UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
Commission File Number 0-29049
SILVERADO FINANCIAL, INC.
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(Exact name of small business issuer as specified in its charter)
Nevada 86-0824125
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
5976 W. Las Positas, Suite 112, Pleasanton, CA 94588
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(Address of principal executive offices) (Zip Code)
Telephone Number: (925) 227-1500
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.
Yes [X] No [ ]
As of August 1, 2004, 19,376,770 of the registrant's common stock, $0.01 par
value per share, were issued and outstanding.
1
SILVERADO FINANCIAL, INC.
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements ............................................... 3
Consolidated Balance Sheet as of June 30, 2004 ..................... 3
Consolidated Statements of Operations for the three and six
months ended June 30, 2004 and 2003 ................................ 4
Consolidated Statements of Cash Flows for the three and six
months ended June 30, 2004 and 2003 ................................ 5
Notes to Financial Statements ...................................... 6
Item 2. Management's Plan of Operation .....................................12
Item 3. Controls and Procedures ............................................27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ..................................................28
Item 2. Changes in Securities ..............................................29
Item 3. Defaults Upon Senior Securities ....................................30
Item 4. Submissions of Matters to a Vote of Security Holders ...............30
Item 5. Other Information ..................................................30
Item 6. Exhibits and Reports on Form 8-K ...................................30
Signatures .................................................................31
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SILVERADO FINANCIAL, INC.
CONSOLIDATED BALANCE SHEET
AT JUNE 30, 2004
(Unaudited)
ASSETS
------
CURRENT ASSETS
Cash $ 42,446
Receivables 3,003
-----------------
Total Current Assets 45,449
OTHER ASSETS
Intellectual property 1,398,020
Furniture, fixtures & equipment, net 114,542
Other 11,547
-----------------
Total assets $ 1,569,558
=================
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
LIABILITIES
CURRENT
Accounts payable and accrued expenses $ 273,572
Accrued officer salaries 84,980
Accrued interest 40,833
Due to affiliates 939
-----------------
Total current liabilities 400,324
OTHER LIABILITIES
Convertible notes payable 36,000
Note payable 275,000
-----------------
Total liabilities 711,324
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value,
5,000,000 shares authorized, none issued
Common stock, $.001 par value, 20,000,000 shares $ 17,377
authorized, 19,376,770 issued and outstanding
Additional paid-in capital 10,816,749
Deferred Stock Compensation (18,130)
Accumulated Deficit (9,957,762)
-----------------
Total stockholders' equity 858,234
-----------------
Total liabilities and stockholders' equity $ 1,569,558
=================
See accompanying notes to these consolidated financial
statements.
3
SILVERADO FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended For the six months ended
June 30, June 30,
2004 2,003 2004 2,003
------------- ------------- ------------- -------------
Revenues
Commission & processing revenue $ 204,098 $ 17,825 $ 312,783 $ 17,825
------------- ------------- ------------- -------------
Operating expenses
Sales expenses and commissions 155,238 - 235,458 -
Consulting 66,080 50,118 148,581 171,418
Interest expense 6,383 6,226 12,765 12,294
Depreciation expense 7,114 4,570 13,828 4,729
Other general and administrative 164,030 179,168 309,186 245,829
------------- ------------- ------------- -------------
Total operating expenses 398,845 240,082 719,818 434,270
------------- ------------- ------------- -------------
Net (Loss) from operations (194,747) (222,257) (407,035) (416,445)
Other income and expense - 9 - 9
(Loss) gain on sale of investments - 153 9,813 (6,201)
------------- ------------- ------------- -------------
Net (Loss) $ (194,747) $ (222,095) $ (397,222) $ (422,637)
============== ============= ============= =============
NET (LOSS) PER SHARE:
Basic & Diluted (0.02) (0.02) (0.02) (0.04)
============== ============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic & Diluted 16,604,781 11,356,524 16,405,191 11,178,875
============== ============= ============= =============
See accompanying notes to these consolidated
financial statements.
4
SILVERADO FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
For the three months ended For the six months ended
June 30, June 30,
2004 2003 2004 2003
---------------- ---------------- ---------------- ----------------
OPERATING ACTIVITIES
Net loss for the period $ (194,748) $ (222,095) $ (397,222) $ (422,637)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization expense 18,014 4,570 31,698 4,729
Loss (gain) on sale of marketable securities - (153) (9,813) 6,201
Common stock issued for services 72,932 112,019 135,873 198,519
Common stock issued for payables and debt 41,614 174,051 135,551 174,051
Common stock issued for Realty Capital
Corporation - 127,654 - 127,654
Changes in assets and liabilities
(Increase)/decrease in accounts receivable (46) 17,427 8,402 (1,750)
(Increase)/decrease in furniture, fixtures
& equipment - (134,271) - (134,271)
(Increase)/decrease in other assets (1,433) - (4,647) -
Increase/(decrease) in accounts payable
and accrued expenses 4,813 (93,403) 28,753 33,206
Increase/(decrease) in accrued officer salaries 66,640 - 24,980 -
Increase/(decrease) in accrued interest 6,381 5,425 12,764 11,491
Increase/(decrease) in note payable - 3,500 - 3,500
---------------- ---------------- ---------------- ----------------
Net cash (used in) provided by operating
activities 14,167 (5,276) (33,661) 693
---------------- ---------------- ---------------- ----------------
FINANCING ACTIVITIES
Net advances (to) from affiliates (13,500) 3,000 (13,061) (10,000)
Proceeds from private placements 17,000 - 72,350 -
---------------- ---------------- ---------------- ----------------
Net cash (used in) provided by
financing activities 3,500 3,000 59,289 (10,000)
---------------- ---------------- ---------------- ----------------
INVESTING ACTIVITIES
Proceeds from sale of marketable securities - 2,854 27,588 10,275
Purchase of office equipment (12,000) - (12,000) -
---------------- ---------------- ---------------- ----------------
Net cash (used in) provided by
investing activities (12,000) 2,854 15,588 10,275
---------------- ---------------- ---------------- ----------------
INCREASE IN CASH 5,667 578 41,216 968
CASH, BEGINNING OF PERIOD 36,779 951 1,230 561
---------------- ---------------- ---------------- ----------------
CASH, END OF PERIOD $ 42,446 $ 1,529 $ 42,446 $ 1,529
================ ================ ================ ================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Cancellation of 62,000 common shares in sale of intellectual
property and Rockford shares - - - (16,684)
=============== ================ ================ ================
See accompanying notes to these consolidated financial statements.
5
SILVERADO FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2004
Note 1 - ORGANIZATION AND BASIS OF PRESENTATION
The unaudited financial statements included herein were prepared from the
records of the Company in accordance with Generally Accepted Accounting
Principles. These financial statements reflect all adjustments which are, in the
opinion of management, necessary to provide a fair statement of the results of
operations and financial position for the interim periods. Such financial
statements generally conform to the presentation reflected in our Form 10-KSB
filed with the Securities and Exchange Commission for the year ended December
31, 2003 and Form 10-QSB for the quarter ended March 31, 2004. The current
interim period reported herein should be read in conjunction with our Form
10-KSB subject to independent audit at the end of the year.
A majority of the shareholders of record on February 10, 2003 voted to amend the
Articles of Incorporation of the Registrant to change the name of the Company to
Silverado Financial, Inc. and to change the authorized common shares to
100,000,000 and the authorized preferred shares to 5,000,000 as described in an
information statement filed on Form 14C with the Securities and Exchange
Commission on February 11, 2003. The Registrant filed with the Secretary of
State of Nevada a Certificate of Amended Articles of Incorporation on March 21,
2003. Subsequently, on April 29, 2003 the Company effected a one for five
reversal of its authorized and outstanding common shares. See Note 2 below.
As shown in the accompanying financial statements, the Company had a net loss of
$194,747 for the three months ended June 30, 2004 and a deficit in working
capital of approximately $354,875 as of June 30, 2004. The ability of the
Company to continue as a going concern is dependent on obtaining additional
capital and financing and operating at a profitable level. The Company intends
to seek additional capital either through debt or equity offerings, or a
combination thereof, and to seek acquisitions which will generate sales volume
with operating margins sufficient to achieve profitability. The financial
statements do not include any adjustments that might be necessary if it is
unable to continue as a going concern. The independent auditor's report on the
financial statements for the year ended December 31, 2003 expressed substantial
doubt about the ability of the Company to continue as a going-concern. The
results of operations for the three months ended June 30, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RESTATEMENT OF SHARE AMOUNTS
Effective April 29, 2003 we changed our trading name and trading symbol to
"SLVO" on the OTCBB and decreased the number of issued and outstanding shares of
common stock by issuing one new share for each five shares held. This action was
authorized by the board of directors at a meeting of the board on April 3, 2003.
CONSOLIDATION
The consolidated financial statements include the results of operations, account
balances and cash flows of the Company and our wholly owned subsidiaries after
elimination of inter-company transactions. The operations of Silverado Financial
Mortgage, formerly Realty Capital Corporation and Financial Software Inc. are
consolidated from their respective acquisition dates of May 9, 2003 and November
15, 2002..
6
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
USE OF 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.
CASH
Cash includes all short-term highly liquid investments that are readily
convertible to known amounts of cash and have original maturities of three
months or less. At times cash deposits may exceed government insured limits.
PROPERTY AND EQUIPMENT
Property and equipment consists of computer equipment, office furniture and is
stated at cost less accumulated depreciation. Depreciation is recorded on a
straight-line basis the estimated useful lives of the assets at 5 years.
Depreciation expenses for the quarter and six months ended June 30, 2004 were $
7,114 and $13,828, respectively. Accumulated depreciation for the quarter ended
June 30, 2004 was $31,729.
REVENUE RECOGNITION
Commissions generated from brokering loans are recognized at the date of close.
FINANCIAL INSTRUMENTS
Financial instruments consist primarily of cash, receivables and obligations
under accounts payable and accrued expenses. The carrying amounts of cash,
accounts receivable, accounts payable, notes payable and accrued expenses
approximate fair value because of the short term maturity of those instruments.
INTELLECTUAL PROPERTY
Our intellectual property is comprised of a software platform acquired with the
acquisition of Financial Services Inc. in 2002. We periodically evaluates the
recoverability of intangible assets and takes into account events or
circumstances that warrant revised estimates of useful lives or that indicate
that impairment exists. Our intangible assets will be subject to amortization
when put into productive use.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event that facts and circumstances indicate that the cost of long-lived
assets, primarily intellectual property and patents, may be impaired, we perform
a recoverability evaluation. If an evaluation is required, the discounted
estimated future cash flows associated with the assets are compared to the
assets' carrying amount to determine whether a write-down to fair value is
required.
On January 1, 2002, we adopted SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" which requires that long-lived assets to be held
and used be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
7
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
We evaluate its long-lived assets for impairment whenever changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted cash flows
expected to be generated by the asset. If assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying
amounts exceed the fair values of the assets. Assets to be disposed of are
reported at the lower of carrying values or fair values, less costs of disposal.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for
Stock-Based Compensation", ("SFAS 123") as amended by SFAS No. 148 "Accounting
for Stock-Based Compensation - Transition and Disclosure", established
accounting and disclosure requirements using a fair-value based method of
accounting for stock-based employee compensation. We have no outstanding options
to consultants or members of the Board of Directors. The Company may
periodically issue restricted common shares in advance of their being earned
which result in the recording the unearned amount as deferred compensation. When
the shares are subsequently earned, the Company records amortization expense for
the amount earned.
INCOME TAXES
We have adopted the provisions of SFAS No. 109, "Accounting for Income Taxes".
SFAS 109 requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
consolidated financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
LOSS PER SHARE
(Loss) per common share is computed based on the weighted average number of
common shares outstanding during each period. Convertible equity instruments
such as convertible debentures, warrants and escrowed shares are not considered
in the calculation of net loss per share, as their inclusion would be
antidilutive.
Note 3 - INTELLECTUAL PROPERTY
Since its inception, we have entered into numerous agreements as a result of
having acquired certain rights to various complex intellectual scientific
properties. On November 19, 2002 we acquired intellectual property comprised of
a software platform acquired with Financial Services Inc. during 2002.
During the quarter ended June 30, 2003, in a non-arms length transaction with
Robert George Krushnisky, a director of the company, we received 62,000 shares
of its own common stock together with cancellation of an outstanding debt in the
amount of $1,100 in exchange for all of the scientific intellectual property
assets acquired prior to the acquisition of FSI in November of 2002 as well as
all shares of Rockford Technology held for sale by the company.
We periodically analyze its investment in intellectual property for impairment.
The stages of development in which the intellectual property is in make
estimation of value or determination of impairment a difficult task. There has
been no substantive revenues generated or value derived from the technology
8
INTELLECTUAL PROPERTY - continued
since its acquisition. We have determined that there is no evidence that the
book value of the intellectual property is impaired until it has been determined
that there is no likely commercial application or one that will produce adequate
cash flow to support those values.
On November 19, 2002, in connection with the acquisition of Financial Software,
Inc., we acquired certain software, web sites and intellectual property which
can aggregate financial information from a large number of data sources on an
individual basis, amalgamate the data and provide accurate and detailed insight
into an individual's personal financial picture on a real time basis. This
software can manage a host of disparate objectives as they relate to a persons
financial goals, be they investment or debt related or any combination. This
software suite, together with mortgage generation capabilities can create a
variety of new and different mortgage, investment or insurance products. We
recorded the software on its books at the seller's basis of $1,398,020. We
engaged an experienced software developer based in Palo Alto, California to
perform an independent, third party valuation of the software during 2003. We
anticipate putting the software into service during the fourth quarter of 2004
and intend to amortize the software over a three year period commencing upon the
in-service date. Estimated amortization expense on this intangible asset is
estimated to be as follows for the years December 31:
2004 $ 116,505
2005 466,000
2006 466,000
2007 349,515
------------ --------------
Total $ 1,398,020
============ ==============
Note 4 - ACCOUNTS AND NOTES PAYABLE
Accounts Payable
We owe our vendors a total of $254,328 of which $238,957 is outstanding payables
over ninety days.
Notes Payable
As part of the acquisition of Financial Services Software, we became obligated
under a note for $275,000 at 8% per annum, payable monthly, in arrears and
amortized over eighteen equal installments of $16,258. Principal and interest
payments due under the note will not be paid until we have raised sufficient
capital through the sale of stock and /or notes to raise a minimum of four times
the monthly payment due. Further, additional monthly payments are abated until
we are able to maintain sufficient capital to allow it to remain cash flow
positive and continue making the payments. There was $35,501 of accrued unpaid
interest at June 30, 2004.
Convertible Notes payable
We have three convertible notes payable totaling $36,000 at 10% per annum
maturing during 2004 as a result of our extensions of two convertible notes that
were originated during 2002. There was $5,332 accrued unpaid interest at June
30, 2004.
A Schedule of the maturity dates of the convertible debentures with their
attached warrants are as follows:
9
ACCOUNTS AND NOTES PAYABLE - continued
Original Extended
Amount Maturity Date Maturity Date Warrants Outstanding
------------- ---------------- ------------- -------------------------------
$ 16,000 10/11/03 10/11/04 40,000 shares at $.40 per share
$ 10,000 11/16/03 11/16/04 25,000 shares at $.40 per share
$ 10,000 7/23/04 7/23/05 25,000 shares at $.40 per share
All debentures can be converted into common stock for the same amount of shares
as their right to purchase the same number of shares through their warrants.
Assuming the Company has the ability to make all note payments under their terms
commencing October 1, 2004 and does not convert or extend the convertible notes
payable, the minimum annual payments are as follows:
Year Amount
------------ --------------
2004 $ 211,096
2005 89,904
--------------
$ 311,000
==============
Note 5 - STOCKHOLDERS' EQUITY
On January 13, 2004 the Company also issued 55,866 unrestricted shares under its
registered 2004 Officers, Directors, Employees and Consultants Stock
Compensation Plan at a fair value of $10,000 to a consultant for services
performed during the previous quarter for assistance with the rescission of San
Francisco Funding, Inc.
On January 13, 2004 the Company also issued 88,281 unrestricted shares under its
registered 2004 Officers, Directors, Employees and Consultants Stock
Compensation Plan to two individuals at a fair value of $14,505 for consulting
services in connection with work on the Company's web site, assistance with
acquisitions and consulting services related to planning for advertising our
mortgage business.
On February 27, 2004 the Company issued 360,000 restricted common shares for
fair value to the officers of the Company for accrued compensation of $83,937
and 235,500 restricted common shares for $45,036 for services through February
2004. The shares were issued under Section 4(2) of the 1933 Securities Act.
On March 11, 2004 the Company issued 20,000 unrestricted shares to one
consultant under its registered 2004 Officers, Directors, Employees and
Consultants Stock Compensation Plan for legal services at a fair value of $3,400
for legal work.
During the quarter ended March 31, 2004 the Company amortized a total of $6,970
of legal services which had been previously paid for in advance with restricted
common shares and recorded as deferred compensation.
Also during the quarter ended March 31, 2004 the Company issued 615,000
restricted common shares to accredited investors for $61,500 of cash. A total of
$6,150 was paid in finders fees resulting in the Company receiving $55,350. The
shares were issued under Section 4(2) of the 1933 Securities Act.
10
STOCKHOLDERS' EQUITY - continued
On April 21, 2004 the Company issued 26,471 restricted common shares at a deemed
value of $4,500 to a public relations company for services rendered during 2003.
The shares were issued under Section 4(2) of the 1933 Securities Act.
On April 23, 2004 the Company issued 55,556 restricted common shares to an
accredited investor in a private placement for $5,000 cash. The shares were
issued under Section 4(2) of the 1933 Securities Act.
On May 4, 2004 the Company issued 266,667 restricted common shares as a retainer
to its legal counsel. The shares were issued under Section 4(2) of the 1933
Securities Act.
On June 10, 2004 the Company issued 434,386 unrestricted common shares under its
registered 2004 Officers, Directors, Employees and Consultants Stock
Compensation Plan to an individual at a fair value of $85,000 for consulting
services in connection with work on the Company's web site, computer system set
up and maintenance in the two offices and assistance in the preparation of the
Company's last annual audit and quarterly financial statement. Also on June 10,
2004 the Company issued 150,000 restricted common shares to an accredited
investor in a private placement for $12,000 and 35,000 restricted common shares
at a deemed value of $1,700 to a licensed broker as a finders fee.
On June 17, 2004 the Company issued 1,800,000 shares under an escrow agreement
to Michael Petrullo and 200,000 restricted common shares to Michael Berstein
pending the closing of the acquisition of Lendingtech.com, Inc. The shares are
not earned and may be returned to the Company in the event that Lendingtech.com,
Inc. is unable to fulfill its contractual obligations to close. The shares would
be incrementally issued in the event that the Lendingtech.com acquisition closed
and the Company was unable to meet its loan obligation with a cash payment for a
given month. The shares issued under the escrow agreement were issued under
Section 4(2) of the 1933 Securities Act.
On June 24, 2004 the Company issued 145,051 shares to two directors for the
settlement of cash advances of $17,406. On the same date the Company issued
49,500 shares to two employees at a deemed value of $5,940. The shares were
issued under Section 4(2) of the 1933 Securities Act.
Note 6 - SUBSEQUENT EVENTS:
On July 1, 2004, we received $12,000 from two accredited investors in a private
placement for 240,000 restricted common shares.
On July 27, 2004 the Company became licensed under the California Department of
Corporations as a Consumer Finance Lender through its subsidiary Silverado
Financial Mortgage, formerly Realty Capital Corporation. The license enables the
Company to contract with loan originators as independent contractors who would
serve under the California Department of Real Estate license.
On August 11, 2004 our wholly owned subsidiary, Silverado Mortgage Corporation
(formerly Realty Capital Corporation) received approval for a $2,000,000
Mortgage Warehouse and Security Facility.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION,
STATEMENTS REGARDING OUR EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES
THAT ARE SIGNIFIED BY THE WORDS "EXPECTS", "ANTICIPATES", "INTENDS", "BELIEVES",
OR SIMILAR LANGUAGE. SUCH FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT
LIMITED TO, THE SEEKING OF REVENUE PRODUCING ACQUISITIONS, THE DEVELOPMENT PLANS
FOR THE TECHNOLOGIES OF THE COMPANY, TRENDS IN THE RESULTS OF OUR DEVELOPMENT,
ANTICIPATED DEVELOPMENT PLANS, OPERATING EXPENSES AND OUR ANTICIPATED CAPITAL
REQUIREMENTS AND CAPITAL RESOURCES. THESE FORWARD-LOOKING STATEMENTS INVOLVE
RISKS, UNCERTAINTIES AND OTHER FACTORS. ALL FORWARD-LOOKING STATEMENTS INCLUDED
IN THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE
HEREOF AND SPEAK ONLY AS OF THE DATE HEREOF. THE FACTORS DISCUSSED BELOW UNDER
"FORWARD-LOOKING STATEMENTS" AND ELSEWHERE IN THIS QUARTERLY REPORT ON FORM
10-QSB ARE AMONG THOSE FACTORS THAT IN SOME CASES HAVE AFFECTED OUR RESULTS AND
COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS. IN ADDITION, THE FOLLOWING DISCUSSION IS INTENDED TO
PROVIDE AN ANALYSIS OF OUR FINANCIAL CONDITION AND PLAN OF OPERATION AND SHOULD
BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND THE NOTES THERETO.
MANAGEMENT'S PLAN OF OPERATION
During the next twelve months our ability to increase the number of offices and
revenue will depend on the availability of cash. During the first six months of
2004, we raised $72,350 from accredited investors through the sale of restricted
common stock at 50% discount to market on the day preceding investment. In order
to continue to expand operations, we intend to raise additional capital, up to
$121,500, through the continued sale of restricted common stock on these terms.
We believe that continued increases in revenue will enable us to pay for our
current operating expenses and preclude the need to raise any additional amounts
in the short term.
We plan to improve our FinanCenter software during the fourth quarter of 2004 as
part of our plan to increase the number of sales offices over the next twelve
months. On July 27, 2004 we became licensed under the California Department of
Corporations as a Consumer Finance Lender through our subsidiary Silverado
Financial Mortgage, formerly Realty Capital Corporation. This license will
enable us to add significant numbers of W-2 employees and to expand throughout
California in contrast to the current independent contractors who serve under
our current California Department of Real Estate license.
Our intention is to become a multifaceted real estate services company which
leverages advances in technology to increase our competitive advantages.
Silverado is currently considering the acquisition of firms and attempting to
establish business lines in the mortgage brokerage, mortgage banking and other
real estate related business sectors.
From inception in 1994 until the fourth quarter of 2002, Silverado Financial,
Inc. (formerly, "Rhombic Corporation"), was primarily focused on the acquisition
of the rights to innovative scientific technologies that could ultimately be
developed into numerous applications. During the years of 1999 through 2001we
began to focus on the research and development of its portfolio of acquired
technologies and to develop specific applications in order to make them
commercially marketable. Our business strategy was to develop a specific
application from a technology, then commence or contract for a marketing effort
for the developed application that would generate sales.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
In 2002 we concluded that we could not raise capital to pursue the planned
efforts for the scientific technology and began seeking potential acquisition
candidates. During the fourth quarter of 2002 we appointed John Hartman as Chief
Executive Officer and director and Sean Radetich as a director.
On November 11, 2002, the board of directors of the Registrant approved the
issuance of 22,000,000 restricted shares of its common stock for the acquisition
of all of the issued and outstanding shares of Financial Software, Inc. ("FSI").
The transaction was closed on November 19, 2002. The value of the consideration
in the exchange was determined at arms length by FSI and the registrant. FSI was
in the financial services technology and publishing industry. A majority of the
shareholders of record on February 10, 2003 voted to amend the Articles of
Incorporation of the Registrant to change the name of the Company to Silverado
Financial, Inc. and to change the authorized common shares to 100,000,000 and
the authorized preferred shares to 5,000,000 as described in an information
statement filed on Form 14C with the Securities and Exchange Commission on
February 11, 2003. The Registrant filed with the Secretary of State of Nevada a
Certificate of Amended Articles of Incorporation on March 21, 2003.
On May 9, 2003 we acquired Silverado Mortgage Corporation, formerly Realty
Capital Corporation, from our president, John Hartman, in a non-arms length
transaction which offices in Campbell, California.
The majority of our sales and telemarketing staff are independent contractors
although we do have four statutory employees and we utilize consultants for
matters pertaining to coordinating technology development and administration.
When current management became responsible for the operations of the company in
2002, among our primary concerns were proposed changes to RESPA regulations and
other regulatory changes such as those concerning predatory lending, and the
desire to better control the lending process and to earn more revenue than we
could as a mortgage broker. To that end, On August 11, 2004, Silverado Mortgage
Corporation (Formerly Realty Capital Corporation) received its first Mortgage
Banking Warehouse Line of Credit in the amount of $2,000,000. We anticipate that
through the use of this credit facility and any others we may be approved for in
future, we will be able to obtain
i.) Better Pricing - Investors should pay more for closed loans versus
loans that are brokered or table-funded;
ii.) More Pricing Options - We may be able to take advantage of mandatory
and small bulk sale pricing further increasing the premiums received
from investors on the sale of loans;
iii.)No Disclosure of SRP - Loans warehoused by may be treated differently
under RESPA as to disclosure of premiums received from investors.
Bankers do not disclose the SRP (Servicing Released Premium) paid to
them by investors. Bankers no longer receive a YSP (Yield Spread
Premium), a disclosable item on borrower closing statements;
iv.) More Control - We may be able to originate and close loans in our own
name. Under certain circumstances we will no longer have to wait for
lenders to underwrite and document loans or to schedule closings. In
certain circumstances we may be able to control that process and
should be able to provide customers with more timely service;
v.) Function as Principal - We may function as a principal in the market
and may own loans until those loans are sold into the secondary
market, we may be able to earn interest on the loans until it they
sold to an investor;
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
vi.) New Origination Channels - As a correspondent lender or mortgage
banker, we may be able to originate loans through retail and wholesale
origination channels;
vii.)Ability to Compete - Functioning as a banker may help us appear
larger in size, making it easier to compete against traditional retail
banking institutions.
As a Banker, Silverado will have more control over its product line and may be
able to generate additional fees and income associated with a banking platform.
Management believes our transition to a mortgage banking platform will increase
margins and as a banker, management believes we will be more appealing to
acquisition targets.
Results of Operations
Comparison of Quarter Ended June 30, 2004 and 2003
During the second quarter of 2004 our mortgage brokerage operation generated
$204,098. Revenues during the second quarter of 2003 began on May 9, 2003 and
amounted to $17,825. The significant increase in revenues was due to increase in
loan origination officers and the establishment of a second office during the
second quarter of 2004.
Direct selling of expenses of $155,238 during the second quarter were sales
commissions and referral fees. There were no direct expenses during the second
quarter of 2003.
Consulting and general and administrative expenses during the second quarter of
2004 were 211,041 compared to $229,286. The expenses incurred during both
comparative quarters were for officer salaries, office expenses and consulting
fees pertaining to computer systems and administrative work.
Comparison of six months ended June 30, 2004 and 2003
We did not have a mortgage brokerage operation until May 9, 2003. Revenues
during the first six months of 2004 were $312,783 compared to the $17,825
generated during the last two months of the period during 2003. The significant
increase in revenues was due to increase in loan origination officers and the
establishment of a second office during the second quarter of 2004
Direct selling of expenses of $235,458 during the six months ended June 30, 2004
were sales commissions and referral fees. There were no direct expenses during
the second quarter of 2003.
Consulting and general and administrative expenses during the six months ended
June 30, 2004 were $457,767 compared to $417,247. The expenses incurred during
both comparative quarters were for officer salaries, office expenses and
consulting fees pertaining to computer systems and administrative work.
Management's objective during the first quarter of 2004 was to increase revenues
over the last quarter of 2003 and to find potential acquisitions candidates.
Management's objective during the first quarter of 2003 was to restate its
capital structure to attract investment capital and to register an employee and
consultants stock compensation plan in a registration statement on Form S-8 in
order to attract competent consultants to assist in structuring the Company to
attract potential acquisitions.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
On April 15, 2004 we signed a lease for our second office on 2,512 sq. ft.
located at 5976 W. Las Positas, Suite 112, Pleasanton, CA 94588. The monthly
lease rate is $4,396. The lease has a term of 36 months. Lease payments do not
commence until June 15, 2004.
On April 20, 2004 and in connection with the lease, we acquired furniture,
fixtures and equipment in exchange for $12,000. The acquired furniture, fixtures
and equipment consist primarily of a digital telephone system, office cubicles,
file cabinets, a copier, lamps, chairs and office kitchen appliances.
Liquidity and Capital Resources
At June 30, 2004 we had $42,446 in cash and $45,449 in current assets. We also
had $400,324 in current liabilities. Although we could probably settle debt to
affiliates of $949 and accrued officer salaries of $84,980 for restricted common
stock, we would still have approximately $268,956 as a working capital deficit.
On February 1, 2004, we began a private placement to accredited investors for
$200,000. Subscribers receive shares at a 50% discount to the closing price of
SLVO common stock on the day preceding receipt of their subscription agreement
and investment. This offering is open only to accredited investors. As of June
30, 2004, we had received $72,350 under this private placement. However, there
is no assurance that we will be able to fully subscribe this offering or
generate capital sufficient to meet our long-term needs. If we can not meet
these requirements, we may not be able to continue as a going concern.
We believe that we have sufficient capital and resources to support operations
through the remainder of 2004. However, we do not believe that we will be able
to successfully implement our long term plans without raising additional
capital. We anticipate that the capital requirements for the balance of the
period ending December 31, 2004 will require that additional cash be raised from
external sources. We believe that this requirement will be met by cash equity
investments.
SUBSEQUENT EVENTS
On July 1, 2004, we received $12,000 from two accredited investors in a private
placement for 240,000 restricted common shares.
On July 27, 2004 the Company became licensed under the California Department of
Corporations as a Consumer Finance Lender through its subsidiary Silverado
Financial Mortgage, formerly Realty Capital Corporation. The license enables the
Company to contract with loan originators as independent contractors who would
serve under the California Department of Real Estate license.
On August 11, 2004 our wholly owned subsidiary, Silverado Mortgage Corporation
(formerly Realty Capital Corporation) received approval for a $2,000,000
Mortgage Warehouse and Security Facility.
FORWARD LOOKING STATEMENTS
Certain statements made in this report on Form 10-QSB is "forward looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such statements involve known and unknown risks, uncertainties and other
factors that may cause our actual results, performance or achievements to be
materially different from any future results implied by such forward looking
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
statements. Although we believes that the expectations reflected in such forward
looking statements are based upon reasonable assumptions, our actual results
could differ materially from those set forth in the forward looking statements.
Certain factors that might cause such a difference might include: the failure of
the registrants efforts to secure additional equity capital, the inability to
successfully execute the revised business plan, the success or failure to
implement the management to operate possible acquisitions profitably, and the
registrant's planned marketing, public relations and promotional campaigns.
RISK FACTORS
Stockholders and prospective purchasers of our common stock should carefully
consider the risks described below before making a decision to buy our common
stock. If any of the following risks actually occurs, our business could be
harmed. In that case, the trading price of our common stock could decline, and
you may lose all or part of your investment. When determining whether to buy our
common stock, stockholders and prospective purchasers should also refer to the
other information in this Form 10-K, including our financial statements and the
related notes.
A prolonged economic slowdown or a lengthy or severe recession could hurt our
operations, particularly if it results in a decline in the real estate market.
The risks associated with our business are more acute during periods of economic
slowdown or recession because these periods may be accompanied by decreased
demand for consumer credit and declining real estate values. Declining real
estate values reduce the ability of borrowers to use home equity to support
borrowings because they negatively affect loan-to-value ratios of the home
equity collateral. In addition, because we make a substantial number of loans to
credit-impaired borrowers, the actual rates of delinquencies, foreclosures and
losses on these loans could be higher during economic slowdowns. Any sustained
period of increased delinquencies, foreclosures or losses could adversely affect
our ability to sell loans, the prices we receive for our loans, the value of our
mortgage loans held for investment or our residual interests in securitizations,
which could have a material adverse effect on our results of operations,
financial condition and business prospects.
Our earnings may decrease because of increases or decreases in interest rates.
Our profitability may be directly affected by changes in interest rates. The
following are some of the risks we face related to an increase in interest
rates:
o An interest rate increase may affect our earnings by reducing the
spread between the interest we receive on our loans and our
funding costs.
o A substantial and sustained increase in interest rates could
adversely affect our loan origination volume because refinancing
an existing loan would be less attractive and qualifying for a
purchase loan may be more difficult.
o During periods of rising interest rates, the value and
profitability of our loans may be negatively affected between the
date of origination or purchase and the date we sell or
securitize the loan.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
o When and if we securitize loans, the value of residual interests
we retain and the income we receive from the securitizations
structured as financings are based primarily on the London
Inter-Bank Offered Rate ("LIBOR"). This is because the interest
on the underlying mortgage loans is based on fixed rates payable
on the loans for the first two or three years while the
bondholders are generally paid based on an adjustable LIBOR-based
yield. An increase in LIBOR reduces the net income we would
receive from, and the value of, these mortgage loans and residual
interests.
o Our adjustable-rate mortgage loans have periodic and lifetime
interest rate caps above which the interest rate on the loans may
not rise. In the event of general interest rate increases, the
rate of interest on these mortgage loans could be limited, while
the rate payable on the senior certificates representing
interests in a securitization trust into which these loans are
sold may be uncapped. This would reduce the amount of cash we
receive over the life of the loans in securitizations structured
as financings and our residual interests, and could require us to
reduce the carrying value of our residual interests.
We are also subject to risks from decreasing interest rates. For example, a
significant decrease in interest rates could increase the rate at which loans
are prepaid, which also could require us to reduce the carrying value of any
residual interests. If prepayments are greater than expected, the cash we would
receive over the life of our residual interests would be reduced.
Higher-than-expected prepayments could also have a negative effect on the value
of any servicing portfolio.
Any such changes in interest rates could have a material adverse effect on our
results of operations, financial condition and business prospects.
An interruption or reduction in the securitization and whole loan markets could
hurt our financial position.
As we implement our plan to become a full service mortgage banking company, we
will become increasingly dependent on the securitization market for the sale of
our loans because we intend to securitize loans directly in the future and many
of the whole loan buyers who purchase loans do so with the intention to
securitize them. The securitization market is dependent upon a number of
factors, including general economic conditions, conditions in the securities
market generally and conditions in the asset-backed securities market
specifically. In addition, poor performance of previously securitized loans
could harm our access to the securitization market. Accordingly, a decline in
the securitization market or a change in the market's demand for loans could
have a material adverse effect on our results of operations, financial condition
and business prospects.
If we are unable to maintain adequate financing sources, our earnings and our
financial position will suffer and jeopardize our ability to continue
operations.
We require substantial cash to support our operating activities and growth
plans. Our primary sources of cash are profits generated by sales of mortgage
products and the sale of our capital stock; however, we intend to generate
income from warehouse and aggregation credit facilities, asset-backed commercial
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
paper and the proceeds from the sales and securitizations of loans. We also
intend to finance residual interests in securitization transactions using Net
Interest Margin, or NIM, structures. As of December 31, 2003, we had no
short-term warehouse and aggregation credit facilities or asset-backed
commercial paper providing us with any committed or uncommitted borrowing
capacity to fund loan originations and purchases pending the pooling and sale of
such loans. As of March 27, 2004, we are in negotiations to acquire a short term
warehouse facility. If we cannot maintain or replace these facilities on
comparable terms and conditions, we may incur substantially higher interest
expense that would reduce our profitability.
During volatile times in the capital and secondary markets, access to warehouse,
aggregation and residual financing as well as access to the securitization and
secondary markets for the sale of loans has been severely constricted. If we are
unable to maintain adequate financing or other sources of capital are not
available, we would be forced to suspend or curtail our operations, which could
have a material adverse effect on our results of operations, financial condition
and business prospects.
New legislation could restrict our ability to make mortgage loans, which could
adversely impact our earnings.
Several states and cities are considering or have passed laws, regulations or
ordinances aimed at curbing predatory lending practices. The federal government
is also considering legislative and regulatory proposals in this regard. In
general, these proposals involve lowering the existing federal Homeownership and
Equity Protection Act thresholds for defining a "high-cost" loan, and
establishing enhanced protections and remedies for borrowers who receive such
loans. However, many of these laws and rules extend beyond curbing predatory
lending practices to restrict commonly accepted lending activities, including
some of our planned activities. For example, some of these laws and rules
prohibit any form of prepayment charge or severely restrict a borrower's ability
to finance the points and fees charged in connection with his or her loan. In
addition, some of these laws and regulations provide for extensive assignee
liability for warehouse lenders, whole loan buyers and securitization trusts.
Because of enhanced risk and for reputational reasons, many whole loan buyers
elect not to purchase any loan labeled as a "high cost" loan under any local,
state or federal law or regulation. Accordingly, these laws and rules could
severely constrict the secondary market for a significant portion of our loan
production. This would effectively preclude us from continuing to originate
loans that fit within the newly defined thresholds. For example, after the
October 1, 2002 effective date of the Georgia Fair Lending Act, many lenders and
secondary market buyers refused to finance or purchase Georgia loans. As a
result, many companies were forced to cease providing mortgages in Georgia until
the law's amendment a few months later. Similar laws have gone into effect in
New Jersey, as of November 27, 2003 ("New Jersey Home Ownership Act of 2002"),
and in New Mexico, as of January 1, 2004 ("New Mexico Home Loan Protection
Act"), that have impacted origination of loans in those states. The potential
long term reduction in loans in New Jersey and in New Mexico could be quite
severe. Moreover, some of our competitors who are national banks or federally
chartered thrifts may not be subject to these laws and may as a consequence be
able to capture market share from us and other lenders. For example, the Office
of the Comptroller of the Currency recently issued regulations effective January
7, 2004 that preempt state and local laws that seek to regulate mortgage lending
practices. Passage of such laws could increase compliance costs, reduce fee
income and reduce origination volume, all of which would have a material adverse
effect on our results of operations, financial condition and business prospects.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
We are no longer able to rely on the Alternative Mortgage Transactions Parity
Act to preempt certain state law restrictions on prepayment penalties, which
could adversely impact our earnings.
The value of a mortgage loan depends, in part, upon the expected period of time
that the mortgage loan will be outstanding. If a borrower pays off a mortgage
loan in advance of this expected period, the holder of the mortgage loan does
not realize the full value expected to be received from the loan. A prepayment
penalty payable by a borrower who repays a loan earlier than expected helps
offset the reduction in value resulting from the early payoff. Consequently, the
value of a mortgage loan is enhanced to the extent the loan includes a
prepayment penalty, and a mortgage lender can offer a lower interest rate and/or
lower loan fees on a loan which has a prepayment penalty. Prepayment penalties
are an important feature used to obtain value on loans.
Certain state laws restrict or prohibit prepayment penalties on mortgage loans,
and until July 2003, lenders could rely on the federal Alternative Mortgage
Transactions Parity Act (the "Parity Act") and related rules issued in the past
by the Office of Thrift Supervision (the "OTS") to preempt state limitations on
prepayment penalties. The Parity Act was enacted to extend to financial
institutions, other than federally chartered depository institutions, the
federal preemption that federally chartered depository institutions enjoy.
However, on September 25, 2002, the OTS released a new rule that reduced the
scope of the Parity Act preemption and, as a result; we are not able to rely on
the Parity Act to preempt state restrictions on prepayment penalties. The
effective date of the new rule, originally January 1, 2003, was subsequently
extended by the OTS until July 1, 2003 in response to concerns from interested
parties about the burdens associated with compliance. The elimination of this
federal preemption requires us to comply with state restrictions on prepayment
penalties. These restrictions prohibit us from charging any prepayment penalty
in eight states and limit the amount or other terms and conditions of our
prepayment penalties in several other states. This may place us at a competitive
disadvantage relative to financial institutions that continue to enjoy federal
preemption of such state restrictions. Such institutions are able to charge
prepayment penalties without regard to state restrictions and, as a result, may
be able to offer loans with interest rate and loan fee structures that are more
attractive than the interest rate and loan fee structures that we are able to
offer.
The scope of our lending operations exposes us to risks of noncompliance with an
increasing and inconsistent body of complex laws and regulations at the federal,
state and local levels.
Currently, we are licensed to originate mortgage loans only in California,
however we are in the process of applying for licenses to generate loans in all
50 states, and when licensed we will be forced to comply with the laws and
regulations, as well as judicial and administrative decisions, for all of these
jurisdictions, as well as an extensive body of federal law and regulations. The
volume of new or modified laws and regulations has increased in recent years,
and, individual cities and counties have begun to enact laws that restrict
non-prime loan origination activities in those cities and counties. The laws and
regulations of each of these jurisdictions are different, complex and, in some
cases, in direct conflict with each other. As our operations continue to grow,
it may be more difficult to comprehensively identify, to accurately interpret
and to properly program our technology systems and effectively train our
personnel with respect to all of these laws and regulations, thereby potentially
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
increasing our exposure to the risks of noncompliance with these laws and
regulations.
Our failure to comply with these laws can lead to:
o civil and criminal liability;
o loss of approved status;
o demands for indemnification or loan repurchases from purchasers of our
loans;
o class action lawsuits; or
o administrative enforcement actions.
Any of these results could have a material adverse effect on our results of
operations, financial condition and business prospects.
If warehouse lenders and securitization underwriters face exposure stemming from
legal violations committed by the companies to whom they provide financing or
underwriting services, this could increase our borrowing costs and negatively
affect the market for whole loans and mortgage-backed securities.
In June 2003, a California jury found a warehouse lender and securitization
underwriter liable in part for fraud on consumers committed by a lender to whom
it provided financing and underwriting services. The jury found that the
investment bank was aware of the fraud and substantially assisted the lender in
perpetrating the fraud by providing financing and underwriting services that
allowed the lender to continue to operate, and held the bank liable for 10% of
the plaintiff's damages. This is the first case we know of in which an
investment bank was held partly responsible for violations committed by the
bank's mortgage lender customer. If other courts or regulators adopt this
theory, investment banks may face increased litigation as they are named as
defendants in lawsuits and regulatory actions against the mortgage companies
with which they do business. Some investment banks may exit the business, charge
more for warehouse lending or reduce the prices they pay for whole loans in
order to build in the costs of this potential litigation. This could, in turn,
have a negative effect on our results of operations, financial condition and
business prospects.
High delinquencies or losses on mortgage loans in securitizations may decrease
cash flows or impair our ability to sell or securitize loans in the future.
Loans made to lower credit grade borrowers, including credit-impaired borrowers,
entail a higher risk of delinquency and higher losses than loans made to
borrowers with better credit. We plan to make a substantial portion of our loans
to borrowers who do not qualify for loans from conventional mortgage lenders. No
assurance can be given that our underwriting criteria or methods will afford
adequate protection against the higher risks associated with loans made to lower
credit grade borrowers. We will be subject to risks of default and foreclosure
following the sale of loans through securitization. To the extent such losses
are greater than expected; the cash flows received through residual interests
and from securitizations structured as financings would be reduced. Increased
delinquencies or losses may also reduce or eliminate our ability to sell or
securitize loans in the future and could have a substantial, material adverse
effect on our operations, financial condition and business prospects.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Our inability to realize cash proceeds from loan sales and securitizations in
excess of the loan acquisition cost could adversely affect our financial
position.
The net cash proceeds received from loan sales consist of the premiums received
on sales of loans in excess of the outstanding principal balance, plus the cash
proceeds received from securitizations, minus the discounts on any loans that
are sold for less than the outstanding principal balance. If we are unable to
originate loans at a cost lower than the cash proceeds realized from loan sales,
our results of operations, financial condition and business prospects could be
materially adversely affected.
Warehouse and aggregation financing is subject to margin calls based on the
lender's opinion of the value of loan collateral. An unanticipated large margin
call could adversely affect our liquidity.
The amount of financing we may receive under any warehouse and aggregation
financing agreements depends in large part on the lender's valuation of the
mortgage loans that secure the financings. Asset-backed commercial paper
facilities have similar provisions. Each such facility provides the lender the
right, under certain circumstances, to reevaluate the loan collateral that
secures outstanding borrowings at any time. In the event the lender determines
that the value of the loan collateral has decreased, it has the right to
initiate a margin call. A margin call would require us to provide the lender
with additional collateral or to repay a portion of the outstanding borrowings.
Any such margin call could have a material adverse effect on our results of
operations, financial condition and business prospects.
We face intense competition that could adversely affect our market share and our
revenues.
We face intense competition from finance and mortgage banking companies and from
Internet-based lending companies. In addition, certain government-sponsored
entities, such as Fannie Mae and Freddie Mac, are also expanding their
participation in the non-prime mortgage industry. These government-sponsored
entities have a size and cost-of-funds advantage that allows them to purchase
loans with lower rates or fees than we are willing to offer. While the
government-sponsored entities presently do not have the legal authority to
originate mortgage loans, including non-prime loans, they do have the authority
to buy loans. A material expansion of their involvement in the market to
purchase non-prime loans could change the dynamics of the industry by virtue of
their sheer size, pricing power and the inherent advantages of a government
charter. In addition, if as a result of their purchasing practices, these
government-sponsored entities experience significantly higher-than-expected
losses, such experience could adversely affect the overall investor perception
of the non-prime mortgage industry.
Competitors with lower costs of capital have a competitive advantage over us. In
addition, establishing a lending operation such as ours requires a relatively
small commitment of capital and human resources. This low barrier to entry
permits new competitors to enter our markets quickly and compete with us. This
could have a material adverse effect on our results of operations, financial
condition and business prospects.
Some thrifts, national banks and their operating subsidiaries are also expanding
their lending activities. By virtue of their charters, these institutions are
exempt from complying with many of the state and local laws that affect our
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
operations. For example, they can offer loans with prepayment charges in many
jurisdictions where we cannot. If more of these federally chartered institutions
are able to use their preemptive ability to provide more competitive pricing and
terms than we can offer, it could have a material adverse effect on our results
of operations, financial condition and business prospects.
The intense competition in the mortgage industry has also led to rapid
technological developments, evolving industry standards and frequent releases of
new products and enhancements. As mortgage products are offered more widely
through alternative distribution channels, such as the Internet, we may be
required to make significant changes to our information systems to compete
effectively. Our inability to continue enhancing our current capabilities, or to
adapt to other technological changes in the industry, could have a material
adverse effect on our results of operations, financial condition and business
prospects.
Our hedging strategies may not be successful in mitigating our risks associated
with changes in interest rates.
We intend to use various derivative financial instruments to provide a level of
protection against changes in interest rates, but no hedging strategy can
protect us completely. When rates change we expect to record a gain or loss on
derivatives which would be offset by an inverse change in the value of loans or
residual interests. We cannot assure you, however, that our use of derivatives
will offset the risks related to changes in interest rates. It is likely that
there will be periods in the future, during which we will incur losses after
accounting for our derivative financial instruments. The derivative financial
instruments we select may not have the effect of reducing our interest rate
risk. In addition, the nature and timing of hedging transactions may influence
the effectiveness of these strategies. Poorly designed strategies or improperly
executed transactions could actually increase our risk and losses. In addition,
hedging strategies involve transaction and other costs. We cannot assure you
that our hedging strategy and the derivatives that we use will adequately offset
the risk of interest rate volatility or that our hedging transactions will not
result in losses.
The complex federal, state and municipal laws governing loan servicing
activities could increase our exposure to the risk of noncompliance.
We intend to service the loan we originate on a nationwide basis. Therefore, we
must comply with the laws and regulations, as well as judicial and
administrative decisions, of all relevant jurisdictions pertaining to loan
servicing, as well as an extensive body of federal laws and regulations. The
volume of new or modified laws and regulations has increased in recent years,
and, in addition, some individual municipalities have begun to enact laws that
restrict loan servicing activities. The laws and regulations of each of these
jurisdictions are different, complex and, in some cases, in direct conflict with
each other. As our servicing operations continue to grow, it may be more
difficult to comprehensively identify, to accurately interpret and to properly
program our technology systems and effectively train our personnel with respect
to all of these laws and regulations, thereby potentially increasing our
exposure to the risks of noncompliance with the laws and regulations pertaining
to loan servicing. Our failure to comply with these laws could lead to, among
other things: (i) civil and criminal liability, including potential monetary
penalties; (ii) legal defenses causing delaying or otherwise adversely affecting
the servicer's ability to enforce loans, or giving the borrower the right to
rescind or cancel the loan transaction; (iii) class action lawsuits; and (iv)
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
administrative enforcement actions. This could result in a material adverse
effect on our results of operations, financial condition and business prospects.
Any non-prime loans we originate will generally have higher delinquency and
default rates, which could result in losses on loans that we are required to
repurchase.
Non-prime mortgage loans generally have higher delinquency and default rates
than prime mortgage loans. Delinquency interrupts the flow of projected interest
income from a mortgage loan, and default can ultimately lead to a loss if the
net realizable value of the real property securing the mortgage loan is
insufficient to cover the principal and interest due on the loan. Also, our cost
of financing and servicing a delinquent or defaulted loan is generally higher
than for a performing loan. We bear the risk of delinquency and default on loans
beginning when we originate them. In whole loan sales our risk of delinquency
typically only extends to the first payment, but when we securitize we continue
to bear some exposure to delinquencies and losses through our residual interests
and the loans underlying our on-balance sheet securitization transactions. We
are required to establish reserves based on our anticipated delinquencies and
losses. We also re-acquire the risks of delinquency and default for loans that
we are obligated to repurchase. We attempt to manage these risks with risk-based
loan pricing and appropriate underwriting policies and loan collection methods.
However, if such policies and methods are insufficient to control our
delinquency and default risks and do not result in appropriate loan pricing and
appropriate loss reserves, our business, financial condition, liquidity and
results of operations could be harmed.
We are subject to losses due to fraudulent and negligent acts on the part of
loan applicants, mortgage brokers, other vendors and our employees.
When we originate mortgage loans, we rely heavily upon information supplied by
third parties including the information contained in the loan application,
property appraisal, title information and employment and income documentation.
If any of this information is intentionally or negligently misrepresented and
such misrepresentation is not detected prior to loan funding, the value of the
loan may be significantly lower than expected. Whether a misrepresentation is
made by the loan applicant, the mortgage broker, another third party or one of
our employees, we generally bear the risk of loss associated with the
misrepresentation. A loan subject to a material misrepresentation is typically
unsaleable or subject to repurchase if it is sold prior to detection of the
misrepresentation, and the persons and entities involved are often difficult to
locate and it is often difficult to collect any monetary losses that we have
suffered from them.
There are controls and processes designed to help us identify misrepresented
information in our loan origination operations. We cannot assure you, however,
that we have detected or will detect all misrepresented information in our loan
originations.
We may be subject to fines or other penalties based upon the conduct of our
independent brokers.
The mortgage brokers from which we obtain loans have parallel and separate legal
obligations to which they are subject. While these laws may not explicitly hold
the originating lenders responsible for the legal violations of mortgage
brokers, increasingly federal and state agencies have sought to impose such
assignee liability. Recently, for example, the United States Federal Trade
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Commission ("FTC") entered into a settlement agreement with a mortgage lender
where the FTC characterized a broker that had placed all of its loan production
with a single lender as the "agent" of the lender. The FTC imposed a fine on the
lender in part because, as "principal," the lender was legally responsible for
the mortgage broker's unfair and deceptive acts and practices. The United States
Justice Department in the past has sought to hold a non-prime mortgage lender
responsible for the pricing practices of its mortgage brokers, alleging that the
mortgage lender was directly responsible for the total fees and charges paid by
the borrower under the Fair Housing Act even if the lender neither dictated what
the mortgage broker could charge nor kept the money for its own account.
Accordingly, we may be subject to fines or other penalties based upon the
conduct of our independent mortgage brokers.
Our business is dependent upon conditions in California where we conduct a
significant amount of our business.
In 2003, 100% of the mortgage loans we originated were secured by property in
California. An overall decline in the economy or the residential real estate
market, or the occurrence of a natural disaster, such as an earthquake, or a
major terrorist attack in California could adversely affect the value of the
mortgaged properties in California and increase the risk of delinquency,
foreclosure, bankruptcy, or loss on mortgage loans in our portfolio. This would
negatively affect our ability to purchase, originate and securitize mortgage
loans, which could have a material adverse effect on our business, financial
condition and results of operations.
If many of our borrowers become subject to the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended our cash flows from our residual securities and
our securitizations structured as financings may be adversely affected.
Under the Soldiers' and Sailors' Civil Relief Act of 1940, a borrower who enters
military service after the origination of his or her mortgage loan generally may
not be charged interest above an annual rate of 6% during the period of the
borrower's active duty status. The Act also applies to a borrower who was on
reserve status and is called to active duty after origination of the mortgage
loan. A prolonged, significant military mobilization as part of the war on
terrorism or the war in Iraq could increase the number of the borrowers in our
securitized pools who are subject to this Act and thereby reduce the interest
payments collected from those borrowers. To the extent the number of borrowers
who are subject to this Act is significant, the cash flows we receive from loans
underlying our on-balance sheet securitizations and from our residual interests
would be reduced, which could cause us to reduce the carrying value of our
residual interests and would decrease our earnings. In addition, the Soldiers'
and Sailors' Civil Relief Act of 1940, imposes limitations that would impair the
ability of the servicer to foreclose on an affected mortgage loan during the
borrower's period of active duty status, and under certain circumstances, during
an additional three month period thereafter. Any such reduction in our cash
flows or impairment in our performance could have a material adverse effect on
our results of operations, financial condition and business prospects.
The inability to attract and retain qualified employees could significantly harm
our business.
We are dependent on our account executives and retail loan officers to attract
borrowers by, among other things, developing relationships with financial
institutions, other mortgage companies and brokers, real estate agents,
borrowers and others. We believe that these relationships lead to repeat and
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
referral business. The market for skilled account executives and loan officers
is highly competitive and historically has experienced a high rate of turnover.
In addition, if a manager leaves New Century, there is an increased likelihood
that other members of his or her team will follow. Competition for qualified
account executives and loan officers may lead to increased hiring and retention
costs. If we are unable to attract or retain a sufficient number of skilled
account executives at manageable costs, we will be unable to continue to
originate quality mortgage loans that we are able to sell for a profit, which
would have a material adverse effect on our results of operations, financial
condition and business prospects.
An interruption in or breach of our information systems may result in lost
business.
We rely heavily upon communications and information systems to conduct our
business. Any failure or interruption or breach in security of our information
systems or the third-party information systems on which we rely could cause
underwriting or other delays and could result in fewer loan applications being
received, slower processing of applications and reduced efficiency in loan
servicing. We are required to comply with significant federal and state
regulations with respect to the handling of customer information, and a failure,
interruption or breach of our information systems could result in regulatory
action and litigation against us. We cannot assure you that such failures or
interruptions will not occur or if they do occur that they will be adequately
addressed by us or the third parties on which we rely. The occurrence of any
failures or interruptions could have a material adverse effect on our results of
operations, financial condition and business prospects.
The success and growth of our business will depend upon our ability to adapt to
and implement technological changes.
Our mortgage loan origination business is currently dependent upon our ability
to effectively interface with our brokers, borrowers and other third parties and
to efficiently process loan applications and closings. The origination process
is becoming more dependent upon technological advancement, such as the ability
to process applications over the Internet, accept electronic signatures, provide
process status updates instantly and other customer-expected conveniences that
are cost-efficient to our process. In addition, we are in the process of
implementing a new loan origination system. Implementing and becoming proficient
with the new loan origination system and other new technology will require
significant financial and personnel resources. There is no guarantee that the
implementation of our new loan origination system or other new technology will
be successful. To the extent that we become reliant on any particular technology
or technological solution, we may be adversely affected to the extent that such
technology or technological solution (i) becomes non-compliant with existing
industry standards, (ii) fails to meet or exceed the capabilities of our
competitors' equivalent technologies or technological solutions, or (iii)
becomes increasing expensive to service, retain and update. Any failure to
acquire technology or technology solutions when necessary could limit our
ability to remain competitive in our industry and could also limit our ability
to increase the cost-efficiencies of our operating model, which would have a
material adverse effect on our results of operations, financial condition and
business prospects.
We may be required to repurchase mortgage loans or indemnify investors if we
breach representations and warranties, which could adversely impact our
earnings.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
When we sell loans, we are required to make customary representations and
warranties about such loans to the loan purchaser. Our whole loan sale
agreements require us to repurchase or substitute loans in the event we breach a
representation or warranty given to the loan purchaser or make a
misrepresentation during the mortgage loan origination process. In addition, we
may be required to repurchase loans as a result of borrower fraud or in the
event of early payment default on a mortgage loan. Likewise, we are required to
repurchase or substitute loans if we breach a representation or warranty in
connection with our securitizations. The remedies available to a purchaser of
mortgage loans are generally broader than those available to us against the
originating broker or correspondent. Further, if a purchaser enforces its
remedies against us, we may not be able to enforce the remedies we have against
the sellers. The repurchased loans typically can only be financed at a steep
discount to their repurchase price, if at all. They are also typically sold at a
significant discount to the unpaid principal balance. Significant repurchase
activity could negatively affect our cash flow and results of operations.
We are exposed to risk of environmental liabilities with respect to properties
to which we take title.
In the course of our business, we may foreclose and take title to residential
properties, and could be subject to environmental liabilities with respect to
these properties. We may be held liable to a governmental entity or to third
parties for property damage, personal injury, investigation, and clean-up costs
incurred by these parties in connection with environmental contamination, or may
be required to investigate or clean up hazardous or toxic substances, or
chemical releases at a property. The costs associated with investigation or
remediation activities could be substantial. In addition, as the owner or former
owner of a contaminated site, we may be subject to common law claims by third
parties based on damages and costs resulting from environmental contamination
emanating from the property. If we ever become subject to significant
environmental liabilities, our business, financial condition and results of
operations could be materially and adversely affected.
Our charter and bylaws and Nevada law contain provisions that could discourage a
takeover.
Our amended and restated certificate of incorporation and our amended and
restated bylaws include various provisions that could delay, defer or prevent a
takeover attempt that may be in the best interest of our stockholders. These
provisions include the existence of a classified board of directors, the ability
of our board of directors to issue shares of our preferred stock without any
further stockholder approval and requirements that (i) our stockholders give
advance notice with respect to certain proposals they may wish to present for a
stockholder vote, (ii) our stockholders act only at annual or special meetings
and (iii) two-thirds of all directors approve a change in the number of
directors on our board of directors. Issuance of our preferred stock could
discourage bids for the common stock at a premium as well as create a depressive
effect on the market price of our common stock.
We are also subject to Nevada General Corporation Law which could discourage
potential acquisition proposals, delay or prevent a change of control and
prevent changes in our management.
If we do not manage our growth effectively, our financial performance could be
harmed.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Rapid growth places, and will continue to place, certain pressures on our
management, administrative, operational and financial infrastructure. As of
December 31, 2003, we had no employees as all of our personnel were independent
contractors; however, we have recently applied for licensure under the
California Department of Corporations as a Consumer Finance Lender and will
begin hiring loan executives as employees. Many of these employees have a
limited understanding of our systems and controls. The increase in the size of
our operations may make it more difficult for us to ensure that we originate
quality loans and that we service them effectively. We will need to attract and
hire additional sales and management personnel in an intensely competitive
hiring environment in order to preserve and increase our market share. At the
same time, we will need to continue to upgrade and expand our financial,
operational and managerial systems and controls.
Various factors may cause the market price of our common stock to become
volatile, which could adversely affect our ability to access the capital markets
in the future.
The market price of our common stock may experience fluctuations that are
unrelated to our operating performance. In particular, the price of our common
stock may be affected by general market price movements as well as developments
specifically related to the consumer finance industry and the financial services
sector. These could include, among other things, interest rate movements,
quarterly variations or changes in financial estimates by securities analysts,
or a significant reduction in the price of the stock of another participant in
the consumer finance industry. This volatility may make it difficult for us to
access the capital markets through additional secondary offerings of our common
stock, regardless of our financial performance.
ITEM 3: CONTROLS AND PROCEDURES
a) Evaluation of disclosure controls and procedures. Our chief executive officer
and principal financial officer, after evaluating the effectiveness of the our
"disclosure controls and procedures" (as defined in the Securities Exchange Act
of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by
this annual report (the "Evaluation Date"), has concluded that as of the
Evaluation Date, our disclosure controls and procedures were adequate and
designed to ensure that material information relating to the Company and our
consolidated subsidiaries would be made known to him by others within those
entities.
(b) Changes in internal control over financial reporting. There were no
significant changes in the our internal control over financial reporting during
the fourth fiscal quarter that materially affected, or are reasonably likely to
materially affect, the our internal control over financial reporting.
27
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 27, 2004 DL Pacific Center LP ("DL Pacific") filed a lawsuit for
$40,444 plus costs and attorney's fees against us in San Diego County Superior
Court. The suit alleges that, after we purchased San Francisco Funding, Inc.
("SFF") in November 2003, we assumed SFF's obligations pursuant to DL Pacific's
lease with SFF by accepting the benefits of such lease and by negotiating with
DL Pacific for amendments to the lease. We are vigorously defending the lawsuit.
It is managements opinion, that we have meritorious defenses based primarily
upon the facts, among others, that (1) we did not accept the benefits of the
lease and/or (2) the alleged promise(s) made by us is (are) unenforceable under
the California Statute of Frauds because, among other reasons, the alleged lease
was for more than one year and the alleged authority of any agent of Silverado
Financial, Inc. was not in writing, as required under the Statute.
On July 23, 2004 Robert E. Vener ("Vener") filed a first amended complaint to
his lawsuit for late charges of $500 for November, 2003, utility charges of $800
for November, 2003, and $7,500 for rent for December 2003 plus costs and
attorney's fees against us in Marin County Superior Court. The suit alleges
that, after we purchased San Francisco Funding, Inc. ("SFF") in November 2003,
we assumed SFF's obligations pursuant to Vener's lease with SFF by stating and
representing to Vener that we would be responsible for any amounts due from SFF
pursuant to the lease, and that Vener relied on our representations by allowing
SFF to remain on the premises following SFF's default in the payment of rent on
the lease. We are vigorously defending the lawsuit. It is management's opinion,
that we have meritorious defenses based upon the facts, among others, that we
did not state or represent that we would be responsible for any amounts due from
SFF pursuant to the lease.
In regard to the DL Pacific and/or Vener lawsuit(s), management intends to file
a cross-complaint against SFF and its major stockholder(s) Mr. and Mrs. Daniel
Selis, for indemnity for the cost of defending the actions and for breach of
contract, fraud and/or interference with our advantageous business relationships
because of : (1) their material breaches of the SFF stock purchase agreement and
their material misrepresentations to us of their liabilities and obligations,
(2) SFF's written false statements to its creditors that we had assumed their
debts, and (3) their forwarding of SFF's phone calls to our offices and
directing their creditors to call our offices concerning payment of their
liabilities and obligations. We anticipate that SFF and the Selis' will file a
non-meritorious cross-complaint against us for breach of the stock purchase
agreement.
On July 16, 2004, the company was served with a complaint by the State of
California, Department of Industrial Relations on behalf of a former employee of
Silverado Mortgage (formerly Realty Capital Corporation) for back wages of
$10,937.50 and penalties of $288.46 for an indeterminate number. It is
management's opinion, that we have meritorious defenses based upon the facts,
among others, that claimant was acting as an independent contractor who was paid
for services performed and her claims are baseless.
On August 16, 2004, we received a complaint from Attorney's representing
Subway.com alleging damages in the amount of $60,000 for breach of contract
regarding a promotional campaign. Management intends to vigorously defend this
lawsuit as it is our opinion that Subway.com breached our contract by failing to
perform its duties there under. It is management's opinion, that we have
meritorious defenses based upon the facts, among others, that the contract was
never approved by the compensation committee of the Silverado Financial
28
LEGAL PROCEEDINGS - continued
Mortgage, no work was ever performed by Subway.com and no consideration was
given to Subway.com to execute any agreement.
ITEM 2. CHANGES IN SECURITIES
On January 13, 2004 the Company also issued 55,866 unrestricted shares under its
registered 2004 Officers, Directors, Employees and Consultants Stock
Compensation Plan at a fair value of $10,000 to a consultant for services
performed during the previous quarter for assistance with the rescission of San
Francisco Funding, Inc.
On January 13, 2004 the Company also issued 88,281 unrestricted shares under its
registered 2004 Officers, Directors, Employees and Consultants Stock
Compensation Plan to two individuals at a fair value of $14,505 for consulting
services in connection with work on the Company's web site, assistance with
acquisitions and consulting services related to planning for advertising our
mortgage business.
On February 27, 2004 the Company issued 360,000 restricted common shares for
fair value to the officers of the Company for accrued compensation of $83,937
and 235,500 restricted common shares for $45,036 for services through February
2004. The shares were issued under Section 4(2) of the 1933 Securities Act.
On March 11, 2004 the Company issued 20,000 unrestricted shares to one
consultant under its registered 2004 Officers, Directors, Employees and
Consultants Stock Compensation Plan for legal services at a fair value of $3,400
for legal work.
During the quarter ended March 31, 2004 the Company amortized a total of $6,970
of legal services which had been previously paid for in advance with restricted
common shares and recorded as deferred compensation.
Also during the quarter ended March 31, 2004 the Company issued 615,000
restricted common shares to accredited investors for $61,500 of cash. A total of
$6,150 was paid in finders fees resulting in the Company receiving $55,350. The
shares were issued under Section 4(2) of the 1933 Securities Act.
On April 21, 2004 the Company issued 26,471 restricted common shares at a deemed
value of $4,500 to a public relations company for services rendered during 2003.
The shares were issued under Section 4(2) of the 1933 Securities Act.
On April 23, 2004 the Company issued 55,556 restricted common shares to an
accredited investor in a private placement for $5,000 cash. The shares were
issued under Section 4(2) of the 1933 Securities Act.
On May 4, 2004 the Company issued 266,667 restricted common shares as a retainer
to its legal counsel. The shares were issued under Section 4(2) of the 1933
Securities Act.
On June 10, 2004 the Company issued 434,386 unrestricted common shares under its
registered 2004 Officers, Directors, Employees and Consultants Stock
Compensation Plan to an individual at a fair value of $85,000 for consulting
services in connection with work on the Company's web site, computer system set
up and maintenance in the two offices and assistance in the preparation of the
Company's last annual audit and quarterly financial statement. Also on June 10,
2004 the Company issued 150,000 restricted common shares to an accredited
investor in a private placement for $12,000 and 35,000 restricted common shares
at a deemed value of $1,700 to a licensed broker as a finders fee.
29
CHANGES IN SECURITIES - continued
On June 17, 2004 the Company issued 1,800,000 shares under an escrow agreement
to Michael Petrullo and 200,000 restricted common shares to Michael Berstein
pending the closing of the acquisition of Lending Tech.com, Inc. The shares were
issued under Section 4(2) of the 1933 Securities Act.
On June 24, 2004 the Company issued 145,051 shares to two directors for the
settlement of cash advances of $17,406. On the same date the Company issued
49,500 shares to two employees at a deemed value of $5,940. The shares were
issued under Section 4(2) of the 1933 Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certificate of Chief Executive Officer quarterly certification
pursuant to section 302 of the Sarbanes-Oxley act of 2002
31.2 Certificate of Chief Financial Officer quarterly certification
pursuant to section 302 of the Sarbanes-Oxley act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18 u.s.c. section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley act of
2002
32.2 Certification of Chief Financial Officer pursuant to 18 u.s.c. section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley act of
2002
(b) Reports on Form 8-K
A Form 8-K/A was filed on April 7, 2004, reported in Items 4
pertaining to the Change in the Registrant's Certifying Accountants.
A Form 8-K was filed on May 20, 2004, reported in Items 2 and 7
pertaining to the acquisition of Lendingtech.com, Inc. The agreement
was amended to extend the closing date until an audit of Lendingtech,
com's historical financials were provided.
30
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.
SILVERADO FINANCIAL, INC.
/s/ John E. Hartman
-------------------------------------
Date: August 19, 2004
By: John E. Hartman
President and Chief Executive Officer
/s/ Albert A. Golusin
-------------------------------------
Date: August 19, 2004
By: Albert A. Golusin
Chief Financial Officer
31
Exhibit 31.1
QUARTERLY CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John E. Hartman., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Silverado Financial,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
IN WITNESS WHEREOF, the undersigned has executed this certification as of the
19th day of August 2004.
/s/ John E. Hartman.
-----------------------------
John E. Hartman
Chief Executive Officer
32
Exhibit 31.2
QUARTERLY CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Albert Golusin, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Silverado Financial,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
IN WITNESS WHEREOF, the undersigned has executed this certification as of the
19th day of August 2004.
/s/ Albert Golusin
-----------------------------
Albert Golusin
Chief Financial Officer
33
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Silverado Financial, Inc. (the
"Company") on Form 10-QSB for the period ending June 30, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, John E.
Hartman., Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
IN WITNESS WHEREOF, the undersigned has executed this certification as of the
19th day of August 2004.
/s/ John E. Hartman.
-----------------------------
John E. Hartman
Chief Executive Officer
34
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Silverado Financial, Inc. (the
"Company") on Form 10-QSB for the period ending June 30, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Albert
Golusin, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
IN WITNESS WHEREOF, the undersigned has executed this certification as of the
19th day of August 2004.
/s/ Albert Golusin
-----------------------------
Albert Golusin
Chief Financial Officer
35