER 31, 1997
Additional
Preferred Common Paid-In Retained
Stock Stock Capital (Deficit) Total
----------- -------- ---------- ----------- -----------
SALE OF STOCK. . . . $ 1 $ 1 $1,049,998 $ -0- $1,050,000
NET LOSS . . . . . . -0- -0- -0- (35,443) (35,443)
----------- -------- ---------- ----------- -----------
BALANCE -
OCTOBER 8, 1996. . 1 1 1,049,998 (35,443) 1,014,557
CONTRIBUTION OF
ADDITIONAL PAID-IN
CAPITAL. . . . . . -0- -0- 79,180 -0- 79,180
NET LOSS . . . . . . -0- -0- -0- (63,560) (63,560)
----------- -------- ---------- ----------- -----------
BALANCE -
SEPTEMBER 30, 1997 1 1 1,129,178 (99,003) 1,030,177
CONTRIBUTION OF
ADDITIONAL PAID-IN
CAPITAL. . . . . . -0- -0- 3,000 -0- 3,000
NET LOSS . . . . . . -0- -0- -0- (3,967) (3,967)
----------- -------- ---------- ----------- -----------
BALANCE -
DECEMBER 31, 1997. $ 1 $ 1 $1,132,178 $ (102,970) $1,029,210
=========== ======== ========== =========== ===========
See accountants' compilation report and accompanying notes.
6
FIRST NATIONS FINANCIAL SERVICES COMPANY
----------------------------------------
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED DECEMBER 31, 1997 AND 1996
Inception to
3 Months Ended December 31, December 31,
- ----------------------------------------------------
1997 1996 1997
-------------- --------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . $ (3,967) $ (7,541) $ (102,970)
-------------- --------------- ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . 3,427 -0- 9,138
Change in operating assets and liabilities:
Interest receivable, related party . . . . . . (23,036) (9,603) (50,978)
Accounts payable . . . . . . . . . . . . . . . (2,385) -0- 28,715
Accrued payroll taxes payable. . . . . . . . . -0- -0- 1,026
Interest payable, shareholder. . . . . . . . . -0- (10,000) -0-
-------------- --------------- ------------
Total Adjustments. . . . . . . . . . . . . . . . (21,994) (19,603) (12,099)
-------------- --------------- ------------
Net Cash Used by Operating Activities. . . . . . (25,961) (27,144) (115,069)
-------------- --------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment on behalf of related party . . . . . . . . (4,934) -0- (4,934)
Purchase of furniture, fixtures and equipment. . . (4,873) -0- (29,837)
Purchase of computer equipment . . . . . . . . . . (1,672) -0- (27,017)
Payment for security deposit . . . . . . . . . . . -0- -0- (2,898)
Payments for trademark . . . . . . . . . . . . . . -0- -0- (5,196)
Payments for organization costs. . . . . . . . . . -0- (23,681) (169,006)
Sale of mortgage note receivable, related party. . -0- 1,000,000 1,000,000
Issuance of notes receivable, related parties. . . -0- (540,000) (858,813)
Collection of notes receivable, related parties. . 24,323 -0- 24,323
-------------- --------------- ------------
Net Cash Provided (Used) by Investing Activities 12,844 436,319 (73,378)
-------------- --------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable. . . . . . . . . . . . -0- -0- 60,000
Proceeds from note payable, shareholder. . . . . . -0- -0- 90,503
Payment of note payable, shareholder . . . . . . . -0- (87,503) (87,503)
Proceeds from sale of certificate of deposit . . . 2,697 -0- 2,697
Issuance of stock. . . . . . . . . . . . . . . . . -0- -0- 50,000
Contribution of additional paid-in capital . . . . 3,000 (22,333) 82,180
-------------- --------------- ------------
Net Cash Provided (Used) by Financing Activities 5,697 (109,836) 197,877
-------------- --------------- ------------
NET (DECREASE) INCREASE IN CASH. . . . . . . . . . . (7,420) (299,339) 9,430
CASH AT BEGINNING OF PERIOD. . . . . . . . . . . . . 16,850 1,930 -0-
-------------- --------------- ------------
CASH AT END OF PERIOD. . . . . . . . . . . . . . . . $ 9,430 $ 301,269 $ 9,430
============== =============== ============
NONCASH INVESTING AND FINANCING ACTIVITIES
Note receivable obtained from related
party for additional paid-in capital . . . . . . $ -0- $ -0- $ 1,000,000
============== =============== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest . . . . . . . . . . . . . . $ -0- $ -0- $ 10,170
============== =============== ============
See accountants' compilation report.
10
See accountants' compilation report.
7
FIRST NATIONS FINANCIAL SERVICES COMPANY
----------------------------------------
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE A BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of Operations - First Nations Financial Services Company (the Company)
- ---------------------
is a Delaware corporation with its principal objective to become a participant
in the financial services industry. The Company believes that its growth will
be sustained by its commitment to servicing a segment of the market, which is
not adequately serviced by commercial banks. The Company has only recently
completed its initial capitalization and has not commenced significant
operations. Because the Company has only limited equity capital with which to
operate, the Company will not commence significant operations until the
Company's offer to sell a substantial amount of the $50,000,000 in
subordinated debt is successful.
Basis of Presentation - The interim financial data is unaudited; however, in
- -----------------------
the opinion of management, the interim data includes all adjustments,
consisting only of normal recurring adjustments necessary for a fair statement
of the results for the interim periods. The financial statements included
herein have been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission. 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, although the Company believes that the
disclosures included herein are adequate to make the information presented not
misleading.
The organization and business of the Company, accounting policies followed by
the Company and other information are contained in the notes to the Company's
financial statements filed as part of the Company's Registration Statement
Form SB-2 and as reflected in the Company's Form 10-KSB at December 31, 1997.
This report should be read in conjunction with such statements.
Estimates - The preparation of financial statements in conformity with
- ---------
generally accepted accounting principles requires management to make estimates
- -------
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk - At December 31, 1997, all of the Company's
- -------------------------------
secured notes receivable ($834,490) are from companies related by common
- ----
ownership and controlled by Mr. Juliano. (See Note C)
- ----
Fair Value of Financial Instruments - Management is of the opinion that the
- --------------------------------------
carrying value of all financial instruments is substantially equal to fair
- --
value at December 31, 1997.
- --
Property and Equipment - Property and equipment are stated at cost.
- ------------------------
Depreciation is calculated considering the estimated useful lives of the
- ----------
respective assets on the straight-line method. Property and equipment are
- -----
depreciated over a three to five year period.
- ----
Expenditures for additions are capitalized and expenditures for maintenance
and repairs are charged to earnings as incurred.
When properties are retired or otherwise disposed of, the cost thereof and the
applicable accumulated depreciation and amortization are removed from the
respective accounts and the resulting gain or loss is reflected in earnings.
Organization Costs - Organization costs include filing fees with the
- -------------------
Securities and Exchange Commission ($17,991), the National Association of
- ---------
Securities Dealers, Inc. ($5,750), Blue Sky registration fees in several
- ----
states ($15,475), legal ($94,102), accounting ($23,508) and other costs
- ----
($12,180) associated with the organization and subordinated debt offering of
- ----
the Company.
Of these costs, approximately $106,000 will be amortized over the average life
of the subordinated debt, if any, discussed in Note E. Remaining capitalized
costs will be amortized over a five year period.
Income Taxes - Since inception, the Company has incurred net operating losses
- -------------
amounting to $102,970. These net operating loss carryforwards will expire
through the year 2012, if not previously utilized.
No tax benefit for the loss carryforwards has been reported in the financial
statements. Accordingly, the tax benefit of approximately $35,000 which may
result from the utilization of the loss carryforward has been offset by a
valuation allowance of the same amount.
Statement of Cash Flows - For purposes of reporting cash flows, cash and cash
- ------------------------
equivalents include only cash on hand and in demand deposit accounts with a
bank.
Loss Per Common Share - Loss per common share is computed using the weighted
- -----------------------
average number of shares of common stock outstanding during the period.
NOTE B MORTGAGE NOTE RECEIVABLE, RELATED PARTY
The 12% $1,000,000 mortgage note receivable assigned to the Company by Mr.
William T. Juliano in exchange for 1,000 shares of preferred stock was
receivable from Plaza Investment Corporation (Plaza), a New Jersey
corporation, and was payable to Mr. William T. Juliano. Mr. Juliano is an
officer and stockholder of both the Company and Plaza. Mr. Juliano acquired
the mortgage note during December 1992 in exchange for $1,000,000 cash
advanced to the then unrelated company, Plaza.
On October 8, 1996, the Company sold, for $1,000,000 cash, the $1,000,000 note
receivable from Plaza Investment Corporation to Mr. Juliano.
NOTE C NOTES RECEIVABLE, RELATED PARTIES
The Company entered into unsecured demand notes receivable with balances
totaling $834,490 at December 31, 1997, with entities related to Mr. Juliano
by common ownership. These notes bear interest at 12.75% per annum. The
proceeds of these notes were used to fund and refinance commercial
construction projects in New Jersey and Delaware. Because it is not
anticipated that these notes will be called or paid within the next fiscal
year, they have been classified as long-term at December 31, 1997.
NOTE D NOTE PAYABLE, SHAREHOLDER
Note payable, shareholder amounting to $87,503 plus accrued interest of
$10,000 was fully paid on October 9, 1996. During fiscal 1997, an additional
$3,000 was loaned to the Company.
NOTE E NOTES PAYABLE
Notes payable at December 31, 1997 consist of the following:
Note payable to individual, due June 23, 1998,
interest at 8.5%, unsecured $ 1,000
Note payable to individual, due January 11, 1998,
interest at 7.15%, unsecured 1,000
Note payable to individual, due July 7, 1998,
interest at 8.5%, unsecured 2,000
Note payable to individual, due July 8, 1998,
interest at 8.5%, unsecured 1,000
---------
$ 5,000
=========
The Company also has a long-term note payable to Mrs. Juliano in the amount of
$55,000 with interest at 8.75% and principal due September 22, 1999. This note
is unsecured.
The Company intends to offer for sale up to $50,000,000 in unsecured senior
subordinated notes with varying interest rates on a best-efforts basis with
maturities ranging from three months to ten years. The notes may be extended,
at the option of the Company, for a term equal to the original term unless the
holder requests repayment within seven days prior to the original maturity
date. There is no minimum amount of the notes that must be sold. The Company
may pay commissions of up to an approximate amount of 6% of the principal
amount of each note sold plus any out-of-pocket expenses incurred in
connection with the offer and sale of the notes up to 1% of the principal
amount of each note sold.
The Company will utilize the net proceeds from the sale of the notes for its
general corporate purposes. Corporate general purposes may include financing
of future growth, origination or acquisition of a business loan portfolio,
origination or acquisition of loans secured by equipment, such as automobiles,
trucks, golf carts, boats and other vehicles; origination or acquisition of a
portfolio of home equity loans as well as other finance related activities;
and possible future acquisition of related businesses or assets. The precise
amounts and timing of the application of such proceeds will depend upon many
factors, including, but not limited to, the amount of any such proceeds,
actual funding requirements and the availability of other sources of funding.
Until such time as the proceeds are utilized, they may be invested in short
and long-term investments, including treasury bills, commercial paper,
certificates of deposit, securities issued by U.S. government agencies, money
market funds and repurchase agreements, depending on the Company's cash flow
requirements. The Company's investment policies permit significant flexibility
as to the types of such investments that may be made by the Company. The
Company may also maintain daily unsettled balances with certain
broker-dealers. While the Company may from time to time consider potential
acquisitions, the Company as of the date of this report had no commitments or
agreements with respect to any material acquisitions.
The Company formerly leased, from a company owned by Mr. William T. Juliano,
office space for its executive offices as well as furniture, fixtures and
equipment at 560 Fellowship Road, Mount Laurel, New Jersey 08054. Effective
October 1, 1996, the lease commitment was renegotiated for a period commencing
on that date and expiring January 31, 1998 at a minimum annual rental of
$60,000. This agreement was not the result of arm's length negotiation. Prior
to its cancellation, the aggregate lease commitment for the remaining lease
term was approximately $65,000. During fiscal 1997, this lease was cancelled
with the understanding that Mr. Juliano would provide substitute space, and
furniture, fixtures and equipment for the Company without cost until cash flow
from operations is adequate to cover these costs. Prior to the cancellation of
this lease agreement, the Company paid rent amounting to $17,965 to this
related entity.
On April 15, 1997, the Company entered into a twelve month lease agreement
with a third party for 1,333 square feet of office space in Newark, Delaware.
Rent expense for the period ended December 31, 1997 associated with this lease
amounted to $6,161. Monthly rental charges are approximately $2,000.
The Company is currently involved in trademark opposition litigation. This
opposition litigation is an administrative proceeding concerning the Company's
service mark and federal registration thereof. Management intends to
vigorously defend this opposition litigation.
15
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
Certain information contained in this Quarterly Report on Form 10-QSB
(particularly that contained in this Part I., Item 2. "Management's Discussion
and Analysis or Plan of Operation") may be deemed to be forward-looking
statements within the meaning of Section 21E of Securities Exchange Act of
1934 and is subject to the "Safe Harbor" provisions of that section. This
information includes, without limitation, statements concerning future
revenues, future earnings, future costs, future margins and future expenses;
anticipated interest rates and yields, releases and technological advances;
the future mix of business and future asset recoveries; and future demand,
future industry conditions, future capital expenditures, and future financial
condition. These statements are based on current expectations and involve a
number of risks and uncertainties. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to be correct.
When used in this report, the words "anticipate," "estimate," "expect,"
"may," "project" and similar expressions are intended to be among the
statements that identify forward-looking statements. Important factors which
could affect the Company's actual results and cause actual results to differ
materially from those results which might be projected, forecast, estimated or
budgeted by the Company in such forward-looking statements include, but are
not limited to, the following: inability of the Company to sell its unsecured
senior subordinate notes at attractive interest rates; inability of the
Company to loan the funds at attractive interest rates; fluctuation of
financial performance due to the effect on gross profit margins by the yields
on investments and borrowing costs in any period; the uncertainty of
conditions affecting the real estate industry; credit risks associated with
loans to customers; retention and financial condition of major customers;
effects of future costs; collectibility of receivables; effects of
governmental regulations; future levels and timing of capital expenditures;
the risk of a disruption in credit markets; the level of competition in the
financial services industry; risks associated with foreign sales; potential
challenges to the Company's intellectual property rights; and the dependence
on and retention of key personnel.
The Company undertakes no obligation to publicly release the result of
any revisions to any such forward-looking statements which may be made to
reflect the events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
RESULTS OF OPERATION
Quarter ended December 31, 1997, compared to the quarter ended December
31, 1996 the Company's revenues from related parties increased to $27,885,
compared to $9,603 for the quarter ended December 31, 1996. This increase
resulted for increased lending activity with related parties. All of the
$27,885 of interest income remains uncollected at December 31, 1997 and is
reflected as interest receivable, related parties on the Company's balance
sheet. For the quarter ended December 31, 1997, the Company incurred a net
loss of $3,967 compared to a net loss of $7,541 for the quarter ended December
31, 1996. The decrease in the December 31, 1997 quarterly loss resulted from
increased related party interest income offset almost entirely by increased
operating expenses as reflected on the accompanying statements of operations.
PLAN OF OPERATION - OVERVIEW
The Company's objective is to become a participant in two interrelated
segments of the financial services industry. The Company believes that it can
achieve its objective by its commitment to servicing a market niche which is
not adequately serviced by commercial banks or traditional lending sources.
In servicing its market, the Company will stress the importance of identifying
profitable lending opportunities and quick closing.
The income generated from the Company's loan portfolio will be used to
pay principal and interest on the Notes, related operating costs and expenses
of the Company. The earnings on the loans and other assets owned by the
Company and the interest cost of the Notes will determine the Company's
results of operations in the future. The Company believes there are no
changes, trends or anomalies which will materially adversely affect the
anticipated delinquency and loss experience of the loans.
PLAN OF OPERATION FOR NEXT 12 MONTHS
Until the Company receives proceeds from the sale of Notes, invests the
proceeds and receives a return on the investment, the Company's only source of
funds for advertising, marketing and promotion will be its limited equity
capital and the income derived from its investments in notes receivables with
related parties. Therefore, the Company will expend significant cash and
incur additional losses of operation to cover its cost of developing and
operating the business for the foreseeable future.
The Company anticipates that proceeds from the sale of Notes will begin
slowly and increase as the Company's marketing plan takes effect. Although no
assurances can be given, the Company's first full year of operations forecast
assumes total proceeds from the sale of Notes in the range of $35,000,000.
Without regard to the amount of Notes sold, management believes that the
Company has sufficient resources to pay its operating expenses for the next 12
months of operations because the Company's executive office and the furniture
and equipment located in the space is furnished by Mr. Juliano without cost to
the Company. On April 15, 1997, the Company entered into a twelve month lease
agreement with a third party for 1,333 square feet of office space in Newark,
Delaware. Rent expense for the fiscal year ended December 31, 1997 associated
with this lease amounted to $6,161. Monthly rental charges are approximately
$2,000. The executive officers of the Company will devote substantially all
their time to operations without compensation until the Company's cash flow is
adequate to cover market level compensation and all other operating expenses.
The Company will initially sell Notes only through its employees.
However, the Company is likely to engage the services of one or more
broker-dealers during the first year of operations. In order to arrive at its
forecasted Note sales for the first 12 months, management had preliminary
discussions with several small broker-dealers and examined the amount of
similar debt instruments sold by two comparable issuers. The sales of other
issuers was discounted substantially to account for the differences in
experience at raising funds. Management believes its estimates are realistic
and conservative. A part of the Company's plan to sell the Notes is direct
personal contact with selected broker-dealers in the states where the offering
is registered. The broker-dealers will be selected based upon their number of
registered representatives and access to financial products comparable to the
Notes offered by the Company. Management believes that it will fill a need
for broker-dealers identified by its selection process because each have a few
clients for whom the Notes are suitable investments and do not otherwise have
the ability to participate in a similar offering.
The following forward-looking table is the Company's present best
reasonable estimate of the possible use of different increments of proceeds
from the offering. Numerous uncertainties exist in estimating the amount and
use of future proceeds. The accuracy of any estimate is a result of the
quality of available market data, interpretation of the data, and business
judgment. Actual results after the date of an estimate may indicate the need
to revise the estimate. The quantity, quality, yield and category of
available loans and other investments cannot be accurately predicted as well
as changes in general economic conditions and interest rates. Accordingly,
the actual use of proceeds set forth in the following table may be materially
different from the actual use of proceeds.
Time after date of Debt Issuance
--------------------------------
Type Investment Three Months Six Months Nine Months One Year
- ------------------------- ---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Case 11 Case 22 Case 1 Case 2 Case 1 Case 2 Case 1 Case 2
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Commercial loans
and leases3 . . . . . . . $2,600,000 $5,000,000 $5,000,000 $ 9,850,000 $ 9,350,000 $20,050,000 $16,050,000 $33,100,000
Securitization. . . . . . -0- -0- -0- -0- -0- -0- -0- -0-
General and
Administrative Costs4
-0- -0- -0- 50,000 50,000 50,000 50,000 50,000
Offering expenses
sales commissions 5%5. 150,000 275,000 250,000 525,000 500,000 1,075,000 850,000 1,750,000
other offering expense 138,000 138,000 -0- -0- -0- -0- -0- -0-
Uninvested proceeds . . . 112,000 87,000 50,000 75,000 100,000 325,000 50,000 100,000
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Total Use of
Proceeds . . . . $3,000,000 $5,500,000 $5,300,000 $10,500,000 $10,000,000 $21,500,000 $17,000,000 $35,000,000
========== ========== ========== =========== =========== =========== =========== ===========
__________________________
1 Worst case.
2 Most likely case.
3 This category includes commercial first and second mortgage loans ranging
from $50,000 to $3,500,000 or more.
4 The executive officers of the Company will devote substantial time to
operations without compensation until the Company's cash flow is adequate to
cover market level compensation and all other operating expenses.
5Assumes sale by broker-dealers which have not yet been identified.
The Company presently has received preliminary expressions of interest to
finance projects ranging from $500,000 or more. The Company anticipates, but
is not assured, that the initial proceeds from the sale of Notes may be used
to fund the commercial real estate investment opportunities which are
tentatively available or other similar investments which do not require any
state license. In such event, the yield will be below the Company's expected
average rate of interest income but the credit will be high quality and the
origination cost will be minimal.
The Company forecasts a cost of funds in the range of 9.4% per annum,
after offering and selling expenses, and net investment yield from its total
portfolios of commercial loans after a reasonable reserve for losses,
delinquencies and servicing costs, in the range of 15.75% [currently earning
12.75% with related entities]. Thus, the positive spread on the Company's
loan portfolio is forecasted to be approximately 6.35%, or $2,222,000 per year
when the projected first year Note proceeds (before deductions for costs
reflected above) of $35,000,000 are fully invested. After allowing for the
time to market the Notes, receive and invest the proceeds, the Company's
financial model assumes average invested proceeds for the first 12 months of
$15,000,000 and income before operating expenses of approximately $970,000.
Because the Company's staffing needs are driven by the amount of Note proceeds
received and funds available for investment, additional operations personnel
will be hired at a rate to match receipt and investment of Note sales
proceeds. However, the Company believes that salaries, general and
administrative, and other operating costs for the first 12 months at the
projected level of business should not exceed $600,000.
The Company intends to maximize its interest and fee income to be earned
on its loan portfolio by selling loans from its portfolio to unrelated third
parties and by securitizing all or a portion of its portfolio. These
transactions are intended to provide an additional source of liquidity for
lending activities.
YIELD ASSUMPTIONS
Annual rates are expected to range from a low of 10% for higher quality,
low risk commercial real estate and business loans. The average yield on
commercial loans and leases is assumed to be 10% or more. Because the
Company's initial primary business will be limited to commercial loans and
leases, the positive spread on the Company's loan portfolio will be
substantially lower than the spread expected when the projected first year
note proceeds (before deductions for costs reflected above) of $35,000,000 is
fully invested. Annual investment yield includes reserves for loan losses
which have been calculated by examining the loan loss reserves and actual loss
experience of companies with loan portfolios similar to the loans contemplated
by the Company. Because management of the Company has limited experience with
originating, servicing and managing a loan portfolio similar to the portfolio
intended by the Company, management will continually monitor its loans for
delinquencies and potential losses in order to establish proper reserves and
predict actual losses.
SOURCES OF INCOME
The Company will derive income from four basic sources: (i) interest and
other charges paid on its loans, (ii) loan origination fees, (iii) a limited
amount of prepayment penalties, and (iv) securitization of loans. The Company
does not anticipate significant income from prepayment of loans in its
portfolio principally because of the fees payable upon prepayment. Thus, the
Company expects the asset/liability maturity risk arising out of prepayments
to be minimal even in periods of declining interest rates because of the
substantial prepayment penalties. The Company anticipates that substantially
all of its loans will be made at fixed rates. However, the Company's cost of
funds will be sensitive to changes in long and short term interest rates.
Therefore, a rise or fall in the general interest rate market will have the
effect of increasing or decreasing the spread which the Company anticipates
between the cost of funds on its short and medium term Notes and the interest
earned on its loan portfolio.
In order to minimize the interest rate risk, the Company intends to
match, to the extent possible, maturities of its loan portfolio and maturities
of the Notes. There will be no interest rate risk in connection with Notes
which mature at the same time as the same dollar amount of portfolio loans
because the obligation to pay interest and the offsetting interest income will
terminate at the same time. Therefore, proceeds from newly issued Notes at
current market interest rates may be used to fund new loans at comparable
market interest rates. To the extent that the loan maturities are of
significantly longer term than the Note maturities, the Company intends to
manage the interest rate risk by selling whole loans in the secondary loan
market or securitizing pools of loans for sale in the public or private
capital markets and reinvesting the funds in loans with maturities that match
maturities of the same dollar amount of Notes. If the Company is successful
it its interest rate management strategy, interest rate risk will be
substantially reduced or eliminated entirely.
SOURCES OF CAPITAL AND LIQUIDITY
The proceeds of the sale of the Notes is the primary source of funds to
meet the Company's liquidity requirements. The proceeds of the Note sales
will be used to fund general operating and lending activities. After receipt
and investment of the Note proceeds, the Company's primary sources of
liquidity will be payments on the loans and the secondary source will be the
equity capital of the Company as of the date of this annual report.
The Company intends to meet its obligations to repay the Notes as they
mature with income generated from its lending activities, funds generated from
repayment of outstanding loans, extensions of maturing Notes and new debt
financing. There can be no assurance that the Company will be able to sell
the Notes at a rate that will permit growth and expansion at the expected
levels or to satisfy future debt obligations. If all of the Notes are sold,
the Company will have debt in the amount of $50,000,000 and only $1,132,180 in
equity which has been provided by the shareholders of the Company. Therefore,
substantially all the risk of loss will be borne by the Noteholders because
for approximately every $1.00 at risk by the shareholders of the Company,
$50.00 is at risk by the Noteholders.
The Company will continue to invest its $1,132,180 of presently available
equity capital without regard to the amount of Notes sold. The proceeds from
the sale of any amount of Notes will increase the Company's ability to make
investments. It is anticipated that such additional investments will produce
yields in excess of the interest payable under the terms of the Notes and the
maturities will be timed to coincide with maturities of the Notes. Therefore,
the Company believes it will be able to timely pay interest and principal on
any amount of Notes sold.
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K were filed by the Company during the
quarter ended December 31, 1997.
SIGNATURES
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.
FIRST NATIONS FINANCIAL SERVICES COMPANY
Date: February 13, 1998 By: /s/ Gary N. Pelehaty
---------------------
Gary N. Pelehaty, President & Chief Executive Officer
Date: February 13, 1998 By: /s/Thomas E. Juliano
---------------------
Thomas E. Juliano, Treasurer, Chief
Financial
Officer and Secretary
Exhibit 27 - Page 1
EXHIBIT 27
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from the
financial statements as of and for the three months ended December 31, 1997,
and is qualified in its entirety by reference to such financial statements.
(In thousands, except EPS.)
ITEM NUMBER
- -------------
ITEM DESCRIPTION AMOUNT
----------------------------------------------------------- -------
5-02(1) Cash and cash items.. . . . . . . . . . . . . . . . . . . $ 9
5-02(2) Marketable securities . . . . . . . . . . . . . . . . . . 0
5-02(3)(a)(1) Notes and interest receivable-trade . . . . . . . . . . . 0
5-02(4) Allowances for doubtful accounts. . . . . . . . . . . . . 0
5-02(6) Inventory . . . . . . . . . . . . . . . . . . . . . . . . 0
5-02(9) Total current assets. . . . . . . . . . . . . . . . . . . 65
5-02(13) Property, plant and equipment . . . . . . . . . . . . . . 57
5-02(14) Accumulated depreciation. . . . . . . . . . . . . . . . . 9
5-02(18) Total assets. . . . . . . . . . . . . . . . . . . . . . . 1,125
5-02(21) Total current liabilities . . . . . . . . . . . . . . . . 38
5-02(22) Bonds, mortgages and similar debt . . . . . . . . . . . . 58
5-02(28) Preferred stock-mandatory redemption. . . . . . . . . . . 0
5-02(29) Preferred stock-no mandatory redemption . . . . . . . . . 1
5-02(30) Common stock. . . . . . . . . . . . . . . . . . . . . . . 1
5-02(31) Other stockholders' equity. . . . . . . . . . . . . . . . 1,029
5-02(32) Total liabilities and stockholders' equity. . . . . . . . 1,125
5-03(b)1(a) Net sales tangible products . . . . . . . . . . . . . . . 0
5-03(b)1 Total revenues. . . . . . . . . . . . . . . . . . . . . . 28
5-03(b)2(a) Cost of tangible goods sold . . . . . . . . . . . . . . . 0
5-03(b)2 Total costs and expenses applicable to sales and revenues 0
5-03(b)3 Other costs expenses. . . . . . . . . . . . . . . . . . . 32
5-03(b)5 Provision for doubtful accounts and notes . . . . . . . . 0
5-03(b)(8) Interest and amortization of debt discount. . . . . . . . 0
5-03(b)(10) Income before taxes and other items . . . . . . . . . . . <4>
5-03(b)(11) Income tax expense. . . . . . . . . . . . . . . . . . . . 0
5-03(b)(14) Income/loss continuing operations . . . . . . . . . . . . <4>
5-03(b)(15) Discontinued operations . . . . . . . . . . . . . . . . . 0
5-03(b)(17) Extraordinary items . . . . . . . . . . . . . . . . . . . 0
5-03(b)(18) Cumulative effect-changes in accounting principles. . . . 0
5-03(b)(19) Net income or loss. . . . . . . . . . . . . . . . . . . . <4>
5-03(b)(20) Earnings per share-primary. . . . . . . . . . . . . . . . <3.97>
5-03(b)(20) Earnings per share-fully diluted. . . . . . . . . . . . . 0