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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 333-04072
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SOVEREIGN CREDIT FINANCE I, INC.
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(Name of small business issuer in its charter)
TEXAS 75-2645150
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4015 BELTLINE ROAD, BUILDING B, DALLAS, TEXAS 75244
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(Address of principal executive offices) (Zip Code)
972-960-5500
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(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: NONE
Name of exchange on
Title of each class which registered
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------------------------------- -------------------------------
Securities registered under Section 12(g) of the Exchange Act: NONE
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(Title of class)
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(Title of class)
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Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B contained in this form,
and no disclosure will be contained this form, and no disclosure
will be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.[X]
State issuers revenues for its most recent fiscal year $178,072
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State the aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to the
price at which the common equity was sold, or the average bid and
asked prices of such common equity, as of a specified date within
the past 60 days. (See definition of an affiliate in Rule 12b-2
of the Exchange Act). NONE
Note: If determining whether a person is an affiliate will
involve an unreasonable effort and expense, the issuer may
calculate the aggregate market value of the common equity held by
non-affiliates on the basis of reasonable assumptions, if the
assumptions are stated.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports
required to be filed by Section 12, 13, or 15(d) of the Exchange
Act after the distribution of securities under a plan confirmed
by a court.
N/A
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the last practicable date.
1,000 SHARES
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB (e.g.,
Part I, Part II, etc.) into which the document is incorporated:
(1) any annual report to security holders;(2) any proxy or
information statement; and (3) any prospectus filed pursuant to
Rule 424(b) or (c ) of the Securities Act of 1933("Securities
Act"). The listed documents should be clearly described for
identification purposes (e.g., annual report to security holders
for the fiscal year ended December 24, 1990).
Transitional Small Business Disclosure Format (Check One):
Yes No X
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2
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SOVEREIGN CREDIT FINANCE I, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-QSB
PART I PAGE
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Item 1. Description of Business. 4
Item 2. Description of Property. 5
Item 3. Legal Proceedings. 5
Item 4. Submission of Matters to a Vote of Security Holders. 5
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters. 6
Item 6. Management's Discussion and Analysis or Plan of
Operation. 6
Item 7. Financial Statements. 7
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure 8
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the
Exchange Act 9
Item 10. Executive Compensation. 11
Item 11. Security Ownership of Certain Beneficial Owners
and Management 11
Item 12. Certain Relationships and Related Transactions. 12
Item 13. Exhibits and Reports on Form 8-K. 12
3
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PART I
Item 1. Description of Business.
Sovereign Credit Finance I, Inc. (the "Company") was formed in 1996
as a Texas corporation for the purpose of purchasing, collecting
and servicing retail installment sales contracts and notes secured
by motor vehicles (the "Contracts"). The Company is a subsidiary
of Sovereign Credit Holdings, Inc. ("Holdings"). Sovereign Credit
Corporation ("Sovereign"), which serves as manager of the Company,
is also a Subsidiary of Holdings. Sovereign Associates, Inc.
("SAI") which provides purchasing and collecting services on behalf
of the Company, is a subsidiary of Sovereign. The Company has no
employees.
The Contracts are generally entered into by an established network
of motor vehicle dealers (the "Dealers") with customers who
generally cannot obtain a loan from a local financial institution
or from the credit facilities of a major automobile manufacturer.
Contracts are purchased and serviced on behalf of the Company under
the terms of a Master Purchasing Agreement and a Servicing
Agreement (collectively, the "Servicing Agreement"). SAI, as the
entity responsible for collection services to the Company, has been
in the note purchase and collection business since 1991. During
1997 it has acquired and implemented an automatic dialer that
prompts collectors as to when an account is delinquent, displays
account history and status on the computer screen, and calls the
customer. The Company believes SAI provides adequate collection
services.
Contracts are purchased from Dealers at a discount on the face
amount of the note. Contracts may be purchased in bulk or on an
individual or point-of-sale basis. Because the Dealers sell
primarily older vehicles with high mileage to high risk customers,
the discount may range from 10% to 60% of the gross projected
proceeds of the note. Such discount is split into interest and
discount components, then recognized into income as collections are
received from the customer. A portion of the discount may be set
aside as a reserve against future losses, in which case the
discount would not be accreted into income.
Funding for the Company operations comes from various sources. The
Company is offering pursuant to a prospectus up to $20 million in
11% Notes Payable (the "Notes") due February 15, 2001. As of June
30, 1997, approximately $5.0 million in Notes had been sold. From
the gross proceeds from the Notes, commissions of eight percent are
paid to broker dealers for marketing the Notes. The Company will
use up to two percent of the proceeds to pay offering and
organization expenses. The remaining proceeds are used to
purchase contracts. Proceeds from cash collections are used to pay
servicing fees and purchase additional contracts.
The Company or SAI has agreements or business relationships with
approximately 75 principal Dealers in fourteen states, primarily in
the South and Southwest United States. Because of the geographic
distribution and number of the Dealers, there has been an adequate
supply of relatively good quality Contracts available for purchase.
No Dealer comprises more than 10% of the total amount of Contracts
which the Company has sought for purchase.
There are several relatively large substandard automobile finance
companies with which the Company competes. During the last year
there has been significant negative press regarding the performance
of companies in this industry. The presence of these
4
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companies has presented opportunities and obstacles to the Company.
Because of the financial difficulties of the competition, there
has been an increase in the availability of Contracts to purchase
in the market. And because of the closing of one company's
regional office, Sovereign was able to hire additional experienced
personnel. However because of the negative press, investors have
been less inclined to invest in companies in this industry and, at
least during the period from February through May, the Company has
not sold Notes at the rate it had anticipated.
The Company differentiates itself from and competes with its
competition on the basis of size and quality of service. Because
Sovereign and SAI manage a relatively few number of notes, the
collection department is able to at least attempt to contact every
customer with a delinquent account. Additionally, SAI has
established underwriting criteria and creative dealer agreements
which cull a significant amount of Contracts which have a higher
probability of defaulting prior to maturity.
Item 2. Description of Property
(not applicable)
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
(not applicable)
5
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
(not applicable)
Item 6. Management's Discussion and Analysis or Plan of Operation.
For the 12 month period comprising the fiscal year ending June 30,
1998, management intends to continue to purchase Contracts to the
extent its sources of liquidity allow. The Company intends to
continue to offer the Notes through January 31, 1998 or until the
offer is terminated, whichever comes first. For such 12 month period,
management believes that the anticipated sources of cash flow will be
sufficient to meet the Company's requirements and does not anticipate
the need to raise additional capital.
6
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Item 7. Financial Statements
Independent Auditors Report
Balance Sheet
Statement of Operations
Statement in Changes in Stockholders' Deficit
Statement of Cash Flows
Notes to Financial Statements
7
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INDEPENDENT AUDITOR'S REPORT
Board of Directors
Sovereign Credit Finance I, Inc.
We have audited the accompanying balance sheet of Sovereign Credit Finance I,
Inc. as of June 30, 1997 and the related statements of operations, changes in
stockholders' deficit and cash flows for the period from March 19, 1996
(inception) through June 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sovereign Credit Finance I,
Inc. as of June 30, 1997 and the results of its operations and its cash flows
for the period from March 19, 1996 (inception) through June 30, 1997 in
conformity with generally accepted accounting principles.
BELEW AVERITT LLP
August 26, 1997
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SOVEREIGN CREDIT FINANCE I, INC.
Balance Sheet
June 30, 1997
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 158,310
Installment contracts receivable, net (Note 2) 3,124,642
Other current assets 86,526
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Total current assets 3,369,478
DEBT ISSUANCE COSTS, net of accumulated
amortization of $30,812 (Note 5) 590,861
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$3,960,339
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LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 106,242
Dealer payable 71,401
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Total current liabilities 177,643
NOTES PAYABLE (Note 3) 4,057,861
STOCKHOLDERS' DEFICIT
Common stock, $.01 par value, 50,000 shares authorized,
1,000 shares issued and outstanding 10
Additional paid-in capital 990
Deficit (276,165)
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(275,165)
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$3,960,339
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See accompanying notes to financial statements.
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SOVEREIGN CREDIT FINANCE I, INC.
Statement of Operations
Period from March 19, 1996 (Inception)
through June 30, 1997
REVENUES - Interest income $ 178,072
EXPENSES
Contract purchase fees (Note 5) 294,106
Interest expense 61,894
General and administrative (Note 5) 44,925
Amortization of debt issuance costs (Note 5) 30,812
Contract servicing fees (Note 5) 22,500
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Total expenses 454,237
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LOSS BEFORE INCOME TAXES (276,165)
INCOME TAXES (Note 4) -
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NET LOSS $(276,165)
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NET LOSS PER SHARE $ (276)
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WEIGHTED AVERAGE SHARES OUTSTANDING
USED IN THE NET LOSS PER SHARE
CALCULATION 1,000
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See accompanying notes to financial statements.
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SOVEREIGN CREDIT FINANCE I, INC.
Statement of Changes in Stockholders' Deficit
Period from March 19, 1996 (Inception)
through June 30, 1997
Common Stock
Outstanding Additional
--------------- paid-in
Shares Amount capital Deficit Total
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BALANCE, March 19, 1996
(Inception) - $ - $ - $ - $ -
ISSUANCE OF COMMON SHARES 1,000 10 990 - 1,000
NET LOSS - - - (276,165) (276,165)
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BALANCE, June 30, 1997 1,000 $10 $990 $(276,165) $(275,165)
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See accompanying notes to financial statements.
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SOVEREIGN CREDIT FINANCE I, INC.
Statement of Cash Flows
Period from March 19, 1996 (Inception)
through June 30, 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from operations $ (276,165)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of debt issuance costs 30,812
Other current assets (86,526)
Accounts payable and accrued liabilities 106,242
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Net cash used in operating activities (225,637)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of installment contracts (3,460,060)
Collections on installment contracts 335,418
Issuance of common stock 1,000
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Net cash used in investing activities (3,123,642)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 4,057,861
Debt issuance costs (621,673)
Increase in dealer payables 71,401
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Net cash provided by financing activities 3,507,589
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NET INCREASE IN CASH 158,310
CASH AND CASH EQUIVALENTS, beginning of period -
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CASH AND CASH EQUIVALENTS, end of period $ 158,310
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SUPPLEMENTAL INFORMATION
Interest paid $ 31,859
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See accompanying notes to financial statements.
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SOVEREIGN CREDIT FINANCE I, INC.
Notes to Financial Statements
June 30, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Sovereign Credit Finance I, Inc. (Company) was incorporated in Texas on
March 19, 1996. The Company is a subsidiary of Sovereign Credit
Holdings, Inc. (Parent) and was formed for the purpose of purchasing,
collecting and servicing retail installment sales and lease contracts
and notes secured by motor vehicles (Contracts). The Contracts are
purchased from various automobile dealers, and typically involve
consumers who cannot obtain loans from local financial institutions or
from the credit facilities of major automobile manufacturers. The
"creditworthiness grade" of the obligors on the Contracts is usually "C"
or "D". The Company does business primarily in the south and southwest.
Sovereign Credit Corporation (SCC), which is also a subsidiary of the
Company's Parent, administers and manages the ongoing operations of the
Company. The Company has contracted with Sovereign Associates, Inc.
(SAI), a subsidiary of SCC, to provide purchasing and collecting
services.
PRESENTATION
The financial statements present the activity for the period from March 19,
1996 (inception) through June 30, 1997. The statements are
reflected as such due to the minimal activity occurring from inception
through June 30, 1996.
MANAGEMENT ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses during the reporting period. Actual results may
vary from such estimates.
CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments exposed to concentrations of credit
risk consist primarily of cash and notes receivable. Cash is maintained
in Federally insured financial institutions which are considered to be
of high credit quality. Notes receivable are collateralized by titles
to automobiles. However, these notes receivable are generally with
customers whose past credit problems cause the creditworthiness of the
loans to carry a grade of "C" or "D". Some of the notes receivable have
been purchased from dealers with full or partial recourse. Because cash
is Federally insured and notes receivable are collateralized by specific
automobiles, management considers concentrations of credit risk to be
limited.
FINANCIAL INSTRUMENTS
The carrying amounts of cash, cash equivalents and contracts receivable,
less the associated dealer holdbacks, approximate fair value because of
the actual or expected short maturity of these instruments. The
carrying amount of the notes payable may change with market interest
rates or approximate market rates.
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CASH AND CASH EQUIVALENTS
Time deposits with maturities at date of purchase of three months or
less are considered components of cash.
INTEREST INCOME
Interest income on Contracts is recognized using the interest method of
accounting until the underlying obligation becomes 90 days past due or
the collateral securing the contract is repossessed, whichever occurs
first. At such time, the Company suspends the accrual of revenue and
provides an allowance for possible losses on uncollected interest income
previously reported in earnings.
ALLOWANCE FOR CREDIT LOSSES
The Company maintains an allowance for credit losses which, in the
opinion of management, adequately reserves against expected future
losses in the portfolio of installment contracts receivable. The
Company's primary business involves purchasing installment receivables
at a discount. A portion of this discount is treated as a nonrefundable
reserve against which credit losses are charged. Additional provisions
for credit losses, if necessary, are charged to income in amounts
considered by management to be adequate to absorb future credit losses
on the outstanding receivables.
Provision for credit losses is dependent on a number of factors,
including, but not limited to, the level and trend of net charge-offs
and the overall economic conditions in the markets in which the Company
operates. Because of the inherent uncertainty involved in predicting
the future performance of those factors, there can be no assurance
regarding the future level of provision for credit losses.
DEBT ISSUANCE COSTS
Debt issuance costs are amortized over the life of the Notes using the
interest method.
DEALER PAYABLE
As part of certain contract purchase agreements, the Company establishes
a dealer holdback at the time of purchase to protect the Company from
potential losses associated with installment contracts. The dealer
holdback is established initially as a reduction to the gross amount
receivable under the contract. As payments on the contract are received
from the customer, the portion of the dealer holdback which is earned by
the dealer is reclassified as dealer payable.
EARNINGS PER SHARE
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS 128), was issued. SFAS 128 specifies the
computation, presentation and disclosure requirements for earnings per
share (EPS) for entities with publicly-held common stock or potential
common stock. SFAS 128 simplifies the standards for computing EPS
previously found in Accounting Principles Board Opinion No. 15,
"Earnings per Share" (APB 15), and makes them comparable to
international EPS standards. It replaces the presentation of primary
EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the statement of
operations for all entities with complex capital structures and requires
a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS
computation. SFAS 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods;
earlier application is
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not permitted. SFAS 128 requires restatement of all prior-period EPS
data presented. The Company will adopt SFAS 128 in its financial
statements as of and for the year ending June 30, 1998 and, based on
current circumstances, does not believe the effect of adoption will be
material.
2. INSTALLMENT CONTRACTS RECEIVABLE
Installment contracts receivable consist of net balances receivable on
Contracts which are collateralized by the related vehicles and earn
interest at rates ranging from 9.16% to 30.83%. The average term of each
Contract is approximately 24 months.
Installment contracts receivable consisted of the following at June 30,
1997:
Gross installment contracts receivable at June 30, 1996 $ -
Additions through acquisition of contracts 6,169,553
Reductions from collections on contracts (335,418)
Gross charge-offs (19,794)
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Gross installment contracts receivable at June 30, 1997 5,814,341
Unearned finance charges (1,295,584)
Unearned purchase discounts (504,348)
Unearned dealer holdback (177,243)
Allowance for credit losses (712,524)
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$ 3,124,642
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A summary of the changes in the allowance for credit losses is as follows:
Balance at June 30, 1996 $ -
Nonrefundable reserve for loan losses 724,524
Installment contracts receivable charged off against
allowance for credit losses, net (12,000)
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$ 712,524
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3. NOTES PAYABLE
Notes payable (Notes) are unsecured, payable to various entities and
individuals and bear interest at 11%, payable monthly. Principal is
payable in 6 equal installments commencing on September 15, 2000. The
Notes mature February 15, 2001, at which time all unpaid principal and
interest are due.
The Company has the option to redeem the Notes, in whole or in part, on
any principal payment date. The redemption price is equal to the
outstanding principal balance plus accrued interest through the date of
the redemption.
4. INCOME TAXES
The Company had available at June 30, 1997, unused operating loss
carryforwards of approximately $276,000 which may be applied against
future taxable income. The carryforward will expire in 2012 if not
previously utilized. At an assumed tax rate of 34%, this carryforward
results in a deferred tax asset.
<PAGE>
At June 30, 1997, the Company recorded a net long-term deferred tax
asset of approximately $94,000, for which a valuation allowance was
provided based on uncertainties regarding realization of the related tax
benefits.
The components of the deferred tax asset at June 30, 1997 are approximately
as follows:
Net operating loss carryforward $ 94,000
Less valuation allowance (94,000)
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$ -
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A reconciliation between the statutory Federal income tax rate and the
effective income tax rates is as follows:
Statutory Federal income tax rate 34.0%
Valuation allowance (34.0)%
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Provision for income taxes -%
-----
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The Company is subject to the Texas franchise tax law which includes an
income tax provision applicable to all corporations doing business in
Texas. As a result, the Company is required to pay annually, the
greater of 4.5% of Federal taxable income or .25% of net taxable capital.
No Federal or state income tax provision was required due to the
Company's net operating loss.
5. RELATED PARTY TRANSACTIONS
The Company pays SAI a monthly contract servicing fee of $20 for each
Contract that is not assigned for repossession and $125 for each
financed vehicle assigned for repossession. The Company be entitled to
reimbursement of its expenses incurred in connection with the
repossession and resale of vehicles out of the proceeds from such
resales. Contract servicing fees totaled approximately $22,000 for the
period from March 19, 1996 (inception) through June 30, 1997.
Additionally, the Company pays SAI a contract purchase fee equal to the
lesser of $500 or 5% of the total amount of installments due under each
Contract as of the date of purchase for Contracts purchased during the
preceding calendar month. Contract purchase fees totaled approximately
$294,000 for the period from March 19, 1996 (inception) through June 30,
1997.
SCC manages the ongoing operations of the Company and has agreed to pay
certain general, administrative and overhead expenses incurred by the
Company. In addition, SCC pays all offering and organization expenses
of the Company, with the exception of broker dealer fees, to the extent
such expenses exceed 2% of the gross proceeds from the sale of the
Notes. Expenses in excess of 2% of such amounts paid on behalf of the
Company through June 30, 1997 were approximately $32,000.
The Company pays SCC 5.5% of the gross proceeds from the sale of the
Notes (5% of the gross proceeds in excess of $9,000,000). Debt issuance
costs paid to SCC at June 30, 1997 were approximately $200,000. These
debt issuance costs are stated at cost less accumulated amortization.
SCC also administers noteholder payments, communications and relations
for an investor administration fee of 1/12 of .5% of the outstanding
principal balance of the Notes. The Company paid approximately $4,000
in investor administration fees to SCC for the period from March 19,
1996 (inception) through June 30, 1997. Investor administration fees
are included in general and administrative expenses.
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure
(not applicable)
8
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PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
The names, ages, backgrounds and principal occupations of the
directors and executive officers of the Company, Holdings and SAI are
as follows:
STARKE (TRACY) TAYLOR, III, age 54, has been President and a Director
of the Company, Holdings, Sovereign and SAI since the formation of
such companies. Mr. Taylor is a Dallas native. He graduated from
Southern Methodist University in 1966 with a B.B.B. degree and
thereafter began a career in professional investment services. From
approximately 1970 to 1971 Mr. Taylor was head of the Employee
Benefits department of Marsh and McClennan's Dallas office, where he
specialized in employee benefits.
Mr. Taylor used his experience in the pension investment field as a
springboard into a diversified financial career. As a principal of
the Watson and Taylor Companies, he was involved in the development
and management of self storage facilities, business centers, shopping
centers, real estate holdings nationwide and real estate notes. He is
a co-general partner in partnerships holding approximately four and
one half million square feet of self storage facilities.
Mr. Taylor was a partner in Lyco Acquisitions Number One, a company
which purchased all of the oil and gas properties of Bethlehem Steel.
Later, he was a principal in Tex-Feld Petroleum Company, which
operated a significant drilling program in the Southwest.
Mr. Taylor has been a general partner in over 100 limited partnerships
which involved real estate or oil and gas investments, with total
original investor contributions of approximately $150 million. The
investment objectives of these partnerships differes significantly
with those of the company. Many of these partnerships have
experienced adverse business developments and conditions. Real estate
revenues have been adversely affected by the overall decline in the
economy. Many of these partnerships utilized a significant amount of
leverage and have experienced significant operating deficits. The
properties owned by various of the partnerships were acquired by their
lenders through foreclosure proceedings.
Mr. Taylor has also served as a general partner or chief executive
officer for 35 partnerships formed to acquire financial notes.
Clearlake, Ltd., of which Mr. Taylor was an individual general
partner, filed a voluntary petition under Chapter 11 of the Federal
bankruptcy laws in September 1992. The plan of reorganization was
confirmed by the court, and all creditors were paid in full by April
1994.
Mr. Taylor is a past Chairman of the Board of Priority One, an
international missionary organization, is on the Board of Trustees of
Dallas Theological Seminary, is a past member of the Dallas County
Advisory Board of the Salvation Army, is a board member of the
Northeast Texas Regional Board of Young Life, and was the founding
Chairman of the Board of the Park Central Athletic Association. He is
past President of the Dallas fire Fighters Association, past President
of the North Dallas Chamber of
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Commerce and a past member of the Board of Directors of the MBank
Lincoln Center and MBank Preston. Mr. Taylor was recognized in 1983
by D MAGAZINE as one of Dallas' ten most outstanding business leaders.
Mr. Taylor is married and has five children.
WILLIAM P. GLASS, age 39, has been Vice President of Marketing and a
director of Sovereign since April, 1990 and Vice President and a
director of the Company and Holdings since the formation of such
companies. Mr. Glass is responsible for all marketing and investor
relations activities for the Company. He attended Baylor University
and was drafted by the Cincinnati Bengals of the National Football
League in 1980. Mr. Glass began his business career in 1981 with Hank
Dickerson & Co. Realtors. In his position as a Sales Associate he led
the Office Division in sales for two of the three years he was
employed the Hank Dickerson & Co.
In 1993, Mr. Glass formed BDI Commercial Real Estate Inc.,
specializing in commercial real estate brokerage and the syndication
of real estate properties. Mr. Glass was venture manager in over 30
general partnerships. In 1989, Mr. Glass sold BGI Commercial Real
estate and joined Cornerstone Commercial Real Estate, Ltd., as Senior
vice President. Cornerstone is a sister company to the Trammell Crow
Development Company. In April, 1990, Mr. Glass left Cornerstone and
became a Vice President of Sovereign.
Mr. Glass is on the Executive Committee of the Board of Directors of
his father's prison ministry, the Bill Glass Evangelistic Association.
He is a former board member of Young Life of Southwest Dallas County.
He is a member of Hope Community Church in Cedar Hill. He is a member
of Oak Cliff Country Club in Dallas. Mr. Glass resides in DeSoto,
Texas with his wife and three children.
B. A. BREEDING, age 56, serves as Vice President and Controller of
Sovereign. Mr. Breeding is responsible for financial accounting,
banking and the day-to-day financial duties. He has been with
Sovereign since April 1997. From 1989 to January 1995, he was
employed by the Lomas Financial Group, a real estate finance,
investment, and servicing company, in a financial management capacity.
Mr. Breeding began a private accounting practice in 1996, where he
continued until joining Sovereign.
Immediately prior to joining Sovereign in March 1997, Mr. Breeding had
his own accounting practice. Prior to that he was a Vice President
with the Lomas Financial Group, responsible for the financial
reporting for some of its publicly traded companies. Prior to joining
Lomas, Mr. Breeding was Senior Vice President and Controller of a
Dallas bank.
Mr. Breeding is married and has one child.
CHRISTOPHER R. FRATTAROLI, age 31, is Treasurer and a director of the
Company, Holdings and Sovereign, and is Treasurer of SAI. He has been
with the Company and Holdings since their formations, and with
Sovereign and SAI since December 1994. Mr. Frattaroli is responsible
for marketing to potential institutional investors. Mr. Frattaroli
graduated from Duke University in 1988 with a Bachelor of Arts degree
in Art History.
In May, 1988, Mr. Frattaroli joined Intermarket Management, Inc. at
which he attained
10
<PAGE>
the office of Vice President and enjoyed a minority interest in the
company. The company's primary business focus was index arbitrage of
equity, currency, and commodity markets. Mr. Frattaroli left the
company in February, 1992.
In March, 1992, Mr. Frattaroli joined American International group
Trading, Inc. as a trader/market maker in the foreign exchange market.
Mr. Frattaroli left the company in December, 1994. Mr. Frattaroli
trade in the spot market as well as arbitraging with the futures
exchanges.
Mr. Frattaroli joined Sovereign in December of 1994. He is married to
the daughter of A. Starke Taylor, III and has two children.
The directors and executive officers of the Company have served in
their respective offices since the organization of the Company. All
directors hold office until the next annual meeting of stockholders or
the election and qualification of their successors
Item 10. Executive Compensation
No director or officer of the Company has received any compensation
from the Company since its formation, nor will they receive any
compensation from the Company prior to satisfaction in full of the
Notes.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information, as of June 30, 1997
relating to the beneficial ownership of the Company's Common Stock by
any person or "group", as that term is used in Item 403 of Regulation
S-B, known to the Company to own beneficially 5% or more of the
outstanding shares of Common Stock, and known to the Company to be
owned by each director of the Company and by all officers and
directors of the Company as a group. Except as otherwise indicated,
each of the persons named below is believed by the Company to possess
sole voting and investment power with respect to the shares of Common
Stock beneficially owned by such person.
Amount and Nature of
Beneficial Ownership(1)
-----------------------
Name of Director or Number of
Name and Address of Shares Percentage
Beneficial Owner Outstanding of Class
------------------- ----------- --------
Sovereign Credit Holdings, Inc.(2) . . . . . . . . . 1,000 100%
4015 Beltline Road
Building B
Dallas, Texas 75244
A. Starke Taylor, III . . . . . . . . . . . . . . . 0(2) --
William P. Glass . . . . . . . . . . . . . . . . . . 0(2) --
Christopher R. Frattaroli. . . . . . . . . . . . . . 0(2) --
Diane D. Taylor, Trustee . . . . . . . . . . . . . . 0(3) --
4015 Beltline Road
Building B
Dallas, Texas 75244
All officers and directors as a group (3 persons). . 0(4) --
- ---------------
(1) The information as to beneficial ownership of Common Stock has been
furnished
11
<PAGE>
by the respective shareholders, directors and officers of the Company.
(2) The directors of Sovereign Credit Holdings, Inc. ("Holdings")
could be deemed to share voting and investment powers over the shares
owned of record by Holdings. The directors of Holdings are A. Starke
Taylor, III, William P. Glass and Christopher R. Frattaroli. Mr.
Taylor owns 30% of Holding's common stock. Mr. Glass owns 10% of
Holding's common stock. The business address for Mr. Taylor, Mr.
Glass, and Mr. Frattaroli is Holding's address.
(3) Diane D. Taylor, the wife of Mr. A. Starke Taylor, III, serves as
trustee of the Austin S. Taylor, III investment trust No. 2, which
owns 43.92% of Holding's common stock and of which Mr. A. Starke
Taylor, III, is the beneficiary, and of five trusts which each owns 3%
of Holding's common stock and of which her and A. Starke Taylor, III's
children (including Mr. Frattaroli's wife) are the beneficiaries. The
business address for Ms. Taylor and each of the foregoing trusts is
Holding's address.
(4) This amount excludes shares owned directly by Holdings.
Item 12. Certain Relationships and Related Transactions
Both the Company and Sovereign are subsidiaries of Holdings. In addition,
SAI is a subsidiary of Sovereign. Sovereign manages a number of other
note purchasing entities (the "Securitization Subsidiaries"), including
entities whose business purposes are or will be, or may include, the
purchasing and servicing of used motor vehicle retail installment contracts
and notes. Purchasing and servicing for such entities will be conducted by
SAI. Sovereign or Holdings beneficially own from 50% to 100% of the
outstanding equity of the Securitization Subsidiaries. Sovereign manages
all of the Securitization Subsidiaries in addition to the Company.
Under the terms of the Servicing Agreement, the Company pays Servicing fees
of $20 per month per Contract to SAI. The Company also pays to SAI a
Purchase Administration Fee equal to the lesser of $500 per Contract
purchased, or 5% of the total amount of installments due under the Contract
as of the date of purchase. SAI will be paid a fee of $125 for each
vehicle repossessed and will be entitled to reimbursement of its expenses
incurred in connection with the repossession and resale of vehicles out of
the proceeds from such resales.
The Company will pay Sovereign a monthly fee (the "Investor Administration
Fee") equal to 1/12th of 0.5% of the aggregate outstanding principal amount
of the Notes to reimburse expenses incurred in the administration of
Noteholder payments, communications and relations for the Company. The
Company will use up to 2% of the gross proceeds from the sale of the Notes
to pay offering and organizational expenses. Sovereign has agreed to pay
such expenses to the extent that they exceed 2% of the gross proceeds from
the sale of the Notes. The Company will pay to Sovereign a fee equal to
5.5% of the gross proceeds from the sale of the Notes (5% of the gross
proceeds in excess of $9 million) for administering and managing the
ongoing operations of the Company.
The Company may purchase Contracts from Sovereign, SAI or its affiliates,
including affiliates that are Dealers, but only if such Contracts are not
in default and satisfied the purchasing criteria established in the trust
indenture and the Servicing agreement at the time of their purchase from
the original Dealer. Any qualifying Contracts will be sold by Sovereign,
SAI or its affiliate to the Company at a price for each Contract equal to
the Purchase Administration Fee paid by the original purchaser plus an
amount determined to provide the Company an internal rate of return on its
investment in the
12
<PAGE>
Contract from the remaining unpaid installments equal to the original
purchaser's initial internal rate of return on its investment in the
Contract, as of its purchase from the Dealer, assuming in both cases
the Contract was paid in full in accordance with its scheduled
installments. Such seller will retain any installments received by it
prior to purchase by the Company and any profits resulting from the
difference between such installments and the reduction in the purchase
price paid to such seller by the Company from the price paid by such
seller to the Dealer.
Item 13. Exhibits and Reports on form 8-K.
(a) See Exhibits following the signature page.
(b) Reports on Form 8-K. A report on Form 8-K dated June 24, 1997 was
filed during the last quarter of the period covered by this report,
reporting a change in the issuer's certifying accountant.
13
<PAGE>
SIGNATURES
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ A. Starke Taylor, III President,
----------------------------- (principal executive
A. Starke Taylor, III officer) and director September 29, 1997
/s/ Christopher R. Frattaroli Treasurer
----------------------------- (principal financial officer
Christopher R. Frattaroli and chief accounting
officer) and director September 29, 1997
/s/ William P. Glass Director
----------------------------- September 29, 1997
William P. Glass
Supplemental information to be Furnished With Reports Filed Pursuant to
Section 15(d) of the Exchange Act By Non-reporting Issuers:
No annual report or proxy material has been sent to security holders for
the period covered by this report, as of September 29, 1997. The
registrant intends to send an annual report to its noteholders for such
period, and shall furnish copies of such material to the Commission when it
is sent to security holders.
14
<PAGE>
EXHIBIT INDEX PURSUANT TO ITEM 601 OF REGULATION S-B
Number Description
- ------ -----------
2 not applicable
3 (i) Articles of Incorporation of Sovereign
Credit Finance I, Inc.*
3 (ii) Bylaws of Sovereign Credit Finance I, Inc.*
4 Indenture between Sovereign Credit
Finance I, Inc. and Sterling Trust Company,
as Trustee*
10.1 Master Contract Purchase Agreement between
Sovereign Credit Finance I, Inc. and
Sovereign Associates, Inc.*
10.2 Servicing Agreement between Sovereign
Credit Finance I, Inc. and Sovereign
Associates, Inc.*
10.3 Subscription Escrow Agreement between
Sovereign Credit Finance I, Inc. and
River Oaks Trust Company as Escrow Agent*
10.4 Form of Broker-Dealer Selling Agreement*
10.41 Broker-dealer Selling Agreement Between
Sovereign Credit Finance I, Inc. and
American Investment Services, Inc.*
10.5 Form of Subscription Agreement*
10.6 Form of Promissory Note of Sovereign Credit
Corporation*
11 not applicable
15 not applicable
16 not applicable
18 not applicable
<PAGE>
19 not applicable
22 not applicable
23 not applicable
24 not applicable
27 Financial Data Schedule
99 not applicable
* Incorporated by reference to the registrant's Registration Statement on
Form S-1, Commission file number 333-04072
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE ISSUER'S AUDITED FINANCIAL STATEMENTS FOR THE PERIOD ENDED
JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 158,310
<SECURITIES> 3,124,642
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,369,478
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,960,339
<CURRENT-LIABILITIES> 177,643
<BONDS> 4,057,861
0
0
<COMMON> 1,000
<OTHER-SE> (276,165)
<TOTAL-LIABILITY-AND-EQUITY> 3,960,339
<SALES> 0
<TOTAL-REVENUES> 178,072
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 329,343
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61,894
<INCOME-PRETAX> (276,165)
<INCOME-TAX> 0
<INCOME-CONTINUING> (276,165)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> (276)
<EPS-DILUTED> 0
</TABLE>
