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As filed with the Securities and Exchange Commission on MAY 15, 1998
REGISTRATION NO. 333-29067
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
======================================
AMENDMENT NO. 3 TO
FORM SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
SENTINEL FINANCING LTD., L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
FLORIDA 6153 65-0776789
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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601 Gateway Blvd., Suite 260, South San Francisco, CA 94080; (650) 869-3600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JONATHON W. HOLLANDSWORTH
Sentinel Acceptance Corporation
President
601 Gateway Blvd., Suite 260
South San Francisco, CA 94080
(650) 869-3600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
Copies to:
MARK A. BONENFANT
Buchalter, Nemer, Fields & Younger
a Professional Corporation
601 South Figueroa Street, Suite 2400
Los Angeles, CA 90017-5704
(213) 891-0700
__________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
__________
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /x/
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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SENTINEL FINANCING LTD., L.P.
CROSS REFERENCE SHEET
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Item No. and Caption Location or Caption in Prospectus
-------------------- ---------------------------------
<S> <C> <C>
1. Forepart of the Registration
Statement and Outside Front Cover
of the Prospectus . . . . . . . . . Cover Page of the Registration
Statement; Outside Front Cover Page
of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus . . . . . . . . Inside Front Cover Page; Outside
Back Cover Page; Available
Information
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges . . . . . . . . . . . . . . Prospectus Summary; Risk Factors;
The Company
4. Use of Proceeds . . . . . . . . . . Use of Proceeds
5. Determination of Offering Price . . Not Applicable
6. Dilution . . . . . . . . . . . . . . Not Applicable
7. Selling Security Holders . . . . . . Not Applicable
8. Plan of Distribution . . . . . . . . Outside Front Cover Page; Plan of
Distribution
9. Legal Proceedings . . . . . . . . . Litigation
10. Directors, Executive Officers,
Promoters and Control Persons . . . Management
11. Security Ownership of Certain
Beneficial Owners . . . . . . . . . Principal Security Holders
12. Descriptions of Securities . . . . . Summary of Offering; Description of
Notes
13. Interest of Named Experts and
Counsel . . . . . . . . . . . . . . Not Applicable
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities . . . . . . . . . . . . Not Applicable
15. Organization Within Last Five Years Business
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16. Description of Business . . . . . . Business
17. Management's Discussion and Analysis
or Plan of Operation . . . . . . . . Management's Discussion and
Analysis of Financial Condition and
Results of Operation
18. Description of Property . . . . . . Business
19. Certain Relationships and Related
Transactions . . . . . . . . . . . . Risk Factors; Management; Certain
Transactions
20. Market For Common Equity and Related
Stockholder Matters . . . . . . . . Not Applicable
21. Executive Compensation . . . . . . . Management
22. Financial Statements . . . . . . . . Financial Statements
23. Changes In and Disagreements with
Accountants on Accounting and
Financial Disclosure . . . . . . . . Not Applicable
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Subject to Completion, Dated ___________, 1998
PROSPECTUS
$15,000,000
Sentinel Financing Ltd., L.P.
12% Secured Notes
Due 2003
Minimum Offering: $1,000,000
Sentinel Financing Ltd., L.P., a Florida limited partnership (the
"Company"), which is a newly organized, single purpose entity, is hereby
offering $15,000,000 aggregate principal amount of 12% Secured Notes due
2003 (the "Notes"). The general partner of the Company is Sentinel
Acceptance Corporation.
The Notes will bear interest at the rate of 12% per annum, payable
monthly on the 15th day of each month commencing ______________, 1998. The
Notes will mature on _____________, 2003, and are subject to redemption at
the option of the Company, in whole or part, at any time at a redemption
price equal to the outstanding principal amount plus accrued interest
thereon, without premium or penalty. The Company will not be required to
make any mandatory redemption or sinking fund payment with respect to the
Notes prior to maturity. Notes may be purchased in multiples of $1,000,
subject to a minimum purchase requirement of $2,000.
The Notes are backed by: (i) retail installment sales contracts secured
by new and used automobiles and light trucks ("Installment Contracts"); and
(ii) certain other collateral described herein. The Installment Contracts
will be purchased with the net proceeds from the sale of the Notes.
Purchasers of Notes must look to the Installment Contracts and related motor
vehicle collateral as the primary source of payment on the Notes.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK, INCLUDING
DEFAULT ON THE INSTALLMENT CONTRACTS. SEE "RISK FACTORS" COMMENCING ON PAGE
7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PURCHASERS
OF THE NOTES.
DEBT SECURITIES OFFERED WITH A HIGH INTEREST RATE OR YIELD GENERALLY
INVOLVE MORE RISK THAN MANY OTHER MEDIUM TERM DEBT INSTRUMENTS WITH LOWER
INTEREST OR YIELD. NO PROVISION HAS BEEN MADE BY THE COMPANY TO ESTABLISH A
SINKING FUND TO PAY THE INTEREST ON THE NOTES OR TO REPAY THE PRINCIPAL.
THESE ARE SPECULATIVE SECURITIES. NO PUBLIC MARKET IS EXPECTED TO
DEVELOP FOR THESE SECURITIES. INVESTORS SHOULD EXPECT TO RETAIN OWNERSHIP OF
THE NOTES AND BEAR THE ECONOMIC RISK OF THEIR INVESTMENT FOR THE ENTIRE TERM
OF THE NOTES.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES AGENCY NOR HAS THE COMMISSION
OR ANY STATE SECURITIES AGENCY PASSED ON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<CAPTION>
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
Underwriting Discounts Proceeds to
Price to Public and Commissions(1) Company(2)
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note 100% 7.5% 92.5%
- ----------------------------------------------------------------------------------------------
Total Minimum $ 1,000,000 $ 75,000 $ 925,000
- ----------------------------------------------------------------------------------------------
Total Maximum $ 15,000,000 $ 1,125,000 $ 13,875,000
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
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(1) The Notes are being offered on a "best-efforts" basis by Attkisson, Carter &
Akers as placement agent. The Company has agreed to indemnify Attkisson,
Carter & Akers against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. The Company may also reimburse
participating dealers for actual due diligence expenses in an amount up to
.5% of the principal aggregate amount of Notes sold and may pay
participating dealers a non-accountable expense allowance not to exceed .5%
of the principal aggregate amount of Notes sold. See "Plan of
Distribution."
(2) Before deduction of a 4% investment banking and marketing fee payable to
Banc Services Corporation and before deducting expenses of approximately
$200,000 to $300,000 payable by the Company. See "Use of Proceeds," and
"Plan of Distribution."
The Notes are being offered on a "best efforts" basis on behalf of the
Company by Attkisson, Carter & Akers. All proceeds from the sale of Notes
will be deposited in an escrow account at Greater Bay Trust Company (the
"Escrow Account"), and no funds will be released to the Company therefrom
unless and until the Company has sold $1,000,000 in aggregate principal
amount of the Notes (the "Minimum Offering"). Upon sale of the Minimum
Offering, the Notes shall be released to purchasers of the Notes (the
"Noteholders") bearing an issue date equal to the date the purchase price
therefor was deposited into the Escrow Account. If the Minimum Offering is
not sold by [120 days after the effective date], 1998, all monies received
will be refunded to investors, together with any net investment earnings
thereon from the investment of such monies by the Escrow Account. In such
event no expenses will be deducted from the escrowed funds. In the event of
any such return of funds, the investors shall not be entitled to receive the
stated interest rate on the Notes. Subscribers for the Notes shall have no
right to withdraw any funds from the Escrow Account. Any subsequent sales
proceeds from the Notes will be immediately available for use by the Company.
The Company reserves the right to reject any subscription in whole or in part.
The offering will terminate on [24 months after the effective date],
unless sooner terminated by the Company in its sole discretion.
The date of this Prospectus is ___________________________________, 1998
2
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SUITABILITY STANDARDS
Notes will only be sold to a person who makes the required minimum
purchase and represents in writing that such person: (i) has annual gross
income of at least $30,000 and a net worth of at least $30,000 (exclusive of
home, home furnishings and automobiles); or (ii) has a net worth of at least
$75,000 (exclusive of home, home furnishings and automobiles); or (iii) is
purchasing in a fiduciary capacity for a person who (or an entity which)
satisfies either of the foregoing clauses (i) or (ii). In the case of sales
to fiduciary accounts, the suitability standards must be satisfied by the
beneficiary; however, where the fiduciary is the donor of funds used for the
investment, the fiduciary and not the beneficiary must meet the foregoing
standards.
All participating dealers will make reasonable inquiry to assure
compliance with these suitability standards, and the Company will not accept
subscriptions from any person who does not represent in the Subscription
Agreement filed as an exhibit to the Registration Statement of which this
Prospectus is a part ("Subscription Agreement") that he or she meets such
standards. These suitability standards are established due to the
illiquidity of the Notes and other risk factors associated with an investment
in the Notes. See "Risk Factors."
No transfers will be permitted of less than the minimum permitted
purchase, nor may an investor transfer, fractionalize or subdivide notes so
as to retain less than such minimum purchase.
[END INSIDE FRONT COVER]
3
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO
APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Sentinel Financing, Ltd., L.P., a Florida limited partnership (the
"Company"), is a newly formed single purpose company organized to specialize
and engage in the purchase, collection and servicing of retail installment
contracts ("Installment Contracts") originated by independent automobile
dealers ("Dealers"). The Company will acquire directly and through
intermediaries Installment Contracts originated by Dealers in connection with
their sale of new and used automobiles and light duty trucks ("Financed
Vehicles") to borrowers with limited credit histories or past credit problems
("Non-prime Consumers"). The Company's general partner is Sentinel Acceptance
Corporation, a Florida corporation ("SAC"), and its sole limited partner is
Four Star Financial Services, LLC, a California limited liability company
("Four Star"). Management services will be provided to the Company by SAC.
The automobile finance industry is the second largest consumer finance
market in the United States and is estimated by analysts to have been a $400
billion market in terms of outstanding credit at the end of 1996. The vast
majority of automobile financing is provided by captive finance subsidiaries
of major auto manufacturers, banks and credit unions for new cars purchased
by "A" credit consumers ("Prime Consumers"). These lenders tend to avoid or
do not consistently serve the Non-prime Consumer market, where primarily used
automobiles are purchased and financed by borrowers with "B," "C" or "D"
credit. The Non-prime Consumer market is estimated to constitute 20% of the
auto finance market and expected to grow annually between $60 and $75 billion
and is serviced primarily by independent finance companies such as the
Company. The Company believes that the Non-prime Consumer market for used
cars is growing due, in part, to (i) demographic and economic trends, (ii)
the extension of the average useful life of automobiles and (iii) the
increasing number of late-model used automobiles being offered for sale,
including former rental cars and vehicles coming off-lease.
The Company intends to supply additional capital to the Non-prime
Consumer market. Utilizing state of the art technology to approve, process,
service and collect automobile loans of a "B" and "C" nature, the Company
will leverage long-term relationships established by its sales force. The
Company will employ sophisticated behavioral models developed by Fair-Issac
of San Rafael, CA to support credit decisions, as well as other tools such as
an internally developed, windows based, loan processing and control systems.
The acquisition and portfolio management systems will support the Company's
commitment to manage the portfolio utilizing the debt policies and practices
applied by commercial banks. See "Risk Factors - Availability of Installment
Contracts."
4
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THE OFFERING
SECURITIES OFFERED $15,000,000 aggregate principal amount of 12% Secured Notes
due 2003 (the "Notes").
MATURITY _______ ___, 2003
INTEREST RATE
AND DATES The Notes will bear interest at the rate of 12% per annum
(the "Note Rate"). Interest will accrue from the date of
issuance, payable monthly on the 15th day of each month.
OPTIONAL
REDEMPTION The Notes will be redeemable at the option of the Company,
in whole or in part, at any time at a redemption price equal
to the outstanding principal amount plus accrued interest
thereon, without premium or penalty.
COLLATERAL The Notes will be secured by a security interest in (i) all
Installment Contracts, acquired with the net proceeds of
this offering, and (ii) certain other collateral described
herein.
SINKING FUND None
USE OF PROCEEDS Net proceeds from the offering will be used for
reimbursement of the expenses associated with this offering,
initial operating expenses and for the purchase of
Installment Contracts. See "Use of Proceeds."
MINIMUM OFFERING The minimum aggregate principal amount of Notes to be sold
pursuant to this Offering is $1,000,000 (the "Minimum
Offering"). All monies received from investors prior to the
date on which the Minimum Offering has been sold (the
"Release Date"), will immediately be deposited in an escrow
account (the "Escrow Account") at Greater Bay Trust Company
(the "Escrow Agent"). On the Release Date all monies in the
Escrow Account shall be released to the Company and the
Notes shall be released to purchasers of the Notes
("Noteholders") bearing an issue date as of the date the
purchase price of each Note was deposited into the Escrow
Account. If the Release Date does not occur on or prior to
[120 days from the effective date], 1998, all monies in the
Escrow Account shall be returned to investors, together with
any net investment earnings thereon and the investors will
not be entitled to the Note Rate. The monies held in the
Escrow Account will be invested by the Escrow Agent in U.S.
government securities, the yield on which is expected to be
substantially lower than the Note Rate.
INDENTURE AND
TRUSTEE The Notes will be issued pursuant to an Indenture of Trust
entered into between the Company and Sterling National Bank,
a national banking association, as trustee (the "Trustee").
5
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The Notes will be offered and sold on a "best efforts"
basis on behalf of the Company by Attkisson, Carter &
Akers, a member of the National Association of Securities
Dealers, Inc. Investor funds will be held in a
subscription escrow account until the minimum of
$1,000,000 in principal amount of the Notes (the "Minimum
Subscription Amount") are sold. If the Minimum
Subscription Amount is not reached on or before
[120 days after effective date], the offering will be
terminated, and the escrowed funds, will be promptly
returned to the subscribing investors by the escrow
agent. Upon receipt of the Minimum Subscription Amount,
the escrowed funds will be released to the Company. See
"Plan of Distribution."
6
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RISK FACTORS
A PURCHASE OF THE NOTES INVOLVES VARIOUS RISK FACTORS, INCLUDING, BUT
NOT LIMITED TO, THE RISKS SET FORTH BELOW. PROSPECTIVE INVESTORS SHOULD
CONSIDER THESE RISK FACTORS IN ADDITION TO THE OTHER INFORMATION CONTAINED IN
THIS PROSPECTUS BEFORE MAKING A DECISION TO PURCHASE THE NOTES.
LIMITED ASSETS AND OPERATING HISTORY. The Company has no prior
operating history and does not have, and is not expected to have any
significant assets other than the Installment Contracts that secure the
Notes. While the Notes remain outstanding, the Company will not engage in
any business other than the purchase, collection and servicing of the
Installment Contracts. The Company's general partner began operations in
1995 and has limited capital, liquidity and experience.
CREDITWORTHINESS OF CONTRACT OBLIGORS. Substantially all of the
Installment Contracts to be purchased by the Company will be Non-prime
Consumer credits. The Non-prime Consumer finance market is comprised of
borrowers who are unable to obtain traditional financing through a bank or a
captive finance company due to either incomplete or imperfect credit
histories. Consequently, the incidence of delinquency or default is expected
to be significantly higher for Non-prime Consumer credits than in the case of
Prime Consumer credits. For these reasons, such Installment Contracts bear
interest at rates significantly higher than in the case of Prime Consumer
credits, but also involve a higher probability of default and greater
servicing costs. The Company's profitability depends, in part, upon its
ability to properly evaluate the creditworthiness of Non-prime Consumers and
efficiently service its Installment Contracts. There can be no assurance
that the discounts negotiated by the Company for Installment Contracts will
accurately reflect the underlying credit risks. Furthermore, as competition
within the industry increases, the Company's ability to negotiate discounts
will be limited even if delinquency rates increase. If the discounts are
inadequate, loan losses may exceed the proceeds of the performing loans, thus
impairing the Company's ability to service the Notes.
ECONOMIC FACTORS AFFECTING DELINQUENCIES. A purchasers' ability to
remit payments as required by the terms of the Installment Contracts is in
most cases dependent on their continued employment, and a job loss will
usually result in defaults on their consumer debts. A prolonged economic
recession resulting in widespread unemployment could cause a significant rise
in delinquencies and charge-offs, which could adversely affect the Company
and affect the Company's ability to pay Noteholders.
AVAILABILITY OF INSTALLMENT CONTRACTS. The Company's ability to
implement its growth strategy depends on its ability to purchase Installment
Contracts meeting its underwriting standards. While management has numerous
relationships with Installment Contract originators, the Company does not
have formalized arrangements with a network of automobile dealers, financial
intermediary or any other originator from which Installment Contracts will be
purchased or through which Installment Contracts will be originated by the
Company. There is no assurance that the Company will be able to find
Installment Contracts to purchase at prices or on terms acceptable to the
Company, or at all. Unfavorable changes in the economic or competitive
environment, or other occurrences resulting in the erosion of the Company's
present and prospective originator base could adversely affect the Company's
operations and impair its ability to achieve continual expansion. If the
Company is unable to purchase suitable Installment Contracts or experiences
delays in purchasing such Installment Contracts, the Company's expected net
interest margin may be reduced, perhaps significantly, which could materially
adversely affect the Company's income and ability to service the Notes.
7
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COMPETITION AND MARKET CONDITIONS. The Non-prime Consumer automobile
finance market is very fragmented and highly competitive. The Company believes
that there are numerous non-traditional consumer finance sources serving this
market. Furthermore, during the past several years, a number of companies have
completed initial public offerings of common stock, the proceeds from which were
to be used (at least in part) to fund expansion and to support increased
purchases of Installment Contracts. Traditional automobile financing sources
include commercial banks, savings and loans, credit unions, captive finance
companies of automobile manufacturers and other consumer lenders, many of which
have significantly greater resources than the Company and may be able to offer
more attractive Installment Contract purchase terms to Dealers. To the extent
that traditional and non-traditional lenders significantly expand their
activities in this market, the Company's ability to execute its business and
growth strategy may be adversely affected. The Company's business is also
affected by certain demographic, economic and industry trends. For example,
these trends include increased sales of used vehicles, the rising price of new
vehicles compared to U.S. median family income and the overall level of interest
rates in general. The Company believes that recent trends favor increased
growth in the portion of the automobile finance industry which serves Non-prime
Consumers. However, a reversal of any of these trends could have a material
adverse affect on the Company's operations, profitability and growth.
Recently, some companies in the auto finance industry have experienced
higher than expected default rates on automobile finance paper from borrowers
who are categorized as "C" or below Non-prime Consumers. These developments
have resulted in the deterioration of the financial condition of some companies
operating in the subprime automobile finance industry.
CONFLICTS OF INTEREST. SAC is the general partner of the Company.
SAC is also the general partner of Sentinel Acceptance Ltd., LP ("Sentinel
Acceptance") and provides management services to Sentinel Acceptance.
Consequently, there will be conflicts of interest with respect to the
allocation of SAC's management time between Sentinel Acceptance and the
Company. Jonathan Hollandsworth, President of SAC will devote approximately
twenty-five percent (25%) of his time to the management of the Company. The
balance of the Company's management team will devote less than five percent
(5%) of their time to the Company's management. SAC will also provide
management, marketing servicing and administrative services to the Company.
There may therefore be conflicts of interest with respect to the allocation
of services, overhead expenses and functions between the activities of SAC,
Sentinel Acceptance and the Company. There can be no assurance that any
particular conflict may be resolved in a manner that does not adversely
affect Noteholders. A significant part of Sentinel Acceptance business is
automobile financing. A potential conflict of interest exists with respect
to determining whether Installment Contracts will be purchased by Sentinel
Acceptance or the Company. To lessen this conflict of interest, Sentinel
Acceptance has agreed that it will not purchase any Installment Contract
until the Company has expended all of its available net proceeds from this
offering for the purchase of Installment Contracts.
The Company will pay SAC for administration, marketing and servicing
provided to the Company, which fees shall consist of the following: (a) one
time boarding fee of $10.00 per Installment Contract; (b) one time
administrative fee of $100.00 per Installment Contract; (c) one time
marketing fee of $150.00 per Installment Contract; and (d) monthly service
fee of $15.00 per Installment Contract. Assuming the Company receives the
minimum proceeds from the sale of the Notes, SAC will receive an aggregate of
approximately $90,000, $80,000, and $80,000 in the first three years,
respectively, for administrative, marketing and servicing fees provided to
the Company. If the Company receives the maximum proceeds from the sale of
the Notes, SAC will receive an aggregate of approximately $485,500, $342,000
and $415,000 in the first three years respectively for
8
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administrative, marketing and servicing fees provided to the Company.
Management believes that the terms of the services provided by SAC are
similar to the terms that would be available from a third party in an
arms-length transaction. See "Business - Operating Expenses," "-Servicing"
and "Certain Transactions - Payments to SAC."
SECURITY FOR NOTES. The Notes are secured by the Installment Contracts
acquired with the net proceeds of this Offering. Although the Noteholders
have been granted a security interest in the Installment Contracts as
security for the Notes, their security position may become unperfected under
certain limited circumstances. If such security interest were not perfected,
the Noteholders would not have a priority claim on the collateral and would,
in effect, be treated as unsecured creditors of the Company. Upon an event
of default under the Notes, if the Noteholders did not have a priority claim
on the collateral through perfection of their security interest, or if they
lose a priority position on the collateral, their ability to sell the
collateral and use the proceeds to pay the Notes would be adversely affected
as other creditors would have an equal, or in some cases, superior, claim to
the collateral, and the Noteholders could suffer a partial or total loss of
principal and unpaid interest on the Notes. See "Certain Legal Aspects of
the Installment Contracts - Security Interests in Financed Vehicles" and
"Description of the Notes -Security."
Statutory liens for repairs or unpaid taxes may have priority over even
a perfected security interest in the Financed Vehicles, and certain state and
federal laws permit the confiscation of motor vehicles used in unlawful
activity which may result in the loss of a secured party's perfected security
interest in a confiscated motor vehicle. Liens for repairs or taxes, or the
confiscation of a Financed Vehicle, could arise or occur at any time during
the term of an Installment Contract. No notice may necessarily be given to
the Company in the event such a lien arises or confiscation occurs.
Certain statutory provisions, including federal and state bankruptcy and
insolvency laws, may limit or delay the ability of the Company to enforce its
rights under the Installment Contracts or to repossess and to resell Financed
Vehicles or enforce a deficiency judgment. In addition, the Company may
determine in its discretion that a deficiency judgment is not an appropriate
or economically viable remedy, or may settle at a significant discount any
deficiency judgment that it does obtain. In the event that deficiency
judgments are not obtained, are not satisfied, are satisfied at a discount or
are discharged in whole or in part in bankruptcy proceedings, the loss will
reduce the collateral securing the Notes, and if other collateral or dealer
recourse agreements are insufficient may adversely affect the ability of the
Company to repay the Notes. In the event of a bankruptcy by the Company, the
Trustee is empowered to file such proofs of claim and other papers or
documents to have the claims of the Trustee and the Noteholders allowed in
any judicial proceedings relative to the Company, its creditors or its
property.
PARTNERSHIP DISTRIBUTIONS. Under the terms of the Company's Partnership
Agreement, the partners of the Company are entitled to quarterly
distributions from Cash Available for Distribution. Cash Available for
Distribution means the remaining cash and other assets available for
distribution to the partners after payment or satisfaction of the following:
(a) all partnership liabilities for ordinary and necessary expenses then due
and owing to the persons other than the partners, (b) all payments currently
due towards interest on the Notes, (c) the current cost of acquiring and
servicing assets (including administrative, marketing and servicing fees
payable to SAC), and (d) such reserves as may be determined by SAC to be
reasonably necessary for the operation of the Company's business. The
Partnership Agreement provides that distributions of Cash Available For
Distribution cannot be made unless at the fiscal quarter or fiscal year end,
as applicable, the Company's net receivables as reflected on the Company's
balance sheet for such fiscal quarter or fiscal year end immediately
preceding the fiscal quarter in which the distribution is to be made exceeds
110% of the principal amount of Notes
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issued and outstanding. These distributions to partners will reduce the
amount of future Installment Contracts that may be acquired and will reduce
cash reserves available for future payments with respect to the Notes in the
event that future cash flow from the Installment Contracts is insufficient to
make Note payments.
EXTENSIVE REGULATORY REQUIREMENTS. The Company's business is subject to
extensive supervision and regulation under federal, state and local laws and
regulations which, among other things, may require the Company to obtain and
maintain certain licenses and qualifications, limit interest rates, fees and
other charges associated with the Installment Contracts purchased by the
Company, require specified disclosures by Dealers to consumers and limit its
right to repossess and sell collateral. An adverse change in, modification
to or clarification of any of these laws or regulations, or judicial
interpretations as to whether and in what manner such laws or regulations
apply to Installment Contracts purchased or originated by the Company, could
result in potential liability related to Installment Contracts previously
purchased and could have a material adverse effect on the Company's financial
condition and results of operations. In addition, due to the
consumer-oriented nature of the industry in which the Company operates and
uncertainties with respect to the application of various laws and regulations
in certain circumstances, industry participants frequently are named as
defendants in litigation involving alleged violations of federal and state
consumer lending or other similar laws and regulations.
The Company is subject to numerous federal laws, including the Truth in
Lending Act, the Equal Credit Opportunity Act and the Fair Credit Reporting
Act and the rules and regulations promulgated thereunder, and certain rules
of the Federal Trade Commission ("FTC"). These laws require the Company to
provide certain disclosures to loan applicants, prohibit misleading
advertising and protect against discriminatory financing or unfair credit
practices. The Truth in Lending Act and Regulation Z promulgated thereunder
require disclosure of, among other things, the terms of repayment, the final
maturity, the amount financed, the total finance charge and the annual
percentage rate charged on each retail installment contract. The Equal
Credit Opportunity Act prohibits creditors from discriminating against loan
applicants (including retail installment contract obligors) on the basis of
race, color, sex, age or marital status. Under the Equal Credit Opportunity
Act, creditors are required to make certain disclosures regarding consumer
rights and must advise consumers whose credit applications are not approved
of the reasons for the rejection. The Fair Credit Reporting Act requires
the Company provide certain information to consumers whose credit
applications are not approved on the basis of a report obtained from a
consumer reporting agency. The rules of the FTC limit the types of property
a creditor may accept as collateral to secure a consumer loan and its holder
in due course rules provide for the preservation of the consumer's claim and
defenses when a consumer obligation is assigned to a subject holder. With
respect to used vehicles specifically, the FTC's Rules on Sale of Used
Vehicles requires that all sellers of used vehicles prepare, complete and
display a Buyer's Guide which explains any applicable warranty coverage for
such vehicles. The Credit Practices Rules of the FTC impose additional
restrictions on loan provisions and credit practices.
Several states, including California where the Company will initially
focus its business, and the federal government have enacted "lemon laws" and
similar statutes concerning protections for purchasers of automobiles. The
application of these statutes may give rise to a claim or defense by an
obligor against a Dealer from or through whom such obligor purchased such
vehicle. These statutes apply to Installment Contracts purchased by the
Company. The Company may be required to cancel Installment Contracts with an
obligor who successfully asserts such a claim or defense, and while the
Company would have a claim against the Dealer if the subject Installment
Contracts had been purchased by the Company, there can be no assurance that
the Company will be made whole in every case in
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which the obligor successfully asserts such rights. The number and amounts
of Installment Contracts with respect to which obligors have asserted such
claims or defenses have been immaterial. Any adverse change in these laws or
regulations, or in the judicial or administrative interpretations thereof,
could have a material adverse effect on the business of the Company.
ABSENCE OF PUBLIC MARKET FOR THE NOTES AND LIMITED TRANSFERABILITY OF
THE NOTES. There is no established trading market for the Notes. The
Company does not intend to list the Notes on any national securities exchange
or to seek the admission thereof to trading in the National Association of
Securities Dealers Automated Quotation System. Noteholders have no right to
cause the Company to redeem, repurchase or prepay their Notes. No transfers
will be permitted of less than the Minimum Purchase, nor may an investor
transfer, fractionalize or subdivide Notes so as to retain less than such
Minimum Purchase. Accordingly, Noteholders will not be able to liquidate
their investment in the Notes in the event of an emergency or for any other
reason and the Notes will not be readily accepted as collateral for loans.
The Notes should be purchased only by persons who have no need for liquidity
in their investment. See "Transferability of Notes."
LIMITED SOURCES FOR REPAYMENT OF THE NOTES. There is no sinking fund
for repayment of the Notes. Generally, the Company expects to use proceeds
of the Installment Contracts not used for operating expenses for the purchase
of additional Installment Contracts, to the extent Installment Contracts are
available on terms acceptable to the Company. As a result, in order to repay
the Notes at maturity, the Company will be obligated to refinance the Notes,
sell the Installment Contracts, incur additional debt, obtain additional
equity investments or engage in some combination of the foregoing. The
Company has no commitments from any source to fund the repayment of the
Notes, and there is no assurance that the Company will be successful in
obtaining the funds necessary for repayment of the Notes on terms acceptable
to the Company or at all. If sufficient funds are not available from any of
such sources, the Company may be unable to repay all or part of the interest
or principal on the Notes.
PREPAYMENT. The Notes may be prepaid, at the option of the Company, in
whole or in part, at any time without any prepayment premium or penalty. A
Noteholder whose Note is prepaid may not have the ability to locate a
suitable replacement investment in anticipation of prepayment. In addition,
if the Notes are prepaid, by refinancing or otherwise, because of a decrease
in interest rates generally, a Noteholder may not be able to reinvest the
proceeds of the Note at the same effective yield.
NO RATING. The Notes will not be rated by any rating agency.
NO AMORTIZATION. The Notes do not provide for the amortization of any
of the principal amount prior to maturity. Accordingly, the Notes involve
greater risk than similar, fully amortizing debt instruments.
NO INTEREST IN THE COMPANY. A Noteholder will not acquire or obtain any
partnership or other equity interest in the Company by a purchase of Notes.
Noteholders have no ability to vote on Company matters or to otherwise
influence management of the Company.
SIZE OF OFFERING. In the event the Company sells less than the
$15,000,000 aggregate principal amount of Notes offered hereby, there will be
a smaller portfolio of Installment Contracts as collateral, Noteholders will
bear a higher proportionate share of organizational and issuance costs
thereby reducing the net proceeds available for purchase of Installment
Contracts, and Noteholders may have an increased risk of loss. In addition,
the performance of individual Installment Contracts securing the Notes will
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have a greater effect on the ability of the Company to pay the Notes than if
a large portion of the offered Notes are sold. See "Use of Proceeds."
USE OF PROCEEDS
The following table sets forth the estimated application by the Company
of the anticipated proceeds of the sale of Notes.
<TABLE>
<CAPTION>
Minimum Midpoint Maximum
------- -------- -------
($1,000,000) ($7,500,000) ($15,000,000)
USE OF PROCEEDS Amount Percent Amount Percent Amount Percent
- --------------- ---------- ------- ---------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Purchase of Installment $ 660,000 66% $6,175,000 82.3% $12,550,000 83.6%
Contracts from
Unaffiliated Third
Parties
Estimated Initial 15,000 1.5 112,500 1.5 225,000 1.5
Expenses Related to
Purchase of
Installment Contracts(1)
Sales Commissions and 75,000 7.5 562,500 7.5 1,125,000 7.5
Concession(2)
Due Diligence 10,000 1.0 75,000 1.0 150,000 1.0
Reimbursement and
Non-Accountable
Expense Allowance(3)
Investment Banking and 40,000 4.0 300,000 4.0 600,000 4.0
Marketing Fee(4)
Other Offering 200,000 20.0 275,000 3.66 350,000 2.3
Expenses(5)
Total Use of Proceeds $1,000,000 100% 7,500,000 100% $15,000,000 100%
---------- ------- ---------- ------- ----------- -------
---------- ------- ---------- ------- ----------- -------
</TABLE>
(1) Assuming the respective minimum amount, midpoint amount or maximum amount,
whichever is the case, is sold within six months after the offering
commences. Approximate amounts to be paid to SAC for administrative,
marketing and servicing fees for the first three months following the
release of proceeds to the Company after which time the Company expects
such fees to be paid from operations.
(2) The Company will pay the participating dealers a selling commission of up
to 7.5% of the sale price for each Note sold. See "Plan of Distribution."
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(3) Includes reimbursement for actual due diligence expenses which may be paid
to the participating dealers in an amount of up to .5% of the principal
amount of each Note and payments which may be made to participating dealers
by the Company as a non-accountable expense allowance not to exceed .5% of
the principal amount of each Note. See "Plan of Distribution."
(4) An investment banking and marketing fee will be paid to Banc Services
Corporation for services including advising the Company with respect to
this offering, the preparation of this prospectus, and assistance with the
selling efforts for the Notes.
(5) Includes legal, accounting, printing, registration and qualification fees,
and trustee and escrow fees and other offering costs. These costs have or
will be incurred by SAC and Four Star and will be reimbursed by the Company
following the offering.
The Company does not intend to use any proceeds of the offering to service
obligations to Noteholders.
Prior to the purchase of Installment Contracts net proceeds not otherwise
expended as described above will be invested in short term, interest-bearing
securities.
To the extent the maximum amount of proceeds is not raised the Company
intends to prioritize the use of proceeds first through the payment of all
expenses, reimbursements and commissions related to this offering, and then to
apply the balance of the proceeds toward the purchase of Installment Contracts.
See "Business--Business Strategy and Purchase of Installment Contracts."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
As of the date of this Prospectus, the Company has had no operating
history. The net proceeds of the sale of the Notes will be employed for
reimbursement of the expenses associated with this offering, initial operating
expenses and for purchase the Installment Contracts. See "Business - Business
Strategy and Purchase of Installment Contracts." While the Notes remain
outstanding, the Company will not engage in any business other than the
purchase, collection and servicing of the Installment Contracts (including
repossession and resale of the vehicle collateral).
The Company's use of the net collection proceeds from the Installment
Contracts will be restricted to payments on the Notes and to payments of
expenses and purchases of additional Installment Contracts. At such time as the
Company's net receivables exceed 110% of the principal amount of the Notes then
outstanding the Company's partnership agreement permits distributions to the
Company's partners. See "Certain Transactions - Partnership Distributions."
CAPITAL RESOURCES AND LIQUIDITY.
The Company's primary sources of funds for repayment of the Notes will be
proceeds from the Installment Contracts and any income on the reinvestment of
such proceeds. The Company does not have, nor is it expected to have in the
future, any significant source of capital for repayment of the Notes and the
expenses incurred by it other than proceeds from the Installment Contracts and
any income from reinvestment of such proceeds. Payment of the principal or
interest on the Notes is not guaranteed by any other person or entity.
Nevertheless, management of the Company believes that the Company will realize
sufficient proceeds from the foregoing sources to pay all installments of
interest
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<PAGE>
when due on the Notes. In order to repay the Notes at maturity, the Company
will be obligated to refinance the Notes, sell the Installment Contracts,
incur additional debt, obtain additional equity investments or engage in some
combination of the foregoing. The Company has no commitments from any source
to fund the repayment of the Notes and there is no assurance that the Company
will be successful in offering the funds necessary for repayment of the Notes
on terms acceptable to the Company or at all. If sufficient funds are not
available from any of such sources, the Company may be unable to repay all or
part of the principal on the Notes.
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<PAGE>
BUSINESS
INTRODUCTION
The Company is a Florida limited partnership formed in August 1997 as a
single purpose entity organized to engage in the purchase, collection and
service of Installment Contracts originated principally by independent
Dealers who sell new and used automobiles and light duty trucks to Non-prime
Consumers.
THE AUTOMOTIVE FINANCE INDUSTRY
INDUSTRY CHARACTERISTICS AND TRENDS. The automobile financing industry
estimated by analysts at $400 billion in 1996 is the second largest consumer
debt market nationwide. The industry originated in the early part of this
century when automobile manufacturers created financing subsidiaries in
response to the hesitancy of banks to enter the new and potentially risky
market of providing credit to consumers to purchase mass produced
automobiles. Banks eventually competed with these captive subsidiaries, and
in the deregulated environment of the early 1980s, savings and loans also
entered the market. Financing subsidiaries and banks did not completely
service the market, however, as the captive subsidiaries focused on
stimulating demand for the manufacturers' new vehicles, and depositary
institutions were generally positioned to serve low-risk borrowers without
the necessary collection efforts and charge-offs associated with higher risk,
Non-prime Consumers. Financing sources for Non-prime Consumers were further
restricted during the tightening credit standards imposed by the late 1980s
de-regulation of the banking industry and the almost simultaneous decline in
the earnings of automobile manufacturers resulting in lower credit ratings
and higher cost of capital for their captive subsidiaries.
THE NON-PRIME MARKET. The Non-prime Consumer credit segment of the
automotive finance market is comprised of individuals who are unable to
obtain traditional financing through traditional sources such as a bank or a
captive finance company due to either incomplete or imperfect credit
histories. The Company believes that the Non-prime Consumer portion of the
automotive finance market is between $60 billion and $75 billion.
Despite the opportunities perceived by the Company in the Non-prime
Consumer market, many traditional financing sources, such as banks, savings
and loans, credit unions, captive finance companies and leasing companies do
not consistently provide financing to, or have from time to time withdrawn
from, this market. The Company believes that market conditions, increased
regulatory oversight and capital requirements imposed by governmental
agencies have limited the activities of many banks and savings and loans in
this market. In addition, the Company believes that captive finance arms of
major automotive manufacturers focus their marketing efforts on this segment
when inventory control and/or production scheduling requirements of their
parent organizations dictate a need to focus on this market, and then exit
the market once these sale volumes are satisfied. Moreover, the focus of
these captive finance companies remains on new car financing. Further, many
financial organizations electing to remain in the automotive finance business
have migrated toward higher credit quality customers to reduce their
processing and collection costs. As a result of these conditions, management
believes that the Non-prime Consumer automotive finance market is highly
fragmented, and primarily serviced by smaller finance organizations that
solicit business when and as their capital resources permit. Due to such a
lack of a major, consistent financing source, a number of competitors,
including well capitalized public companies, have entered this market in
recent years. See "- Competition."
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While financing sources for the Non-prime Consumer market were eroding
in the 1980s, the demand for non-prime used automobile financing increased.
Dealers shifting to the used car market found themselves lacking the means as
well as the training, time and financial skills to operate a financing
operation. Furthermore, the Dealers' incentive to sell a vehicle at the
highest price is directly at odds with a financing entity's desire to
maximize the potential for loan repayment. Growth, if any, could be the
result of several primary market stimuli, including aggressive marketing by
non-prime lenders, larger numbers of automobiles subject to expiring leases,
longer vehicle life, growing inability of consumers to afford new vehicles,
and Dealers' preference for the relatively high margins realized on used
vehicles. Because the automobile finance industry is heavily dependent on
the sale of used automobiles, management believes its business is seasonal.
Sales are strongest in the second quarter when consumers receive tax refunds,
and weakest during the winter holidays as consumers are spending their
disposable income on gifts. New vehicle sales are strong during the end of
the model year when dealers offer close-out prices.
Industry analysts report that most Non-prime Consumer lenders purchase
Installment Contracts through agreements with Dealers or other lenders
without direct contact with the borrower. The terms of Installment Contracts
purchased range from one to five years and average up to approximately 36
months. Annual interest rates on the Installment Contracts average
approximately 19.5%. Most Non-prime Consumer lenders service the Installment
Contracts they purchase.
As competition among Non-prime Consumer lenders increases, Dealers are
gaining bargaining power within the industry. Most Dealers have
relationships with at least five Non-prime Consumer lenders, permitting them
to offer credit applications to various companies to find the most rapid and
profitable acceptance. Therefore, successful lenders or their originators
must have close relationships with Dealers and provide prompt and consistent
approval of applications. The larger publicly held lenders have
relationships with more than half of these 10,000 Dealers. In this
environment, skilled personnel with experience in the industry are critical
to maintain relationships that discourage adverse credit selection, to
evaluate Dealer integrity, to properly price loans based on risks assumed and
to ensure adequacy of loss reserves. See "Risk Factors - Limited Assets and
Operating History."
CONSUMER CREDIT CHARACTERISTICS. The Company believes that gradations
exist with respect to the credit profiles of customers of automobile
financing according to the following generalized criteria:
- An "A" credit consumer is a Prime Consumer who has a long credit
history with no defaults, has been employed in the same job for a
period of at least 18 months, and can easily finance a new car
purchase through a bank, a captive finance subsidiary of an automobile
manufacturer or an independent finance company that focuses on Prime
Consumer credit.
- A "B" credit consumer is a Non-prime Consumer who may have had some
slight credit problems in his or her past or may not have been
employed at his or her current job for 18 months. To finance a new or
late-model used car, the "B" credit borrower may not qualify for a
loan from a captive finance subsidiary, but may have success borrowing
from a bank and can access credit through an independent finance
company.
- A "C" credit consumer is a Non-prime Consumer who may have an
inconsistent employment record or more significant or unresolved
problems with credit in the past. To finance a late-model or older
used car purchase, this borrower will generally not be
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<PAGE>
able to obtain a loan from a captive finance subsidiary or a bank,
and will have to access an independent finance company that lends
into this market category.
- A "D" credit consumer is a Non-prime Consumer who has an unfavorable
employment history and serious credit problems, such as a personal
bankruptcy. This borrower's only choice is to finance his or her used
car purchase through an independent finance company that is active in
this market segment.
While such gradations are by nature inexact, the Company will primarily
target Non-prime Consumers who fall into the "B" and "C" categories. The
default rates during the life of non-prime credits range from 5% to 40%.
Finance companies that acquire non-prime credits require higher yields to
compensate for the risks of default and collection expenses assumed. The
Company believes, based on prior experience of its management, that low-grade
finance paper can be re-sold to other finance organizations at a higher grade
after the consumer has made regular payments for at least six months.
BUSINESS STRATEGY AND PURCHASE OF INSTALLMENT CONTRACTS
The Company intends to supply additional capital to the Non-prime
Consumer market. THE COMPANY WILL PRIMARILY FOCUS ON THE CALIFORNIA MARKET,
BUT FROM TIME TO TIME ALSO EVALUATE OTHER GEOGRAPHICAL AREAS IN THE UNITED
STATES FOR OPPORTUNITIES WHERE MANAGEMENT BELIEVES THE PARTICULAR REGIONAL
ECONOMY IS SOUND. Utilizing state of the art technology to approve, process,
service and collect automobile loans of an "B" and "C" nature, the Company
will leverage long-term relationships established by its sales force. The
Company will employ sophisticated behavioral models developed by Fair-Issac
of San Rafael, CA to support credit decisions, as well as other tools such as
an internally developed, windows based, loan processing and control systems.
The acquisition and portfolio management systems will support the Company's
commitment to manage the portfolio utilizing the debt policies and practices
applied by commercial banks. In addition, from time to time, the Company
intends to negotiate non-exclusive purchase arrangements with intermediaries
and originators, including independent financing companies and, to a lesser
extent, individual Dealers. See "Risk Factors - Availability of Installment
Contracts."
RISK MANAGEMENT. The Company intends to manage the
default risks posed by its Non-prime Consumer financing through the structure
of the purchase transaction and the subsequent servicing, portfolio
management and collection procedures, for example the Company intends to:
- - establish an allowance for losses on the date of purchase of 5% to 10% on
all Installment Contracts, in addition to the purchase discount
- - select dealers based on management's prior experience with the dealership,
which have been in operation for a number of years and are in good standing
with management
- - require quarterly reporting by dealers based on their portfolio's
performance
- - enter into agreements with qualified third parties to handle all
repossessions and remarketing
- - utilize "behavioral" scoring analysis models to manage risk, determine loan
loss reserves, stratify collection activities and reduce expenses
- - implement a "commercial banking" quality control review process to identify
and correct systemic deficiencies as well as underwriter credit authority
delegation
- - utilize an automobile credit application scoring model to classify loan
grades of A, B, C and D.
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<PAGE>
DEALER APPROVAL CRITERIA. No credit applications will be accepted from
any Dealer that has not been approved by the Company. Approval will
generally be granted to automobile dealers who meet the following criteria:
- A tangible net worth of $100,000 (exclusive of goodwill or other
intangible assets), or a parent or affiliate which meets the net
worth criterion and guarantees the performance of the obligation
of the automobile dealer under the purchase agreements, replacement
guarantees or other forms of dealer recourse.
- A minimum of three years of successful operation as an automobile
dealer, as evidenced by financial statements or prior tax returns.
(Unless the owner of the Dealer has substantial personal net worth,
and provides a personal guarantee).
- Possess acceptable accounts payable history.
- Experienced contract loss rates during the immediately preceding year
acceptable to the Company.
- Possess acceptable personal credit history (owner and spouse).
- Possess acceptable floor plan references (if applicable).
- Verifiable banking references.
- Possess acceptable mortgage or landlord references.
- Satisfactory onsite premises inspection.
- Possess a current DMV automobile dealer license.
- Is able to obtain signed inter-creditor agreements from various
lenders in order to provide the Company UCC security interest in
financed collateral.
CERTAIN CONTRACT PURCHASE CRITERIA. The Company will endeavor to
purchase Installment Contracts from intermediaries or originators at
discounts to their aggregate remaining unpaid principal balances and at
prices which are below the average wholesale value of the Financed Vehicles.
In addition, the Company will seek to obtain Installment Contracts whose
maturities are less than the remaining useful lives of the Financed Vehicles
and which require substantial down payments. The Company anticipates
purchasing Installment Contracts on a "package" basis involving several
Installment Contacts at one time.
With respect to the credit information to be supplied by borrowers on
the Installment Contracts, the Company has established certain credit
criteria to be satisfied by each borrower. The Company's review will
generally take into account such matters as the individual's stability of
residence, employment history, bank information, credit history, income,
discretionary income, ability to pay, and debt ratio. In order to satisfy
these criteria, a borrower, among other things, must be able to provide
verifiable personal references, must have a valid driver's license issued by
his state of residence, must have been a resident of such state for a minimum
of six months, and must be at least 18 years of age and have no co-signors on
the Installment Contract except immediate family members. In order to
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<PAGE>
verify the foregoing information, the Company will be required to obtain from
the Dealer a copy of the credit application executed by the borrower which
contains the necessary information, to verify by telephone or otherwise the
borrower's addresses, employment and personal references and to obtain a
credit report from a credit reporting agency or from the Dealer.
Although borrowers under the Installment Contracts are anticipated to be
somewhat less creditworthy than typical purchasers of automobiles from new
car dealers, the Company has established certain general criteria to be used
as a guide to purchasing Installment Contracts. These criteria are as
indicated below; however, at the discretion of the Company actual purchase of
packages and individual Installment Contracts may vary substantially from
this guide: (i) the Company expects the purchase discount from the face
amount of the loan will generally range between par and 25% depending on the
creditworthiness of each individual buyer and the Dealer, and the overall
credit quality of the package of Installment Contracts purchased; (ii)
Installment Contracts will usually have an original term of 48 months or
less; (iii) at least one payment will have been made by the borrower on the
Installment Contract; (iv) the age of each Financed Vehicle may not exceed
those listed in the appropriate National Auto Research Market Guides, which
are modified periodically; (v) the borrowers on the Installment Contracts are
required to make a down payment in cash plus net trade-in allowance of 10-25%
of the purchase price of the Financed Vehicles; (vi) the interest rate on the
Installment Contracts will not violate any applicable usury laws; and (vii)
no Installment Contract may be more than one installment in arrears at the
time of the purchase.
THIRD PARTY PORTFOLIO ACQUISITIONS. The Company may also acquire
existing Installment Contract portfolios for investment. These portfolio
acquisitions would normally be in the range of $50,000 to $5 million.
Portfolio acquisitions by the Company will involve a financial and
documentary review including the following:
- All Installment Contracts contained in each portfolio under
consideration for acquisition will be reviewed for completeness and
accuracy of documentation.
- All payment histories will be reviewed and verified.
- Underlying vehicles will be evaluated and the purchase prices will be
verified.
- Uniform Commercial Code lien searches will be performed on all
Installment Contracts acquired. All third party liens will be
required to be removed prior to or upon the Company's acquisition of
the portfolio.
Upon satisfactory completion of the above procedures, the portfolio may
be purchased. The Company may require additional personal and/or corporate
guarantees from the vendor of the portfolio. In some cases, the Company may
require that the Installment Contracts and underlying vehicles be purchased
with full recourse to the sellers of the portfolio should any underlying
Installment Contract obligor default.
OPERATING EXPENSES
In addition to interest on the Notes, the Company believes that its
expenses will include, but are not limited to, expenses and fees for
Installment Contract servicing, custodian fees, purchase and administration
fees, trustees' fees, bank fees and charges, legal fees, title and transfer
fees, account fees, Installment Contract purchase fees, insurance,
repossession, repair and liquidation expenses, enforcement
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of Dealer Installment Contract replacement guarantees and/or other Dealer
recourse arrangements, federal, state and local taxes, out-of-pocket expenses
incurred in connection with any resale of Installment Contracts and other
general and administrative expenses. SAC will provide management, marketing
and administrative services to the Company. The fees for such services
consist of the following:
- One time boarding fee $10.00 per Installment Contract
- Monthly service fee $15.00 per Installment Contract
- One time administrative fee $100.00 per Installment Contract
- One time marketing fee $150.00 per Installment Contract
SERVICING
SAC, (the "Servicer") will undertake the collection process for all
accounts contractually delinquent, and subsequently undertake all
repossession functions. The Servicer will service all Installment Contracts
purchased with the proceeds of this offering. The Company's servicing
activities include (i) monitoring Installment Contracts and collateral, (ii)
accounting for and posting all payments received, (iii) responding to
customer inquiries, (iv) taking all action to maintain the security interest
granted in the Financed Vehicle, (v) investigating delinquencies and
communicating with the borrowers to obtain timely payment, and (vi) pursuing
deficiencies in Installment Contracts.
At the time of a purchase of a Financed Vehicle, the automobile dealer
or intermediary which is selling the Installment Contract to the Company
notifies the purchaser that the Installment Contract will be acquired by the
Company and directs the purchaser to make payments to the Company. The
Servicer mails to the Financed Vehicle owner a welcome letter and coupon book
advising the owner of the purchase of the Installment Contract and where and
how to make payments. The Servicer will also undertake the collection process
for all accounts contractually delinquent, and subsequently all repossession
functions. The Servicer will receive copies of all Installment Contracts
purchased with the proceeds of this offering.
The servicing and collection activities incorporate numerous pro-active
procedures and systems to minimize Installment Contract losses. For example,
the customer will be informed of their responsibilities and obligations with
respect to the Installment Contract upon the purchase of the Installment
Contract by the Company, the necessity of paying on time and of maintaining
insurance coverage, and the related benefits of building a stronger credit
background for future purchases. The customer will also be informed of the
Company's delinquency and repossession policies. The Servicer will utilize
monthly billing statements to bill customers for their monthly payment
obligations. If an account becomes delinquent by more than 5 days the
Servicer will mail a past due notice. A second notice will be mailed if
payment has not been received within 10 days of the due date. When an
account becomes 15 days past due the Servicer will make customary efforts to
contact the borrower by telephone and in writing. The Servicer will continue
its efforts to obtain payment from a borrower whose payment has not been made
until 30 days have elapsed from the due date at which time the account is
turned over to a repossession firm.
The Company's repossession policy will be administered on a case-by-case
basis. For example if a customer's payment is delinquent, the Company's policy
is to work with the customer to permit the customer to keep the Financed
Vehicle, while a suitable solution to the delinquency problem can be
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arranged between the customer and the Servicer. However, should a customer
become seriously delinquent or be dealing in bad faith, the Company will
repossess the customer's Financed Vehicle. Repossessions will be handled by
independent repossession firms engaged by the Servicer. It is presently
anticipated that repossessed vehicles will generally be resold by the
Servicer through wholesale automobile networks or auctions which are attended
principally by Dealers or through an established network of Dealers who will
sell repossessed vehicles for the Servicer on a retail basis.
COMPETITION
The Non-prime Consumer credit market consists of many national, regional
and local competitors with various strategies to approach industry risks.
Although fragmented, the market is becoming increasingly competitive due to
its profitability and relative ease of entry. In the past years, a number of
companies have completed initial public offerings of common stock, the
proceeds from which were used, at least in part, to fund expansion and
support increased purchases of Installment Contracts. Existing and potential
competitors include well-established financial institutions, such as banks,
savings and loans, small loan companies, leasing companies and captive
finance companies owned by automobile manufacturers and others. The Company
believes that many of these financial organizations do not consistently
solicit business in the Non-prime Consumer credit market. The Company
believes that captive finance companies generally focus on new car financing,
and direct their marketing efforts to the Non-prime Consumer market only when
inventory control and/or production scheduling requirements of their parent
organizations dictate a need to enhance sales volumes and then exit the
market once such sales volumes are satisfied. Increased regulatory oversight
and capital requirements imposed by market conditions and governmental
agencies have limited the activities of many banks and savings and loans in
the Non-prime Consumer credit market. In many cases, those organizations
electing to remain in the automobile finance business have migrated toward
higher credit quality customers to allow reductions in their overhead cost
structures. As a result, the Non-prime Consumer credit market is primarily
serviced by smaller finance organizations that solicit business when and as
their capital resources permit. Like the Company, several of its competitors
specifically target "B" and "C" credit borrowers. Industry sources indicate
that no one competitor or group of competitors has a dominant presence in the
Non-prime Consumer market segment of "B" and "C" credit consumers to be
targeted by the Company. The Company's strategy is designed to leverage
management's relationships with originators to capitalize on the
fragmentation in this market. Some industry analysts expect competition to
continue to increase in the industry as Non-prime Consumer borrowers become
more conscious of financing alternatives such as direct Non-prime Consumer
lenders and seek more favorable loan terms or leases.
REGULATION
The Company's business is subject to regulation and licensing under various
federal, state and local statutes and regulations. The states in which the
Company does business govern the Company's operations. Most states in which the
Company purchases Installment Contracts limit the interest rate, fees and other
charges that may be imposed by, or prescribe certain other terms of, the
Installment Contracts that the Company purchases. In addition, the Company is
not currently required to be licensed or registered to conduct its finance
operations in CALIFORNIA OR majority of OTHER states in which the Company
currently purchases Installment Contracts. Several of these state's laws
subject the Company to periodic examination by state regulatory authorities.
The state licenses are revocable for cause. The Company believes that it
substantially complies with applicable regulations. In order for the Company
to expand its operations into other states, it will be required to comply with
the laws of such states. The Company has no current plans to expand its
business into any jurisdiction where
21
<PAGE>
it is not now licensed, or would be required to be licensed to do business.
There can be no assurance that the Company can comply with the laws of these
additional states or obtain appropriate licenses or permits.
Numerous federal and state consumer protection laws and related
regulations impose substantive disclosure requirements upon lenders and
servicers involved in automobile financing. Some of the federal laws and
regulations include the Truth-in-Lending Act and Regulation Z promulgated
thereunder, the Equal Credit Opportunity Act, the FTC, the Fair Credit
Reporting Act, the Fair Debt Collection Practices Act, the Magnuson-Moss
Warranty Act, the Federal Reserve Board's Regulation B and Z and the
Soldiers' and Sailors' Civil Relief Act.
In addition, the FTC has adopted a holder-in-due-course rule which has
the effect of subjecting persons that finance consumer credit transactions
(and certain related lenders and their assignees) to all claims and defenses
which the purchaser could assert against the seller of the goods and
services. With respect to used automobiles specifically, the FTC's Rules on
Sale of Used Vehicles requires that all sellers of used automobiles prepare,
complete and display a Buyer's Guide which explains the warranty coverage for
such automobiles. The Credit Practices Rules of the FTC impose additional
restrictions on sales contract provisions and credit practices.
Certain states in which the Company operates have adopted motor vehicle
retail installment sales acts or variations thereof. These laws regulate,
among other things, the interest rate, fees and other charges and terms and
conditions of motor vehicle retail installment loans. These laws also impose
restrictions on consumer transactions and require disclosures in addition to
those required under federal law. These requirements impose specific
statutory liabilities upon creditors who fail to comply. The laws of certain
states grant to the purchasers of vehicles certain rights of rescission under
so-called "lemon laws." Under such statutes, purchasers of motor vehicles
may be able to seek recoveries from, or assert defenses against, the Company.
In the event of default by a borrower, the Company has all the remedies
of a secured party under the Uniform Commercial Code ("UCC"), except where
specifically limited by other state laws. See "Risk Factors - Security for
Notes," and "Certain Legal Aspects of the Installment Contracts."
The Company believes that it is in substantial compliance with all
applicable material laws and regulations. Adverse changes in the laws or
regulations could have a material adverse effect on the Company's business.
Because the Company generally charges the highest finance charges permitted
by law, reductions in statutory maximum rates could directly impair the
Company's profitability.
FACILITIES
The Company's executive offices are located at 601 Gateway Blvd., Suite
260,, South San Francisco, CA 94080. This space is shared with an affiliated
company under a five-year lease for 11,081 square feet that expires in 2000.
The Company has no obligations under the lease and pays no rent.
Administrative fees paid to SAC include the use of the premises.
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<PAGE>
EMPLOYEES
The Company will not employ any full time employees. Services will be
provided to the Company by four full time employees of SAC.
LITIGATION
The Company is not a party to any legal proceedings.
CERTAIN LEGAL ASPECTS OF THE INSTALLMENT CONTRACTS
GENERAL
The Installment Contracts are "chattel paper" as defined in the UCC.
Pursuant to the UCC, a security interest in chattel paper may be perfected by
taking possession of the chattel paper or by the filing of a UCC financing
statement with the Secretary of State of the state in which a corporate
debtor's principal place of business is located, which in the case of the
Company is the Secretary of State of California.
Upon any purchase of Installment Contracts by the Company, the
Installment Contracts and related title documents for the Financed Vehicles
will be delivered to the Custodian (as defined) and will be physically marked
to indicate the security interest therein of the Company. In addition, a UCC
financing statement will be filed in the appropriate public office to perfect
by filing the Company's security interest in the Installment Contracts and
all proceeds therefrom.
SECURITY INTERESTS IN FINANCED VEHICLES
Under the UCC as adopted in most states, retail installment sale
contracts such as the Installment Contracts constitute security agreements
for personal property and contain grants of security interests in the
Financed Vehicles. Perfection of security interests in the Financed Vehicles
is generally governed by the motor vehicle registration laws of the state in
which such vehicle is located. In many states, a security interest in a
Financed Vehicle is perfected by notation of the secured party's lien on the
vehicle's certificate of title and registration of such lien with the
appropriate state agency such as the department of motor vehicles. In other
states, a security interest in a Financed Vehicle is perfected by filing a
financing statement with the Secretary of State or other designated filing
agency.
Upon the purchase of the Installment Contracts, the originating Dealers
will be required to assign the Installment Contracts (and the security
interests arising thereunder in the Financed Vehicles) to the Company. The
originating Dealers will also provide evidence that proper applications for
certifications of title have been made to ensure that the Company will be
named as the lienholder on the certificates of title relating to the Financed
Vehicles or, in states where a filing is required, that proper financing
statements have been filed to perfect the security interest of the Company in
the Financed Vehicles.
Under the laws of many states, liens for repairs performed on a Financed
Vehicle and liens for certain unpaid taxes take priority over even a
perfected security interest in a Financed Vehicle. The Internal Revenue Code
of 1986, as amended, also grants priority to certain federal tax liens over
the lien of a secured party. Certain state and federal laws permit the
confiscation of Financed Vehicles
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<PAGE>
under certain circumstances if used in unlawful activities, which may result
in the loss of a secured party's perfected security interest in the
confiscated Financed Vehicle. However, liens for repairs or taxes, or the
confiscation of a Financed Vehicle, could arise or occur at any time during
the term of an Installment Contract. No notice will be given to the Company
in the event such a lien arises or confiscation occurs.
If the owner of a Financed Vehicle relocates to another state, under the
laws of most states, the perfected security interest in the Financed Vehicle
would continue for four months after such relocation and thereafter, in most
instances, until the owner re-registers the Financed Vehicle in such state.
Almost all states generally require surrender of a certificate of title to
re-register a titled Financed Vehicle in another state. Therefore, the
Company must surrender possession if it holds the certificate of title to
such Financed Vehicle, before the Financed Vehicle owner may effect the
re-registration. In addition, the Company should receive, absent clerical
error or fraud, notice of surrender of the certificate of title because the
Company will be listed as a lienholder on its face. Accordingly, the Company
will have notice and the opportunity to re-perfect its security interest in
the Financed Vehicle in the state of relocation. If the Financed Vehicle
owner moves to one of the few states which does not require surrender of a
certificate of title for registration of a Financed Vehicle, re-registration
could defeat perfection. In the ordinary course of servicing the Installment
Contracts, the Company will take steps to effect such re-perfection upon
receipt of notice of re-registration or other information from the borrower
as to relocation. Similarly, when an borrower under an Installment Contract
sells a Financed Vehicle, the Company must surrender possession of the
certificate of title, or the Company will receive notice as a result of its
lien noted thereon. Accordingly, the Company will have an opportunity to
require satisfaction of the related Installment Contract before release of
the lien.
REPOSSESSION
In the event of default by a borrower under an Installment Contract, the
holder of the Installment Contract has all the remedies of a secured party
under the UCC. The UCC remedies of a secured party include the right to
repossession by self-help means, unless such means would constitute a breach
of the peace. Unless the borrower under an Installment Contract voluntarily
surrenders a Financed Vehicle, self-help repossession, by an individual
independent repossession specialist engaged by a subcontract servicer or the
Company, is the method presently anticipated to be employed when a borrower
defaults. Self-help repossession would not be used where the Company has
other recourse rights, under a dealer agreement or otherwise, against the
originating Dealer or some other party, in which case, the Company likely
would exercise such right prior to effecting a repossession. Self-help
repossession is accomplished by retaking possession of the Financed Vehicle.
If the borrower objects or raises a defense to repossession, or if the
applicable state law so requires, a court order must be obtained from the
appropriate state court and the Financed Vehicle may only be repossessed in
accordance with that order.
NOTICE OF SALE; REDEMPTION RIGHTS
In the event of default by the borrower under an Installment Contract,
some jurisdictions require that the borrower be notified of the default and
be given a time period within which the borrower may cure the default prior
to repossession. Generally, this right of reinstatement may be exercised on
a limited number of occasions in any one-year period.
In most jurisdictions, the UCC and other state laws require the secured
party to provide the borrower with reasonable notice of the date, time and
place of any public sale or the date after which
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<PAGE>
any private sale of the collateral may be held. Unless the borrower waives
his rights after default, the borrower has the right to redeem the collateral
prior to actual sale by paying the secured party the unpaid installments due
on the Installment Contract (less any required discount for prepayment), plus
reasonable expenses for repossessing, holding and preparing the collateral
for disposition and arranging for this sale, plus in some jurisdictions,
reasonable attorneys' fees or, in some states, by payment of delinquent
installments.
DEFICIENCY JUDGMENTS AND EXCESS PROCEEDS
The Company will apply the proceeds of resale of the repossessed
Financed Vehicles first to reimburse itself for its expenses of resale and
repossession and then to the satisfaction of the obligations of the borrower
on the Installment Contract. While some states impose prohibitions or
limitations on deficiency judgments if the net proceeds from resale do not
cover the full amount of the Installment Contract obligations, some states
allow a deficiency judgment to be sought, subject to satisfaction of
statutory procedural requirements by the secured party and certain
limitations as to the initial sale price of the Financed Vehicle. Virtually
all states limit or eliminate deficiency rights if the resale of the
repossessed Financed Vehicle is not done in a commercially reasonable manner.
A deficiency judgment is a personal judgment against the borrower for the
difference between the amount of the obligations of the borrower and the net
proceeds from resale. A defaulting borrower on an Installment Contract
typically lacks capital or income following the repossession of the
borrower's Financed Vehicle. Therefore, the Company may determine in its
discretion that pursuit of a deficiency judgment is not an appropriate or
economically viable remedy or may settle a judgment that it obtained.
Certain statutory provisions, including federal and state bankruptcy and
insolvency laws, may limit or delay the ability of the Company to repossess
and resell the Financed Vehicle or enforce a deficiency judgment. In
addition, courts have applied general equitable principles to secured parties
seeking repossession or liquidation involving deficiency judgments. In the
event that deficiency judgements are not obtained, are not satisfied, are
satisfied at a discount or are discharged, in whole or in part, in bankruptcy
proceedings, including bankruptcy proceedings under Chapter 13 of the
Bankruptcy Reform Act of 1978, as amended, the loss will be borne by the
Company and may adversely affect the ability of the Company to repay the
Notes.
Occasionally, after resale of a Financed Vehicle and payment of all
expenses and obligations, there is a surplus of funds. In that case, certain
state laws require the secured party to remit the surplus to any holder of a
lien with respect to a Financed Vehicle, or, if no such lienholder exists,
the UCC requires the secured party to remit the surplus to the former owner
of the Financed Vehicle.
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<PAGE>
MANAGEMENT
SAC is the general partner of the Company. SAC was incorporated under
the laws of Florida in 1995. The balance sheet of SAC as for the year ended
December 31, 1997 (audited) and for the three months ended March 31, 1998
(unaudited) is included elsewhere in this prospectus. SAC provides
management and administrative services to the Company. The Company's
management therefore consists of the officers and directors of SAC as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jonathon W. Hollandsworth 41 President of SAC
Dorothy Kulpinski 51 Secretary, Treasurer and Director of SAC
Dean Kayes 44 Director of SAC
Suzanne Tikkannen 42 Director of SAC
</TABLE>
JONATHON W. HOLLANDSWORTH has spent more than 12 years in the commercial
banking and financial services industries in progressively responsible
positions in consumer and business lending. He joined SAC in November 1997
and has been with the Company since its inception. Prior to joining SAC, Mr.
Hollandsworth was the Chief Credit Officer for CFC Investments (October 1996
to November 1997). Previously he was the Manager of the Consumer Lending
Division of Sumitomo Bank (November 1994 to October 1998). In the years
preceding that position, Mr. Hollandsworth worked for Bank of America (March
1989 to November 1994) and Security Pacific Bank (March 1987 to March 1989).
He held management assignments at these banks in Portfolio Credit Risk,
Credit Policy Compliance, Credit Operations, Bank Operations and Sales &
Marketing.
DEAN KAYES became a Director of SAC in August 1997. Mr. Kayes is also
the Vice President and Senior Staff Counsel for Starlink, a
telecommunications servicing company. Prior to joining Starlink in January
1997, he had been in the private practice of law since 1989.
DOROTHY H. KULPINSKI has been a Director and the Secretary and Treasurer
of SAC since October 1997. Prior to joining SAC she was Corporate Controller
for Condor Investment Corporation from April 1996 to October 1996. From July
1995 to April 1996, Ms. Kulpinski worked as an independent financial
consultant. From 1991 to June 1995, she worked as a financial manager for
Crum & Forster.
SUZANNE TIKKANNEN became a Director of SAC in August 1997. Ms.
Tikkannen is the Senior Vice President and Director of Finance for Condor
Investment Corporation, a California corporation, which provides management
services. She is also Senior Vice President of Four Star.
Mr. Hollandsworth will devote approximately twenty-five percent (25%) of
his time and other members of the management will devote no more than five
percent of their time on the management of the Company.
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<PAGE>
EXECUTIVE COMPENSATION
The Company does not pay salaries to any individual. SAC has contracted
to manage the Company and to service the Company's Installment Contracts.
The Company will pay SAC for administration, marketing and general services
provided to the Company, which fees shall consist of the following: (a) one
time boarding fee of $10.00 per Installment Contract; (b) one time
administrative fee of $100.00 per Installment Contract; (c) one time
marketing fee of $150.00 per Installment Contract; and (d) monthly service
fee of $15.00 per Installment Contract. Assuming the Company receives the
minimum proceeds from the sale of the Notes, SAC will receive an aggregate of
approximately $90,000, $80,000, and $80,000 in the first three years
respectively for administrative, marketing and servicing fees provided to the
Company. If the Company receives the maximum proceeds from the sale of the
Notes, SAC will receive an aggregate of approximately $485,500, $342,000 and
$415,000 in the first three years respectively for administrative, marketing
and servicing fees provided to the Company. Of the compensation paid to Mr.
Hollandsworth by SAC, approximately $60,000 is attributable for his
management services to the Company. Since the balance of the Company's
management will devote less than five percent (5%) of their time to the
management of the Company, it is not possible to identify what portion of
their compensation from SAC is attributable to management services provided
to the Company. Management believes that the terms of the services provided
by SAC are similar to the terms that would be available from a third party in
an arms-length transaction. See "Risk Factors - Conflict of Interests,"
"Business - Operating Expenses" and "- Servicing."
CERTAIN TRANSACTIONS
PARTNERSHIP DISTRIBUTIONS.
Under the terms of the Company's Partnership Agreement, the partners of
the Company are entitled to quarterly distributions from Cash Available for
Distribution. Cash Available for Distribution means the remaining cash and
other assets available for distribution to the partners after payment or
satisfaction of the following: (a) all partnership liabilities for ordinary
and necessary expenses then due and owing to the persons other than the
partners, (b) all payments currently due towards interest on the Notes, (c)
the current cost of acquiring and servicing assets (including administrative,
marketing and servicing fees payable to SAC), and (d) such reserves as may be
determined by the general partner to be reasonably necessary for the
operation of the Company's business. The Partnership Agreement provides that
distributions of Cash Available for Distribution cannot be made unless at the
fiscal quarter or fiscal year end, as applicable, the Company's net
receivables as reflected on the Company's balance sheet for such fiscal
quarter or fiscal year end immediately preceding the fiscal quarter in which
the distribution is to be made exceeds 110% of the principal amount of Notes
issued and outstanding. These distributions to partners will reduce the
amount of future Installment Contracts that may be acquired and will reduce
cash reserves available for future payments with respect to the Notes in the
event that future cash flow from the Installment Contracts is insufficient to
make Note payments.
PAYMENTS TO SAC
SAC has contracted to manage the Company and to service the Company's
Installment Contracts. The Company will pay SAC for administration, marketing
and general services provided to the Company, which fees shall consist of the
following: (a) one time boarding fee of $10.00 per Installment Contract;
(b) one time administrative fee of $100.00 per Installment Contract; (c) one
time marketing fee of $150.00 per Installment Contract; and (d) monthly service
fee of $15.00 per
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<PAGE>
INSTALLMENT CONTRACT. Assuming the Company receives the minimum proceeds
from the sale of the Notes, SAC will receive an aggregate of approximately
$90,000, $80,000, and $80,000 in the first three years respectively for
administrative, marketing and servicing fees provided to the Company. If the
Company receives the maximum proceeds from the sale of the Notes, SAC will
receive an aggregate of approximately $485,500, $342,000 and $415,000 in the
first three years respectively for administrative, marketing and servicing
fees provided to the Company. Management believes that the terms of the
services provided by SAC are similar to the terms that would be available
from a third party in an arms-length transaction. See "Risk Factors -
Conflict of Interests," "Business - Operating Expenses" and "- Servicing."
28
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Set forth below is certain information as of the date of this Prospectus
with respect to the beneficial ownership of the outstanding shares of the
common stock of SAC, the general partner of the Company by (i) each
beneficial owner of more than 5% of the common stock, (ii) each of SAC's
directors and executive officers, and (iii) all directors and executives of
the SAC as a group. Because the Notes do not constitute and are not
convertible into equity of SAC the percentage of ownership set forth below
will not vary as a result of this offering.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME OF BENEFICIAL OWNER(1) SHARES (1) OUTSTANDING SHARES
- --------------------------- ---------- ------------------
<S> <C> <C>
Four Star Financial Services, LLC(2) 10,000 100%
601 Gateway Boulevard
Suite 260
South San Francisco, California 94080
Jonathon W. Hollandsworth --- ---
Dorothy Kulpinski --- ---
Dean Kayes --- ---
Suzanne Tikkannen --- ---
All directors and executive officers as a --- ---
group (4 persons)
</TABLE>
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Subject to community property
laws where applicable, the persons or entities named in the table above
have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them. Unless otherwise indicated the
address for the shareholder is the same as the Company's principal
executive offices.
(2) The sole limited partner of the Company. The managing members of Four Star
are Ronald Anson, Mark Cohn and Jack Garrett.
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<PAGE>
DESCRIPTION OF THE NOTES
The Notes are general obligations of the Company and will be issued
pursuant to an Indenture of Trust, dated as of _________________, 1998 (the
"Indenture") by and between the Company and Trustee. Set forth below is a
summary of certain provisions of the Notes, Security Agreement, Custodian
Agreement and Trust Indenture. A form of the Notes is attached hereto as
Exhibit A, and a form of the Security Agreement is attached hereto as
Exhibit B. Copies of the Indenture and the Custodian Agreement are available
upon request to the Company. This summary is qualified in its entirety by
the terms and conditions of such documents. Prospective Noteholders are
encouraged to read these documents in their entirety. The Indenture is
subject to the provisions of the Trust Indenture Act of 1939 ("TIA") which
imposes certain duties on various persons and, in the event of a disagreement
between the TIA and the Indenture, the TIA provisions control. Capitalized
terms used herein and not otherwise defined shall have the meanings assigned
to them in the Indenture wherever particular provisions of the Indenture are
referred to in this summary, such provisions are incorporated by reference as
a part of the statements made and such statements are qualified in their
entirety by such reference.
GENERAL
The Notes are secured general obligations of the Company, limited in
aggregate principal amount to $15,000,000. The Notes are issuable only in
fully registered form, without coupons, in denominations of $1,000 subject to
a minimum purchase requirement of $2,000.
The Notes will mature on __________, 2003. The Notes will bear interest
at 12% per annum from the date of issuance, payable monthly on the 15th day
of each month to the persons in whose names such Notes are registered at the
close of business on the record date next preceding the interest payment
date. Interest on the Notes will be calculated on the basis of a 360-day
year consisting of twelve 30-day months. To the extent lawful, any
installment of interest on the Notes which is not paid when due will accrue
interest at the lesser of 18%, compounded quarterly, or the highest lawful
rate of interest from the due date until paid.
Principal of, and interest on the Notes will be payable, at the
Company's office. At the option of the Company, payment of principal and
interest may be made by check mailed to the Noteholders at the addresses set
forth upon the registry books of the Company.
There is no public market for the Notes and no market is expected to
develop in the future. The Notes should be purchased only by persons who
have no need for liquidity and can bear the economic risk of ownership for
the entire term of the Notes.
REDEMPTION
The Notes will be redeemable for cash at any time at the option of the
Company, in whole or in part, upon not less than 30 days nor more than 60 days
notice to each Noteholder at the redemption price of 100% of the principal
amount thereof plus accrued and unpaid interest to the date of redemption,
without prepayment premium or penalty. Notice will be mailed to all
Noteholders setting forth (i) the redemption date, (ii) the redemption price
including the amount of accrued and unpaid interest to be paid upon such
redemption, (iii) the name and address of the paying agent, (iv) a statement
that the Notes must be delivered to the paying agent, and (v) a statement
that interest on the Notes, or portion thereof being redeemed, ceases to
accrue on and after the redemption date. In the
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<PAGE>
case of notice to the holder of any Note to be redeemed in part, a new Note
or Notes in principal amount equal to the unredeemed portion of such Note
will be issued. In the event of partial redemption of the Notes, the Notes
to be redeemed in whole or in part will be selected on a pro rata basis, or
in such other manner as the Company deems appropriate and fair. The Notes
may be redeemed in multiples of $1,000 only.
SECURITY
The Notes are secured by a security interest granted to the Trustee (the
"Security Interest") pursuant to the Security Agreement in and to all of the
following (i) all Installment Contracts acquired with the proceeds of this
offering; (ii) all Installment Contracts acquired with net collection
proceeds of Installment Contracts described in the foregoing clause (i)
("Replacement Contracts"); (iii) Financed Vehicles; and (iv) the funds held
from time to time in the Master Account described below.
The Company has established a "Master Account" at a financial
institution into which all payments made on or with respect to the
Installment Contracts will be deposited. The Servicer will be required under
its Service Agreement to promptly remit payments collected by it to the
Master Account, including any proceeds from resales of returned or
repossessed Financed Vehicles, net of liquidation expenses, and any
recoveries from insurance claims on Financed Vehicles. Although the funds in
the Master Account will not be restricted in any way, the Company intends to
cause the funds contained in the Master Account to be withdrawn or applied
only for the following purposes: FIRST, to the payment of all Permitted
Expenses (as defined herein) of the Company, including any amounts due to the
Trustee for its fees and expenses; SECOND, to the payment of interest due on
the outstanding Notes; THIRD, to the purchase of Replacement Contracts; and
FOURTH, to the payment of Partnership Distributions (as defined herein).
"Permitted Expenses" means operating expenses including servicing fees,
custodian fees, trustee fees, bank fees and charges, legal fees, title and
transfer fees, account fees, Installment Contract purchase fees, insurance,
repossession, repair and liquidation expenses, enforcement of dealer recourse
arrangements, federal, state and local taxes, out of pocket expenses incurred
in connection with the resale of Installment Contracts and other general and
administrative expenses. "Partnership Distributions" means distributions to
the Company's partners in accordance with the Partnership Agreement. Under
the terms of the Partnership Agreement, distributions of Cash Available for
Distribution (as defined in the Partnership Agreement) may be made at the end
of any fiscal quarter or fiscal year end provided however, that no Event of
Default (as defined in the Indenture) is in effect and the Company's net
receivables as set forth on the Company's balance sheet for such fiscal
quarter or fiscal year end exceeds 110% of the principal amount of the Notes
outstanding. See "Risk Factors - Partnership Distributions."
The sole sources of payment of interest on the Notes will be cash flow
generated by the Installment Contracts which are security for the Notes,
capital contributions or loans from the Company's partners, or operational
borrowings obtained from third party lenders. The sole sources of repayment
of principal and accrued interest on the Notes at the end of their term will
be a refinancing of the Notes, a sale of the Installment Contracts which are
pledged as security for the Notes, any funds in the Master Account or loans
or capital contributions from the Company's partners. The Company's partners
and affiliates are under no obligation to make capital contributions or loans
to the Company and there is no present intention or potential for any such
loan or capital contribution. The Company has no commitment to obtain loans
from third party lenders and there is no assurance that such loans could be
obtained. If sufficient funds are not available from any of such sources,
the Company may be unable to repay all or part of the interest or principal
on the Notes.
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<PAGE>
CUSTODIAN AGREEMENT
The Company has entered into a Custodian Agreement Sterling Financial
Services Company (the "Custodian"), an affiliate of the Trustee pursuant to
which the Custodian agrees to hold all original Installment Contracts and
certain additional documents relating to the Installment Contracts for the
benefit of the Trustee. Under the Custodian Agreement, the Custodian's
duties are limited solely to receiving the Installment Contracts and related
documents from the Company, keeping them as specified in the Custodian
Agreement and releasing them to the Company upon receipt of an affidavit
signed and sworn to by a duly authorized officer of the Company that (a) the
Company has received or anticipates receiving within five (5) business days
payment in full from the obligor under the Installment Contract, (b) the
Company needs the Financed Vehicle title to repossess a Financed Vehicle
after default on an Installment Contract, or any administrative event for
which release for mailing to any state is required under statute, rule,
regulation or practice such as change in the name of a Financed Vehicle owner
due to marriage or divorce, change of address of a Financed Vehicle owner, or
notation of a subordinate lien on the title. Upon a release of a Financed
Vehicle title pursuant to the above, the Company or its agent shall promptly
return the Financed Vehicle title to the Custodian upon receipt of the
reissued Financed Vehicle title after the changes have been made by the
appropriate state agency. Upon an Event of Default under the Notes or
Security Agreement, the Custodian shall, upon request of the Trustee,
promptly deliver to the Trustee all Collateral held by the Custodian.
The Custodian Agreement provides that the Custodian may without
investigation act in reliance upon any writing or instrument or signature
which it, in good faith, believes to be genuine, may assume without
investigation the validity and accuracy of any statement or assertion
contained in such a writing or instrument, and may assume without
investigation that any person purporting to give any writing, notice, advice
or instructions in connection with the provisions hereof has been duly
authorized to do so. The Custodian shall not be liable in any manner for the
sufficiency or correctness as to form, manner and execution, or validity of
any instrument deposited under the Custodian Agreement, nor as to the
identity, authority or right of any person executing the same; and the
Custodian's duties under the Custodian Agreement shall be limited to the
safekeeping of such agreements, monies, instruments or other documents
received by it thereunder, and for the disposition of the same in accordance
therewith.
EVENTS OF DEFAULT AND REMEDIES
The Indenture defines an Event of Default as (i) failure by the Company
to pay any installment of interest on the Notes when the same becomes due and
payable; (ii) the failure by the Company to pay all or any part of the
principal on the Notes when and as the same becomes due and payable at
maturity, upon redemption, by acceleration or otherwise; (iii) the failure of
the Company to observe or perform any other covenant or agreement contained
in the Notes, the Indenture, the Security Agreement or the Custodian
Agreement and, subject to certain exceptions, the continuance of such failure
for a period of 90 days after written notice is given to the Company by the
Trustee or by the holders of at least a majority in aggregate principal
amount of the Notes outstanding; and (iv) certain events of bankruptcy,
insolvency or reorganization in respect of the Company.
If an Event of Default occurs and is continuing, the Trustee may pursue
any available remedy to collect the payment of principal and interest on the
Notes or to enforce the performance of any provision of the Notes, the
Security Agreement, the Custodian Agreement or the Indenture. If an Event of
Default occurs and is continuing, the Trustee by notice to the Company, or
the Holders of at least a majority in principal amount of the then
outstanding Notes by notice to the Company and Trustee,
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<PAGE>
may declare the unpaid principal of and any accrued interest on all
outstanding Notes to be due and payable immediately, except that in the case
of an Event of Default arising from an insolvency the Notes become due and
payable immediately without any further action.
The holders of a majority in principal amount of the outstanding Notes
by notice to the Trustee may waive an existing Default or Event of Default
and its consequences except a continuing Default or Event of Default in the
payment of the principal of or interest on any Note. The holders of not less
than 75% of the principal amount of the then outstanding Notes may consent on
behalf of the holders of all Notes to the postponement of any interest
payment for a period not exceeding three years from its due date.
The holders of a majority in aggregate principal amount of the Notes may
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred upon the
Trustee. The Trustee, however, may refuse to follow any direction that
conflicts with any law or the Indenture, that is unduly prejudicial to the
rights of other Noteholders, or that would involve the Trustee in personal
liability. The Trustee may take any other action deemed proper which is not
inconsistent with such direction.
A Noteholder may not use the Indenture to prejudice the rights of
another Noteholder or to obtain a preference or priority over another
Noteholder.
If required under the provisions of TIA Section 313(a), within 60 days
after each December 31st beginning with the December 31st following the date
of the Indenture, the Trustee shall provide to the Noteholders specified in
TIA Section 313 a brief report dated as of such December 31st that complies
with TIA Section 313(a). The Trustee also shall comply with TIA Section
313(b). A copy of each report at the time of its mailing to Noteholders
shall be filed with the Commission.
The Company is obligated to indemnify the Trustee against any loss or
liability incurred by it, except to the extent arising from the Trustee's
negligence or bad faith.
The Trustee may resign by so notifying the Company. The holders of a
majority in aggregate principal amount of the then outstanding Notes may
remove the Trustee by so notifying the Trustee and the Company. The Company
may remove the Trustee under certain circumstances involving the Trustee's
inability or failure to perform, whereupon the Company must promptly appoint
a successor Trustee.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of material federal income tax
consequences of the purchase, ownership and disposition of the Notes. The
following summary is intended as an explanatory discussion of the possible
effects of certain federal income tax consequences to Noteholders generally,
but does not purport to furnish information in the level of detail or with
the attention to a Noteholder's specific tax circumstances that would be
provided by a Noteholder's own tax advisor. For example, it does not discuss
the tax treatment of Noteholders who are insurance companies, regulated
investment companies or dealers in securities. In addition, the discussion
regarding the Notes is limited to the federal income tax consequences of the
initial Noteholders and not a purchaser in the secondary market. This
summary is also generally limited to investors who will hold the Notes as
"capital assets" (generally, property held for investment) within the meaning
of Section 1221 of the Internal Revenue Code of 1986, as amended (the
"Code"). Prospective investors should note that no rulings have been
33
<PAGE>
or will be sought from the Internal Revenue Service ("IRS") with respect to
any of the federal income tax consequences discussed below. Thus, the IRS
may disagree with all or a part of the discussion below. Prospective
investors are urged to consult their own tax advisors in determining the
federal, state, local, foreign and any other tax consequences to them of the
purchase, ownership and disposition of the Notes.
The following summary is based upon current provisions of the Code, the
Treasury regulations promulgated thereunder and judicial or ruling authority,
all of which are subject to change, which change may be retroactive. There
is a risk to Noteholders that the IRS may determine that the Notes are not
debt, but equity for Federal income tax purposes. In that event, Noteholders
would be deemed to be partners in the Company. The federal income tax
consequences to Noteholders will vary significantly depending on whether they
are treated as creditors of or deemed to be partners in the Company.
TAX CHARACTERIZATION OF THE COMPANY AS A PARTNERSHIP
The Company's Partnership Agreement specifies that the Company will
elect partnership classification in accordance with the Check-the-Box federal
income tax regulations. As a result, the Company is intended to be treated
as a partnership for federal income tax purposes. This treatment assumes
that the terms of the Partnership Agreement, the Notes and related documents
will be complied with, and that the Company and the Notes will not have
certain characteristics necessary for a partnership to be classified as a
publicly traded partnership, taxable as a corporation.
If the Company were taxable as a corporation for federal income tax
purposes, the Company would be subject to corporate income tax on its taxable
income. The Company's taxable income would include all its income on the
Installment Contracts, and would not be reduced by its interest expense on
the Notes in the event that the Notes are not respected as debt for federal
income tax purposes (see discussion in the following paragraph). Any such
corporate income tax could materially reduce cash available to make payments
on the Notes and lead to other potentially significant negative tax
consequences for the Noteholders.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
TREATMENT OF THE NOTES AS INDEBTEDNESS. The Company will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal, state and local income and franchise tax purposes. The
discussion below assumes that the Notes will be classified as debt for
federal income tax purposes.
The discussion below assumes further that all payments on the Notes are
denominated in U.S. dollars. Moreover, the discussion assumes that the
interest formula for the Notes meets the requirements for "qualified stated
interest" under Treasury regulations (the "OID regulations") relating to
original issue discount ("OID"), and that any OID on the Notes (I.E., any
excess of the principal amount of the Notes over their issue price) does not
exceed a DE MINIMIS amount (I.E., 1/4% of their principal amount multiplied
by the number of full years included in their term), all within the meaning
of the OID regulations.
INTEREST INCOME ON THE NOTES. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with
34
<PAGE>
such Noteholder's method of tax accounting. Under the OID regulations, a
Noteholder issued with a DE MINIMIS amount of OID must include such OID in
income, on a pro rata basis, as principal payments are made on the Note. A
purchaser who buys a Note for more or less than its principal amount will
generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
SALE OR OTHER DISPOSITION. If a Noteholder sells a Note, the holder
will recognize gain or loss in an amount equal to the difference between the
amount realized on the sale and the holder's adjusted tax basis in the Note.
The adjusted tax basis of a Note to a particular Noteholder will equal the
holder's cost for the Note, increased by any market discount, OID and gain
previously included by such Noteholder in income with respect to the Note and
decreased by the amount of bond premium (if any) previously amortized and by
the amount of principal payments previously received by such Noteholder with
respect to such Note. Any such gain or loss will be a capital gain or loss
if the Note was held as a capital asset, except for gain representing accrued
interest and accrued market discount not previously included in income.
Capital losses generally may be used by a corporate taxpayer only to offset
capital gains, and by an individual taxpayer only to the extent of capital
gains plus $3,000 of other income.
FOREIGN HOLDERS. Interest payments made (or accrued) to a Noteholder
who is a nonresident alien, foreign corporation or other non-United States
person (a "foreign person") generally will be considered "portfolio
interest", and generally will not be subject to United States federal income
tax and withholding tax, if the interest is not effectively connected with
the conduct of a trade or business within the United States by the foreign
person and the foreign person (i) is not actually or constructively a "10
percent shareholder" of or a "controlled foreign corporation" related to the
Company within the meaning of the Code and (ii) fulfills certain
certification requirements. Under such requirements, the beneficial owner of
the Notes must certify, under penalty of perjury, on Form W-8 or a similar
form, that it is not a "United States person" and must provide its name and
address. For this purpose, "United States person" means a citizen or
resident of the United States, a corporation, partnership or other entity
created or organized in or under the laws of the United States or any
political subdivision thereof, or an estate or trust the income of which is
includable in gross income for United States federal income tax purposes,
regardless of its source. If a Note is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide the relevant signed statement to the withholding
agent; in that case, however, the signed statement must be accompanied by a
Form W-8 or substitute form provided by the foreign person that owns the
Note. If such interest is not portfolio interest, then it will be subject to
United States federal income and withholding tax at a rate of 30 percent,
unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 or
more aggregate days in the taxable year or in the year being tested plus
1/3rd of the number of such days in the prior year and 1/6th of the number of
days in the year prior to that.
BACKUP WITHHOLDING. Each Noteholder (other than an exempt holder such
as a corporation, tax exempt organization, qualified pension and profit
sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's
name, address, correct federal taxpayer identification number and a statement
that the holder is not subject to backup withholding. Should a nonexempt
Noteholder fail to provide the required certification, the Company will be
required to
36
<PAGE>
withhold 31 percent of the amount otherwise payable to the holder, and remit
the withheld amount to the IRS as a credit against the holder's federal
income tax liability. Noteholders should consult with their tax advisors as
to their eligibility for exemption from backup withholding and the procedure
for obtaining the exemption.
POSSIBLE ALTERNATIVE TREATMENT OF THE NOTES. If the IRS successfully
asserts that the Notes did not represent debt for federal income tax
purposes, the Notes might be treated as equity interests in the Partnership.
If so treated, the Company might be taxable as a publicly traded partnership
that would be taxable as a corporation for federal income tax purposes.
Treatment of the Notes as equity interests in such a publicly traded
partnership could have adverse tax consequences to the Company and the
Noteholders. For example, interest paid with respect to the Notes would be
treated as dividends and would not be deductible by the Company. The
resulting increase in the Company's taxable income could increase the
Company's tax burden and correspondingly reduce the cash available to the
Company for payments of interest and principal on the Notes.
The determination whether the Notes will be treated as debt or equity
would be based upon all the facts and circumstances. Courts and commentators
have offered a number of criteria by which to judge the true nature of an
investment which is in form a debt: (1) whether there is an unconditional
promise on the part of the issuer to pay a sum certain on demand or at a
fixed maturity date that is in the reasonably foreseeable future; (2) whether
holders of the instruments possess the right to enforce the payment of
principal and interest; (3) whether the rights of the holders of the
instruments are subordinate to rights of general creditors; (4) whether the
instruments give the holders the right to participate in the management of
the issuer; (5) whether the issuer is thinly capitalized; (6) whether there
is identity between holders of the instrument and stockholders of the issuer;
(7) the label placed upon the instruments by the parties; and (8) whether the
instruments are intended to be treated as debt or equity for non-tax purposes.
Based on the foregoing factors, the Notes should be treated as debt for
Federal income tax purposes. However, given the Partnership's limited
initial equity capital, there can be no assurances given that the IRS will
not attempt to treat the Notes as equity for Federal income tax purposes.
PARTNERSHIP TAXATION AND TERMINATION. As a partnership, the Company
will not be subject to Federal income tax. The Partnership will keep
complete and accurate books for financial reporting and tax purposes. Such
books will be maintained on an accrual basis, and the Partnership's fiscal
year will be the calendar year. The Company will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year.
Under Section 708 of the Code, the Company will be deemed to terminate
for federal income tax purposes if 50% or more of the capital and profit
interests in the Company are sold or exchanged within a 12-month period. If
such a termination occurs, under current Treasury regulations the Partnership
will be considered to distribute its assets to the partners, who would then
be treated as recontributing those assets to the Company, as a new
partnership. Proposed Treasury regulations would modify this treatment.
Under the proposed regulations, the Company would be deemed to transfer all
of its assets and liabilities to a new partnership in exchange for an
interest in the new partnership. Immediately thereafter, the Company would
be deemed to have distributed interests in the new partnership to the
partners in liquidation of the Company, either for the continuation of the
business or for its dissolution and winding up.
36
<PAGE>
STATE AND LOCAL TAX CONSEQUENCES
The above discussion does not address the tax treatment of the Company,
Notes, or Noteholders under any state or local tax laws. Prospective
investors are urged to consult with their own tax advisors regarding the
state and local tax treatment of the Company as well as any state and local
tax consequences to them of purchasing, holding and disposing of Notes issued
by the Partnership.
* * *
THE FEDERAL AND STATE TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A
NOTEHOLDER'S PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT
THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF NOTES, INCLUDING THE TAX CONSEQUENCES
UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit-sharing or other employee benefit plan subject to ERISA, as well as
individual retirement accounts, certain types of Keogh Plans and other plans
subject to Section 4975 of the Code (each a "Benefit Plan"), from engaging in
certain transactions with persons that are "parties in interest" under ERISA
or "disqualified persons" under the Code with respect to such Benefit Plan.
A violation of these "prohibited transaction" rules may result in an excise
tax or other penalties and liabilities under ERISA and the Code for such
persons.
A fiduciary of a Benefit Plan considering the purchase of Notes should
carefully review with its legal and other advisors whether the assets of the
Partnership would be considered plan assets, and whether the purchase or
holding of the Notes could give rise to a transaction prohibited or otherwise
impermissible under ERISA or the Code.
Certain employee benefit plans, such as governmental plans (as defined
in Section 3(32) of ERISA) and certain church plans (as defined Section 3(33)
of ERISA) are not subject to the fiduciary and prohibited transaction
provisions under ERISA or the Code discussed herein, but governmental plans
may be subject to comparable restrictions under applicable state law.
PLAN OF DISTRIBUTION
The Company is offering up to $15,000,000 in aggregate principal amount
of the Notes. The Notes are being offered on a "best-efforts" basis on
behalf of the Company by Attkisson, Carter & Akers ("Attkisson") a member of
the National Association of Securities Dealers Inc. (the "NASD"). The
Company has agreed to indemnify Attkisson against certain liabilities,
including liabilities under the Securities Act of 1933. Investor funds will
be held in escrow at Greater Bay Trust Company until a minimum of $1,000,000
of Notes are sold (the "Minimum Offering"). In the event the Minimum
Offering is not subscribed on or before __________________, the offering will
be terminated and the escrowed funds, plus any net interest earned thereon,
will be promptly returned to the Investors by the Escrow Agent. Upon the
subscription by investors for the Minimum Offering, the escrowed funds,
37
<PAGE>
including interest thereon, will be released to the Company. Any subsequent
sales proceeds from Notes will be immediately available for use by the
Company. The Company will pay Attkisson a selling commission of up to 7.5%
of the sales price of all Notes sold. In addition, an investment banking and
marketing fee of 4% of the sale price of each Note sold will be paid to Banc
Services Corporation. The Company will also reimburse Attkisson for due
diligence expenses an amount up to .5% of the sale price of each Note sold
and pay Attkisson an amount up to .5% of the sale price of each Note sold as
a non-accountable expense allowance. Attkisson is not affiliated with the
Company.
However, Attkisson will be under no obligation to sell any or all of the
Notes offered hereby. The staff of the Securities and Exchange Commission
has taken the position that any broker/dealer that sells Notes in the
offering may be deemed an underwriter as defined in Section 2(11) of the
Securities Act of 1933, as amended.
The Notes are being offered subject to prior sale, withdrawal,
cancellation or modification of the offer, including its structure, terms and
conditions, without notice. The Company reserves the right, in its sole
discretion, to reject, in whole or in part, any offer to purchase the Notes.
The Company intends to sell the Notes in this offering only in the
states in which the offering is qualified. An offer to purchase may only be
made and the purchase of the Notes may only be negotiated and consummated in
such states. The Subscription Agreement for the Notes must be executed, and
the Notes may only be delivered in such states. Resale or transfer of the
Notes may be restricted under state law. See "Risk Factors - Absence of
Public Market For the Notes and Limited Transferability of the Notes," and
"Transferability of Notes."
If the Company does not terminate the offering earlier, which it may in
its sole discretion, the offering of Notes will continue until the Company
sells $15,000,000 in aggregate principal amount of the Notes, provided that
the offering period for the Notes will expire no later than 24 months after
the date of this Prospectus.
Attkisson has agreed in accordance with the provisions of SEC Rule
15c2-4 to cause all funds received for the sale of a Note to be promptly
deposited with the Escrow Agent upon the receipt of the executed Subscription
Agreement and related funds by the Attkisson by or before noon of the next
business day following the sale of said Notes.
The Notes purchased from the Company will be issued as soon as
practicable after the sale thereof (or, if later, upon sale of the Minimum
Offering).
TRANSFERABILITY OF NOTES
The Notes will be registered with the Commission and the states of
Florida and Georgia. The Notes may be registered or exempt form registration
in other states. No public or other market for the Notes exists and no
market is expected to develop in the future. No transfers will be permitted
of less than the Minimum Purchase, nor may an investor transfer,
fractionalize or subdivide Notes so as to retain less than such Minimum
Purchase. Accordingly, the Notes should be purchased only as an investment
to be held to the end of the term of the Notes because Noteholders may not be
able to liquidate their investment in the event of an emergency or for any
other reason.
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<PAGE>
LEGAL MATTERS
The validity of the Notes offered here will be passed upon by Buchalter,
Nemer, Fields & Younger, Los Angeles, California.
EXPERTS
The balance sheet of SAC as of December 31, 1997 and the balance sheet
of the Company as of December 31, 1997 appearing in this Prospectus and
Registration Statement have been audited by Millward & Co. CPAs, independent
auditors, as stated in their reports appearing elsewhere herein, and are
included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission in
Washington, D.C. a Registration Statement on Form SB-2. File No. 333-29067,
under the Securities Act of 1933 with respect to the Notes offered hereby.
As used herein, the term "Registration Statement" means the initial
Registration Statement and any and all amendment thereto. This Prospectus
does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information
with respect to the Company and the Notes, reference is hereby made to such
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily completed and in each instance, reference is
made to the copy of such contract or documents filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects
by such reference. The Registration Statement, including the exhibits and
schedules thereto, may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington D.C. 20549 and at certain regional offices of the Commission
located at 75 Park Place, 14th Floor, New York, New York 1007 and Northwest
Atrium Center, 500 Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials can be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Room 1025, Washington D.C. 20549,
at prescribed rates. The Commission maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements
and other information regarding registrants that filed electronically with
the Commission.
Upon completion of the offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934 and, in
accordance therewith, will file reports with the Commission. The Company
intends to furnish to Noteholders annual reports containing audited financial
statements of the Company audited by its independent accountants and
quarterly reports containing unaudited condensed financial statements for
each of the first three quarters of the fiscal year.
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<PAGE>
FINANCIAL STATEMENTS
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITOR'S REPORT . . . . . . . . . . . . . . . . . . . . . F-1
SENTINEL ACCEPTANCE CORPORATION
BALANCE SHEET, December 31, 1997 and March 31, 1998 (unaudited) . . . F-2
NOTES TO BALANCE SHEET . . . . . . . . . . . . . . . . . . . . . . . F-3 - F-5
INDEPENDENT AUDITOR'S REPORT . . . . . . . . . . . . . . . . . . . . . F-6
SENTINEL FINANCING LTD., L.P.
BALANCE SHEET, December 31, 1997 and March 31, 1998 (unaudited) . . . F-7
NOTES TO BALANCE SHEET . . . . . . . . . . . . . . . . . . . . . . . F-8, F-9
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders
Sentinel Acceptance Corporation
Coral Springs, Florida
We have audited the accompanying balance sheet of Sentinel Acceptance
Corporation as of December 31, 1997. This balance sheet is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this balance sheet 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 that our audit provides a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents
fairly, in all material respects, the financial position of Sentinel
Acceptance Corporation as of December 31, 1997 in conformity with generally
accepted accounting principles.
Millward & Co. CPAs
Fort Lauderdale, Florida
May 1, 1998
INVESTORS IN THE NOTES ARE NOT ACQUIRING ANY FINANCIAL INTEREST OR LIABILITY OF
THE CORPORATION WHOSE BALANCE SHEET APPEARS ABOVE.
F-1
<PAGE>
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, MARCH 31, 1998
1997 (Unaudited)
------------ ---------------
<S> <C> <C>
ASSETS
Current asset:
Cash $ 100 $ 44
--------- ---------
Investment in Partnership 150,050 $ 150,050
--------- ---------
--------- ---------
Total assets $150,150 $ 150,094
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' equity:
Preferred stock, $1 par value; 110,000 shares
authorized, issued and outstanding 110,000 110,000
Common stock, $1 par value; 10,000 shares
authorized, issued and outstanding 10,000 10,000
Additional paid-in capital 93,400 93,400
Accumulated deficit (63,250) (63,306)
--------- ---------
Total shareholders' equity 150,150 150,094
--------- ---------
--------- ---------
Total liabilities and shareholders' equity $ 150,150 $ 150,094
--------- ---------
--------- ---------
</TABLE>
Investors in the Notes are not acquiring any financial interest or
liability of the Corporation whose Balance Sheet appears above.
F-2
<PAGE>
SENTINEL ACCEPTANCE CORPORATION
NOTES TO BALANCE SHEET
DECEMBER 31, 1997
(INFORMATION PERTAINING TO THE THREE
MONTHS ENDED MARCH 31, 1998 IS UNAUDITED)
NOTE 1. - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Sentinel Acceptance Corporation (the "Company") was organized pursuant
to the laws of the State of Florida on September 5, 1995. The Company's
principal asset is an investment in a limited partnership whose primary
business is to engage in the purchase, collection and securing of retail
installment contracts in the non-prime consumer market originated by
independent automobile dealers.
INVESTMENT IN PARTNERSHIP
Investment in partnership (Sentinel Acceptance Ltd., L.P.) is accounted
for using the equity method, under which the Company's share of earnings or
loss of this partnership is reflected as income or (loss) with an adjustment
to the Company's investment in the partnership. Investment in the partnership
consists of costs incurred in processing existing receivables. The carrying
value of the investment in the partnership is reviewed if the facts and
circumstances suggest that it may be impaired. The partnership has
experienced continuing losses, accordingly the original investment has been
impaired and has been adjusted and reduced to the guaranteed value of
$150,000, the amount guaranteed by four star financial services, LLC, an
affiliate. As of December 31,1997, the company reduced the carrying value of
the investment by $41,412.
The Company has a $50 investment in Sentinel Financing Ltd., L.P. for
its general partnership interest.
INCOME TAXES
Income taxes are accounted for under the asset and liability method of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, the
effect on deferred tax assets and liabilities or a change in tax rate is
recognized in income in the period that includes the enactment date.
Deferred tax assets are reduced to estimated amounts to be realized by the
use of a valuation allowance.
Investors in the Notes are not acquiring any financial interest or
liability of the Corporation whose Balance Sheet appears above.
F-3
<PAGE>
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with a maturity of three months or less to
be cash equivalents. As of December 31, 1997, the Company did not have any
cash equivalents.
ACCOUNTING 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.
RECENT PRONOUNCEMENTS
In June 1996, the FASB issued Statement of Financial Accounting
Standards No. 125 (SFAS 125"), "Accounting for Transfers of Servicing of
Financial Assets and Extinguishment of Liabilities. SFAS 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on a financial-components
approach that focuses on control. SFAS 125 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1997 and is to be prospectively applied. The Company
believes that the adoption of SFAS 125 will have no impact on its financial
statements.
NOTE 2. - RELATED PARTY TRANSACTIONS
MANAGEMENT FEES
The Company charges Sentinel Acceptance Ltd., L.P. a management fee on a
monthly basis for reimbursement of certain operating assets as incurred. For
the year ended December 31, 1997, the Company recognized approximately $292,429
in management fee income, which has been included in income on the statement of
operations.
The Company is a co-defendant with Sentinel Acceptance Ltd., L.P. in a
claim for approximately $12,000.
INVESTMENT IN PARTNERSHIP
The Company has an investment in a partnership that is accounted for using
the equity method. During 1995 the Company invested $213,400 in a Partnership
in exchange for a 1% interest in the Partnership. The principal business
activity of the Company is investing in a limited partnership whose primary
business is describe in Note 1 -- "Organization". The following represents the
Company's investment activity:
1995 Investment $213,400
1995 Company share of partnership loss 471
--------
--------
1996 Company share of partnership loss 7,805
--------
Balance - December 31, 1996 205,124
Company share of loss for the eleven months
ended November 30, 1997 17,687
--------
Balance - November 30, 1997 (unaudited) $187,437
--------
--------
Investors in the Notes are not acquiring any financial interest or
liability of the Corporation whose Balance Sheet appears above.
F-4
<PAGE>
NOTE 3. - SHAREHOLDERS' EQUITY
In 1995, the Company issued 10,000 common shares of its $1.00 par value
stock and 110,000 shares of its $1.00 preferred stock in exchange for the
shareholders providing cash of $213,400 to a limited partnership, Sentinel
Acceptance Ltd., L.P., which represents the Company's investment in the limited
partnership.
The distribution to the Company's equity accounts was as follows:
Preferred stock $ 110,000
Common stock 10,000
Additional paid-in capital 93,400
---------
$ 213,400
---------
---------
NOTE 4. - INCOME TAXES
At December 31, 1997, the Company has net operating loss carryforwards of
approximately $21,000 that expire through 2012. Such net operating losses are
available to offset future taxable income, if any. As the utilization of such
operating losses for tax purposes is not assured, the deferred tax asset
(approximately $7,000) has been fully reserved through the recording of a 100%
valuation allowance. Should a cumulative change in the ownership of more than
50% occur within a three-year period, there could be an annual limitation on the
use of the net operating loss carryforward.
Investors in the Notes are not acquiring any financial interest or
liability of the Corporation whose Balance Sheet appears above.
F-5
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Partners
Sentinel Financing Ltd., L.P.
South San Francisco, California
We have audited the balance sheet of Sentinel Financing LTD., L.P. as of
December 31, 1997. This balance sheet is the responsibility of the Partnership's
management. Our responsibility is to express an opinion on this financial
statement 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 balance sheet is 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 that our audit provides a reasonable
basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Sentinel Financing Ltd., L.P. as
of December 31, 1997, in conformity with generally accepted accounting
principles.
Millward & Co. CPAs
Fort Lauderdale, Florida
January 5, 1998
F-6
<PAGE>
SENTINEL FINANCING LTD., L.P.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
December 31, March 31, 1998
1997 (UNAUDITED)
---- -----------
<S> <C> <C>
ASSETS
Cash $ 100 $ 100
Debt Issuance Costs 4,900 4,900
------- -------
5,000 5,000
------- -------
------- -------
EQUITY
Partnership Equity $5,000 $5,000
------- -------
------- -------
</TABLE>
F-7
<PAGE>
SENTINEL FINANCING, LTD., L.P.
NOTES TO BALANCE SHEET
DECEMBER 31, 1997
(INFORMATION PERTAINING TO THE THREE
MONTHS ENDED MARCH 31, 1998 IS UNAUDITED)
NOTE 1. - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
ORGANIZATION
Sentinel Financing, Ltd., L. P. a Florida limited partnership (the
"Company"), is a newly formed single purpose company organized to specialize and
engage in the purchase, collection and servicing of retail installment contracts
("Installment Contract") originated by independent automobile dealers
("Dealers"). The Company intends to acquire directly and through intermediaries
Installment Contracts originated by Dealers in connection with their sale of new
and used automobiles and light duty trucks ("Financed Vehicles") to borrowers
with limited credit histories or past credit problems ("Non-prime Consumers").
The Company's general partner is Sentinel Acceptance Corporation ("SAC"), and
its sole limited partner is Four Star Financial Services, LLC ("Four Star").
Management services will be provided to the Company by SAC.
The company has not yet commenced operations.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. As of December 31,
1997, the Company did not have any cash equivalents.
ACCOUNTING 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 or liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses in the future.
Actual amounts could differ from those estimates.
DEBT ISSUANCE COSTS
The costs related to the PROPOSED issuance of debt are capitalized and
amortized to interest expense using the effective interest method over the lives
of the related debt. If the debt offering is unsuccessful, the costs will be
charged to operations.
NOTE 2. - DEBT OFFERING
The Company is offering $15,000,000 aggregate principal amount of 12%
secured Notes due 2003. The Notes will bear interest at the rate of 12% per
annum, payable monthly on the 15th day of each month. The Notes will mature in
five years, and are subject to redemption at the option of the Company, in whole
or part, at any time at a redemption price equal to the outstanding principal
amount plus accrued interest thereon without premium or penalty. The Company
will not be required to make
F-8
<PAGE>
SENTINEL FINANCING, LTD., L.P.
NOTES TO BALANCE SHEET
DECEMBER 31, 1997
(INFORMATION PERTAINING TO THE THREE
MONTHS ENDED MARCH 31, 1998 IS UNAUDITED)
any mandatory redemption or sinking fund payment with respect to the Notes
prior to maturity. Notes may be purchased in multiples of $1,000, subject to
a minimum requirement of $2,000. The Notes will be secured by retail
installment sales contracts received by used automobiles and light trucks.
The Notes are being offered on a best efforts, $1,000,000 minimum offering
basis.
NOTE 3. - DEBT ISSUANCE COSTS
A related entity (Four Star) has incurred $162,362 for costs of the debt
offering on behalf of the SENTINEL ACCEPTANCE CORPORATION as of December 31,
1997. If the offering is successful, the advances will be reimbursed and
deferred debt issuance costs will be charged (Note 1). If the offering is
unsuccessful, these advances will be charged to the operations of the affiliate.
NOTE 4. - EQUITY CONTRIBUTION
As of December 31, 1997, the Company received equity contributions from
its partners as follows:
<TABLE>
<S> <C>
Four Star Financial Services, LLC $4,950.
Sentinel Acceptance Corporation 50.
-------
$5,000
-------
-------
</TABLE>
F-9
<PAGE>
EXHIBIT A
FORM OF SECURED NOTE
(FACE OF SECURITY)
No. $
SENTINEL FINANCING, LTD., L.P.
promises to pay to
or registered assigns,
the principal sum of Dollars on ______
12% SECURED FIXED RATE NOTES
DUE ___________, 2003
Interest payment Dates:
Record Dates:
Dated:
_________________________________________________
By_______________________________________________
By_______________________________________________
(SEAL)
Authenticated to be one of the
Securities described in the Indenture
referred to herein:
By
--------------------------------------
Authorized Signature
A-1
<PAGE>
(Back of Security)
12% Secured Fixed Rate Notes due _____________, 2003
1. INTEREST. SENTINEL FINANCING, LTD., L.P., a Florida limited
partnership (the Company"), promises to pay interest on the principal amount of
this Security at a rate of 12% per annum from the date of issuance, payable
monthly on the 15th day of each month commencing on ____________, 1998, to the
Persons in whose names such Notes are registered at the close of business on the
Record Date next preceding the Interest Payment Date. Interest will be computed
on the basis of a 360-day year consisting of twelve 30-day months. To the
extent lawful, any installment of interest on the Notes which is not paid when
due shall accrue interest at the lesser of 18% compounded quarterly, or the
highest lawful rate of interest from the due date until paid.
2. METHOD OF PAYMENT. Principal of, and interest on the Securities
will be payable, at the Company's office. The Company will pay principal and
interest in money of the United States that is legal tender for payment of
public and private debts. At the option of the Company, payment of principal
and interest may be made by check mailed to the Holder at the address set forth
in the registry books of the Company.
3. PAYING AGENT AND REGISTRAR. Initially, the Trustee will act as
Paying Agent and Registrar. The Company may change any Paying Agent, Registrar
or co-registrar without notice to any Securityholder. The Company or any
Subsidiaries of the Company may act in any such capacity.
4. INDENTURE. The Company issued the Securities under an
Indenture dated as of ____________________, 1998 (the "Indenture") between
the Company and the Trustee. The terms of the Securities include those
stated in the Indenture and those made part of the Indenture by reference to
the Trust Indenture Act of 1939 (15 U.S. Code Sections 77aaa-77bbbb) as in
effect on the date of the Indenture. The Securities are subject to, and
qualified by, all such terms, certain of which are summarized herein, and
Securityholders are referred to the Indenture and such Act for a statement of
such terms. The Securities are secured obligations of the Company limited to
$15,000,000 in aggregate principal amount.
5. OPTIONAL REDEMPTION. All or any part of the Securities may be
redeemed by the Company, in whole or part, at any time or some of them from
time to time, upon not less than 30 or more than 60 days' notice at a
redemption price equal to 100% of the principal amount plus accrued interest
to the Redemption Date.
6. NOTICE OF REDEMPTION. Notice of redemption will be mailed at
least 30 days but not more than 60 days before the Redemption Date to each
holder of Securities to be redeemed at his registered address. Securities in
denominations larger than $1,000 may be redeemed in part but only in whole
multiples of $1,000. On and after the Redemption Date interest ceases to
accrue on Securities or portions of them called for redemption. In the event
of a partial redemption of the Notes, the Notes will be redeemed in whole or
part will be selected on a pro rata basis or in such other manner as the
Company deems appropriate and fair.
If this Security is redeemed subsequent to a record date with
respect to any interest payment date specified above and on or prior to such
interest payment date, then any accrued
A-2
<PAGE>
interest will be paid to the Person in whose name this Security is registered
at the close of business on such record date.
7. DENOMINATIONS, TRANSFER, EXCHANGE. The Securities are in
registered form without coupons in denominations of $1,000 and integral
multiples of $1,000. The transfer of Securities may be registered and
Securities may be exchanged as provided in the Indenture. The Registrar may
require a holder, among other things, to furnish appropriate endorsements and
transfer documents and to pay any taxes and fees required by law or permitted
by the Indenture. The Registrar need not exchange or register the transfer
of any Security or portion of a Security selected for redemption. Also, it
need not exchange or register the transfer of any Securities for a period of
15 days before a selection of Securities to be redeemed.
8. PERSONS DEEMED OWNERS. The registered holder of a Security may
be treated as its owner for all purposes.
9. AMENDMENTS AND WAIVERS. Subject to certain exceptions, the
Indenture or the Securities may be amended with the consent of the holders of
at least a majority in principal amount of the then outstanding Securities.
Without the consent of any Securityholder, the Indenture or the securities
may be amended to cure any ambiguity, defect or inconsistency, to comply with
the requirements of the SEC in connection with the qualification of the
Indenture under the TIA, to add covenants of the Company for the benefit of
the Holders, to provide guarantors of the Securities, to evidence succession
of another Person to the Company, to provide for uncertificated Securities in
addition to certificated Securities or to make any change that does not
adversely affect the rights of any Securityholder.
10. DEFAULTS AND REMEDIES. An Event of Default occurs if: (i)
the Company fails to pay any installment of interest on the Securities when
the same becomes due and payable; (ii) the Company fails to pay all or any
part of the principal of any Security when the same becomes due and payable
at maturity, upon redemption, by acceleration or otherwise; (iii) the
Company fails to observe or perform any covenant, condition or agreement on
the part of the Company to be observed or performed pursuant to the
Securities, the Security Documents, or the Indenture (iv) the Company or any
Subsidiary of the Company pursuant to or within the meaning of any bankruptcy
law: (a) commences a voluntary case or proceeding, (b) consents to the entry
of an order for relief against it in an involuntary case or proceeding, (c)
consents to the filing of a petition seeking reorganization or relief under
any applicable Bankruptcy Law, or to the appointment of a receiver of it or
for all or substantially all of its property, (d) makes a general assignment
for the benefit of its creditors, or (e) admits in writing its inability to
pay its debts generally as they become due; or (v) a court of competent
jurisdiction enters an order or decree under any Bankruptcy law that: (a) is
for relief against the Company or any Subsidiary in an involuntary case, (b)
appoints a receiver of the Company for all or substantially all of its
property, or (c) orders the liquidation of the Company, and any such order or
decree under (v) herein remains unstayed and in effect for 90 days. If an
Event of Default occurs and is continuing, the Trustee or the holders of at
LAST a majority in principal amount of the then outstanding Securities may
declare all the Securities to be due and payable immediately, except that in
the case of an Event of Default arising from certain events of bankruptcy or
insolvency all outstanding securities become due and payable immediately
without further action or notice. Securityholders may not enforce the
Indenture or the Securities except as provided in the Indenture. The Trustee
may require indemnity satisfactory to it before it enforces the Indenture or
the Securities. Subject to certain
A-3
<PAGE>
limitations, holders of a majority in principal amount of the then
outstanding Securities may direct the Trustee in its exercise of any trust or
power. The Trustee may withhold from Securityholders notice of any
continuing default (except a default in payment of principal or interest) if
it determines that withholding notice is in their interests. The Trustee is
only deemed to have knowledge of a default or Event of Default under certain
circumstances set forth in the Indenture. The Company must furnish an annual
compliance certificate to the Trustee.
11. SECURITY. The due and punctual payment of interest and
principal of the Securities when and as the same shall be due and payable,
whether at maturity, by acceleration, or otherwise, and the interest on the
overdue principal of the Securities and payment and performance of all other
obligations of the Company to Holders or the Trustee under the Indenture and
the Securities shall be secured as provided in the Security Documents.
12. NO RECOURSE AGAINST OTHERS. A Director, officer, Partner,
employee or Stockholder, as such, of the Company shall NOT have any
liability for any obligations of the Company under the Securities or the
Indenture or for any claim based on, in respect of or by reason of such
obligations of their creation. Each Securityholder by accepting a Security
waives and releases all such liability. The waiver and release are part of
the consideration for the issue of the Securities.
13. AUTHENTICATION. This Security shall not be valid until
authenticated by the manual signature of the Trustee or an authenticating
agent.
14. ABBREVIATIONS. Customary abbreviations may be used in the
name of a Securityholder or an assignee, such as: TEN COM (= tenants in
common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with
right of survivorship and not as tenants in common), CUST (= Custodian), and
U/G/M/A (= Uniform Gifts to Minors Act).
15. INDENTURE CONTROLS. Nothing contained herein shall in any way
be construed to impose any duties upon the Trustee beyond those contained in
the Indenture. All immunities, indemnities, exceptions from liability and
other provisions of the Indenture insofar as they relate to the Trustee shall
apply to this Security and are incorporated herein.
The Company will furnish to any Securityholder upon written request
and without charge a copy of the Indenture, which has in it the text of this
Security in larger type. Request may be made to:
SENTINEL FINANCING LTD., L.P.
601 Gateway Blvd., Suite 260
South San Francisco, California 94080
A-4
<PAGE>
ASSIGNMENT FORM
To assign this Security, fill in the form below:
(I) or (we) assign and transfer this Security to
______________________________________________________________________________
(Insert assignee's soc. sec. or tax I.D. no.)
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
(Print or type assignee's name, address and zip code)
and irrevocably appoint ______________________________________________________
____________________________agent to transfer this Security on the books of the
Company. The agent may substitute another to act for him.
______________________________________________________________________________
Date: _____________ Your Signature:________________________________
(Sign exactly as your name appears on the other side of this Security)
Signature Guarantee.
A-5
<PAGE>
EXHIBIT B
SECURITY AGREEMENT
This SECURITY AGREEMENT (hereinafter called this "Agreement") is made as
of ___________, 1998, by and between Sentinel Financing Ltd., L.P., a Florida
limited partnership (hereinafter called ("Debtor") and Sterling National Bank
& Trust Company (the "Trustee"), as Trustee (the "Secured Party").
W I T N E S S E T H:
In consideration of the covenants and conditions stated in this
Agreement, the parties agree as follows:
1. INDEBTEDNESS SECURED.
This Agreement and the Security Interest (as defined below) secure
the payment of certain Notes issued and executed by Debtor, pursuant to the
Indenture of Trust (the "Indenture") dated ___________, 1998, by and between
Debtor and Trustee, and made payable to the holders of such notes in the
aggregate principal sum of up to $15,000,000 (hereinafter collectively called
the "Notes"), together with all other indebtedness of every kind or nature
owed by Debtor to Secured Party pursuant to the Indenture or this Agreement,
whether now existing or hereafter incurred, direct or indirect, absolute or
contingent, and whether the indebtedness is from time to time reduced and
thereafter increased or entirely extinguished and thereafter reincurred, and
including any sums advanced and any costs and expenses incurred by Secured
Party pursuant to this Agreement, the Notes or any other note or evidence of
indebtedness (all of such is herein sometimes referred to as the
"Indebtedness").
2. SECURITY INTEREST.
For value received, Debtor hereby grants to Secured Party a
security interest (the "Security Interest") in and to all of the following:
(i) any and all retail motor vehicle installment sale contracts (the
"Contracts") acquired with the funds constituting the Indebtedness or with
funds received from the repayment of said Contracts (the "Replacement
Contracts") or the Replacement Contracts, which Contracts or Replacement
Contracts are originated in connection with the financing of new and used
automobiles and light-duty trucks (the "Vehicles"), including all rights to
receive payments thereunder and security interests in and instruments of
title to the Vehicles, whether now owned or hereafter acquired; (ii) all
funds in the following bank account of the Company ________________________
____________________________ (the "Master Account"); (iii) all net proceeds
of the issuance and sale of the Notes; and (iv) all products thereof and all
cash and non-cash proceeds of any of the foregoing, in any form, including,
without limitation, proceeds of insurance policies from the loss thereof, all
titles to the Vehicles and all assignments of liens, all Contracts, Vehicle
titles, assignments or other documents and instruments deposited with and in
the possession, custody and control of the Secured Party as described in
paragraph 4.5 hereof (all of the foregoing hereinafter called the
"Collateral").
B-1
<PAGE>
3. REPRESENTATION AND WARRANTIES OF DEBTOR.
Debtor represents and warrants and, so long as any portion of the
Indebtedness remains unpaid, shall be deemed continuously to represent and
warrant that:
3.1 Debtor is the owner of the Collateral free and clear of all
security interests or other encumbrances and claims of any kind or nature in
favor of any third persons other than the rights of the purchasers of the
Vehicles under the Contracts and Replacement Contracts, ("Vehicle
Purchasers"), and Secured Party has and at all times maintain a first,
perfected security interest in all of the Collateral;
3.2 Debtor is authorized to enter into this Agreement and into the
transactions contemplated hereby and evidenced by the Notes and this
Agreement is a valid and binding obligation of Debtor enforceable in
accordance with its terms;
3.3 The Collateral is used or bought for use solely in business
operations, and all of the relevant Collateral will remain personal property
regardless of the manner in which any of it may be affixed to real property.
3.4 Debtor has established the Master Account.
4. COVENANTS OF DEBTOR.
Debtor covenants that so long as any Indebtedness remains unpaid,
Debtor:
4.1 Will defend the Collateral against the claims and demands of
all other parties, except the rights of Vehicle Purchasers.
4.2 Will keep the Collateral free and clear from all security
interests, liens and other encumbrances and claims of any kind or nature in
favor of any third persons other than Vehicle Purchasers, and other than the
Security Interest; and Debtor will not pledge the Collateral as security for
any debts or obligations other than the Notes;
4.3 Will not pledge, transfer, assign, deliver, or otherwise
dispose of any Collateral or any interest therein, except that until the
occurrence of an Event of Default (as defined in paragraph 7.1 of this
Agreement), it may so dispose of the Collateral so long as the proceeds
thereof are applied to:
a. Make payments of principal and/or interest on the Notes; or
b. Pay operating expenses, including servicing fees,
custodian fees, trustee's fees, bank fees and charges, legal fees, title and
transfer fees, account fees, contract purchase fees, insurance, repossession,
repair and liquidation expenses, enforcement dealer recourse arrangements,
federal, state and local taxes, out-of-pocket expenses incurred in connection
with any resale of Contracts, and other general and administrative expenses
incurred in the ordinary course of business ("Permitted Expenses");
c. Distributions to the Debtor's partners in accordance with
the Limited Partnership Agreement among Sentinel Acceptance Corporation, as
general partner, and the persons
B-2
<PAGE>
named as limited partners therein, dated ___________________, 1997; provided,
however, that no distribution may be made pursuant to this subsection if at
the time of such distribution the "Net Receivables" as reflected on the
Debtor's balance sheet for the most recent completed fiscal quarter or year
end, as applicable, do not exceed 110% of the principal amount of Notes then
outstanding ("Partner Distributions").
4.4 Will keep in accordance with generally accepted accounting
principles, consistently applied, accurate and complete records concerning the
Collateral; will mark such records and, upon request of the Secured Party made
from time to time, the Collateral to give notice of the Security Interest; and
will, upon request made from time to time, permit the Secured Party or its
agents to inspect the Collateral and the Debtor's records concerning the
Collateral and to audit and make abstracts of such records or any of the
Debtor's books, ledgers, reports, correspondence and other records;
4.5 Upon demand will deliver to the Custodian for the Secured
Party any instruments, documents of title and chattel paper representing or
relating to the Collateral or any part thereof, and all schedules, invoices,
shipping, or delivery receipts, together with any endorsements or assignments
thereof and all other documents representing or relating to purchases or
other acquisitions, sales or other dispositions of the Collateral and the
proceeds thereof and any and all other schedules, documents, and statements
in accordance with the terms of the Custodian Agreement;
4.6 Will notify the Secured Party in writing at least thirty (30)
days in advance of any change in the Debtor's address specified on the first
page of this Agreement, of any change (other than change in the location of
Vehicles in the ordinary course of the use thereof by the purchasers thereof)
in the location or of any additional locations at which the Collateral is
kept, of any change in the address at which records concerning the Collateral
are kept and of any change in the location of the Debtor's residence, chief
executive office or principal place of business;
4.7 Will execute and deliver to the Secured Party such financing
statements and other documents requested by the Secured Party, subject to the
limitations set forth herein, to perfect, protect or continue the perfection
of the Security Interest and to effect the purposes of this Agreement;
4.8 Will pay or cause to be paid when due all taxes, assessments
and other charges of every kind and nature which may be levied or assessed
upon or against the transaction contemplated hereby or the Collateral;
4.9 Will deliver the Contracts and Replacement Contracts to the
Custodian pursuant to that certain Custodian Agreement between the Company,
Custodian and Trustee on behalf of the Secured Party of even date herewith,
within five (5) business days of the acquisition of the Contract or
Replacement Contract, as applicable, by delivery to custodian of original
executed Contracts and Replacement Contracts and related assignments,
contracts and other documents evidencing any rights of Debtor with respect
thereto;
4.10 Will not make any distributions to partners or payments to
affiliates except as herein provided;
4.11 Will deposit and retain all funds which constitute the
Collateral in the Master Account, will withdraw funds therefrom only for the
conduct of Debtor's business as permitted hereby and the Indenture with
respect to the servicing of Contracts and Replacement Contracts and the
B-3
<PAGE>
requisition of Replacement Contracts, and for the payment of Permitted
Expenses and Partner Distributions, and will not commingle any other funds
with funds in said account;
4.12 Will execute and deliver to the Custodian the Collateral
Assignments attached hereto as Exhibits 1 and 2 as required by the Secured
Party.
5. VERIFICATION OF COLLATERAL.
Secured Party shall have the right to verify the existence of the
Collateral in any manner and through any medium which Secured Party may
consider appropriate and which will not interfere with the conduct of
Debtor's business, and Debtor shall furnish such assistance and information
and perform such acts as Secured Party may require in connection therewith.
6. FUTURE ADVANCES.
It is agreed that any additional loans or advances by the Secured
Party secured hereby to or for the benefit of Debtor, whether such loans or
advances are obligatory or are made at the option of Secured Party or
otherwise, at any time within twenty (20) years from the date of this
Agreement, with interest thereon at the rate agreed upon at the time of each
such loan or advance, shall be equally secured with and have the same
priority as the original indebtedness and be subject to all of the terms and
provisions of this Agreement, whether or not such additional loan or advance
is evidenced by the Notes or any other promissory note of Debtor and whether
or not identified by a recital that it is secured by this Agreement;
provided, however, that Debtor hereby understands and agrees that this future
advance provision does not in any way obligate Secured Party or any other
person to make any additional loans or advances to Debtor.
7. DEFAULT.
7.1 EVENTS OF DEFAULT. An Event of Default shall occur under this
Agreement upon any Event of Default as defined by Section 6.1 of the
Indenture.
7.2 RIGHTS AND REMEDIES UPON DEFAULT. If an Event of Default
occurs and is continuing Secured Party, by written notice to the Debtor, may
declare the principal of and accrued interest on all the Notes to be due and
payable immediately. After a declaration such principal and interest shall
be due and payable immediately.
If an Event of Default occurs and is continuing, Secured Party may
pursue any available remedy by proceeding at law or in equity to collect the
payment of principal and interest on the Notes or to enforce the performance
of any provision of the Notes or this Agreement.
7.3 NOTICE. Debtor agrees that any notice by Secured Party of the
sale, lease or other disposition of the Collateral or any other intended
action hereunder, whether required by the Uniform Commercial Code or
otherwise, shall constitute reasonable notice to Debtor if the notice is
mailed by regular or certified mail, postage prepaid, at least ten (10) days
before the date of any public sale, lease or other disposition of the
Collateral, or the time on or after which any private sale, lease or other
disposition of the Collateral is to take place, to Debtor's address as
specified in this Agreement or to any other address which Debtor has notified
Secured Party in writing as the address to which notices shall be given to
Debtor.
B-4
<PAGE>
7.4 COSTS. Debtor shall pay all costs and expenses incurred by
Secured Party in enforcing this Agreement, realizing upon any Collateral and
collecting any Indebtedness. Costs and expenses will include but not be
limited to all reasonable attorneys' fees and expenses.
7.5 DEFICIENCY. In the event that the proceeds of the Collateral
are insufficient to satisfy the entire unpaid Indebtedness, Debtor will be
responsible for the deficiency and shall pay the same upon demand. Secured
Party will account to Debtor for any proceeds of the Collateral in excess of
the Indebtedness and the costs and expenses referred to in Section 7.4.
8. MISCELLANEOUS.
8.1 PERFECTION OF SECURITY INTEREST. Debtor authorizes Secured
Party at Debtor's expense to file any financing statement or statements
relating to the Collateral (with or without Debtor's signature thereon), and
to take any other action deemed necessary or appropriate by Secured Party to
perfect and to continue perfection of the Security Interest. Debtor hereby
irrevocably appoints Secured Party as its attorney-in-fact to execute
financing statements in Debtor's name and to perform all other acts which
Secured Party deems necessary or appropriate to perfect and protect the
Security Interest. Such appointment is binding and coupled with an interest.
Upon request of Secured Party before or after the occurrence of an Event of
Default but subject to the rights of Vehicle Purchasers, Debtor agrees to
give Secured Party possession of any Collateral, possession of which is, in
Secured Party's opinion, necessary or desirable to perfect or continue
perfection or priority of the Security Interest. A photocopy of this
Agreement is sufficient as a financing statement and may be filed as such if
Secured Party so elects.
8.2 CONTINUING AGREEMENT. This Agreement is a continuing
agreement with respect to the subject matter hereof and shall remain in full
force and effect until all of the Indebtedness now or hereafter contracted
for or created or existing and any extensions or renewals of the Indebtedness
together with all interest thereon has been paid in full.
8.3 RIGHT TO PROCEEDS. Upon the occurrence of an Event of Default
and in the course of the exercise of remedies as permitted hereby, Secured
Party may demand, collect, and sue for all proceeds of the Collateral (either
in Debtor's or Secured Party's name at the latter's option) with the right to
enforce, compromise, settle, or satisfy any claim. Debtor hereby irrevocably
appoints Secured Party as Debtor's attorney-in-fact to endorse, by writing or
stamp, Debtor's name on all checks, commercial paper, and other instruments
pertaining to the proceeds. Such appointment is binding and coupled with an
interest. Debtor also authorizes Secured Party to collect and apply against
the Indebtedness any refund of insurance premiums or any insurance proceeds
payable on account of the loss of or damage to any of the Collateral and
hereby irrevocably appoints Secured Party as Debtor's attorney-in-fact to
endorse, by writing or stamp, any check or draft representing such proceeds
or refund. Such appointment is binding and coupled with an interest. Upon
the occurrence of an Event of Default and in the course of the exercise of
remedies as permitted hereby, Secured Party may notify any party obligated to
pay proceeds of the Collateral of the existence of the Security Interest and
may also direct them to pay all such proceeds to Secured Party.
8.4 PROPERTY IN SECURED PARTY'S POSSESSION. As further security
for the repayment of the Indebtedness, Debtor grants to Secured Party a
security interest in all property of Debtor which is or may hereafter be in
Secured Party's possession in any capacity, including all monies owed or to
be owed by Secured Party to Debtor; and with respect to all of such property,
Secured Party shall have the same rights as it has with respect to the
Collateral.
B-5
<PAGE>
8.5 SET-OFF. Without limiting any other right of Secured Party,
whenever Secured Party has the right to declare any Indebtedness to be
immediately due and payable, Secured Party may set off against the
Indebtedness all monies then owed to Debtor by Secured Party in any capacity
whether due or not.
8.6 FAILURE TO PERFORM; REIMBURSEMENT. Upon Debtor's failure to
perform any of its duties hereunder, Secured Party may, but it shall not be
obligated to, perform any of such duties and Debtor shall forthwith upon
demand reimburse Secured Party for any expense incurred by Secured Party in
doing so with interest thereof at a rate equal to the lesser of the per annum
rate of interest specified in the Notes plus two percentage points or the
maximum rate permitted by applicable law.
8.7 NON-WAIVER. No delay or omission by Secured Party in
exercising any right or remedy hereunder or with respect to any Indebtedness
shall operate as a waiver of that or any other right or remedy, and no single
or partial exercise of any right or remedy shall preclude Secured Party from
any other or future exercise of the right or remedy or the exercise of any
other right or remedy. Secured Party may agree to a cure of any default by
Debtor in any reasonable manner without waiving any other prior or subsequent
default by Debtor.
8.8 THIRD PARTIES. Secured Party shall have no obligation to
take, and Debtor shall have the sole responsibility for taking, any steps to
preserve rights against all prior parties to any document of title, general
intangible, instrument or chattel paper in Secured Party's possession as
Collateral or proceeds of the Collateral.
8.9 WAIVER OF NOTICE OF DISHONOR AND PROTEST, ETC. Debtor waives
dishonor, protest, presentment, demand for payment, notice of dishonor and
notice of protest of any instrument at any time held by Secured Party with
respect of which Debtor is in any way liable and waives notice of any other
action by Secured Party.
8.10 ASSIGNMENTS. Debtor's rights and obligations under this
Agreement are not assignable in whole or in part by operation of law or
otherwise. Secured Party may assign its rights and obligations under this
Agreement, in whole or in part, without notice to or consent of Debtor and
all of such rights shall be enforceable by Secured Party's successors and
assigns.
8.11 DEFINITIONS, MULTIPLE PARTIES; SECTION HEADINGS. The term
"person" when referred to herein shall mean an individual, partnership,
corporation or any other legal entity. If more than one Debtor executes this
Agreement, the term "Debtor" includes each of the Debtors as well as all of
them, and their obligations under this Agreement shall be joint and several.
Whenever the context so requires, the neuter gender includes the feminine and
masculine and the singular number includes the plural. Unless otherwise
defined herein or the context requires otherwise, terms used herein shall
have the same meaning as defined in the Uniform Commercial Code as enacted by
the State of New York. Section headings are used herein for convenience only
and do not alter or limit the meaning of the language contained in each
section.
8.12 AMENDMENT; WAIVER. This Agreement may not be modified or
amended nor shall any provision of it be waived except by a written
instrument signed by Debtor and by Secured Party.
8.13 CHOICE OF LAW; WAIVER OF JURY TRIAL. This Agreement has been
delivered in the State of New York and shall be interpreted, and the rights
and liabilities of the parties hereto
B-6
<PAGE>
determined, in accordance with the internal laws (as opposed to the conflicts
of law provisions) of the State of New York. Debtor and Secured Party hereby
waive any right to a trial by jury in any action to enforce or defend any
matter arising from or related to (i) this Agreement; (ii) any Note; or (iii)
any documents or agreements evidencing or relating to this Agreement or any
Note. Debtor agrees that a final judgment in any such action or proceeding
shall be conclusive and may be enforced in any other jurisdiction by suit on
the judgment or in any other manner provided by law. Nothing in this
paragraph shall affect or impair Secured Party's right to serve legal process
in any manner permitted by law, or Secured Party's right to bring any action
or proceeding against Debtor, or the property of Debtor, in the courts of any
other jurisdiction.
Any legal action or proceeding with respect to this Agreement
may be brought in the courts of the State of New York or of the United States
for the Sourthern District of New York, and, by execution and delivery of
this Agreement, Debtor hereby irrevocably accepts for itself and in respect
of its property, generally and unconditionally, the jurisdiction of the
aforesaid courts. Debtor hereby further irrevocably waives any claim that
any such courts lack jurisdiction over Debtor, and agrees not to plead or
claim, in any legal action or proceeding with respect to this Agreement
brought in any of the aforesaid courts, that any such court lacks
jurisdiction over Debtor. Debtor irrevocably consents to the service of
process in any such action or proceeding by the mailing of copies thereof by
registered or certified mail, postage prepaid, to Debtor, at its address for
notices pursuant to Section 8.15, such service to become effective 10 days
after such mailing. Debtor hereby irrevocably waives and agrees not to plead
or claim in any action or proceeding commenced hereunder or under any other
document that service of process was in any way invalid or ineffective.
Nothing herein shall affect the right of the Secured Party to serve process
in any other manner permitted by law or to commence legal proceedings or
otherwise proceed against Debtor in any other jurisdiction. Debtor hereby
irrevocably waives any objection which it may now or hereafter have to the
laying of venue of any of the aforesaid actions or proceedings arising our of
or in connection with this Agreement brought in the courts referred to above.
8.14 EXPENSES. Debtor shall pay all costs and expenses relating to
this Agreement and the Indebtedness, including but no limited to, filing and
recording fees, documentary stamps including, without limitation, Florida
documentary stamps (if any), intangible tax (if any), and Secured Party's
attorney's fees and expenses.
8.15 NOTICE. Except as otherwise provided herein, any notice
required hereunder shall be in writing and shall be deemed to have been
validly served, given or delivered by hand, by overnight courier or upon
deposit in the United States certified or registered mails, with proper
postage prepaid, addressed to the party to be notified as follows:
a. If to Secured Party at:
Sterling National Bank & Trust Company
430 Park Avenue
New York, New York 10022
Attention: Jerrald Gilbert, General Counsel
B-7
<PAGE>
b. If to Debtor at:
Sentinel Financing Ltd., L.P.
601 Gateway Blvd., Suite 260
South San Francisco, CA 94080
or to such other address as each party may designate for itself by like
notice.
8.16 SEVERABILITY. If any provision of this Agreement is
prohibited by, or is unlawful or unenforceable under, any applicable law of
any jurisdiction, such provision shall, as to such jurisdiction, be
ineffective to the extent of such prohibition without invalidating the
remaining provisions hereof; provided, however, that any such prohibition in
any jurisdiction shall not invalidate such provision in any other
jurisdiction.
8.17 RELIANCE BY SECURED PARTY. All covenants, agreements,
representations and warranties made herein by Debtor shall, notwithstanding
any investigation by Secured Party, be deemed to be material to and to have
been relied upon by Secured Party.
8.18 ENTIRE AGREEMENT. This Agreement, the Notes and the other
instruments, agreements and documents contemplated hereby contain the entire
agreement between Secured Party and Debtor with respect to the subject matter
hereof and supersedes and cancels any prior understanding and agreement
between Secured Party and Debtor with respect thereto.
8.19 BINDING EFFECT. Subject to the provisions of paragraph 8.10,
this Agreement shall be binding upon their heirs, personal representatives,
successors and assigns of Debtor and shall inure to the benefit of the
successors and assigns of Secured Party.
8.20 TIME. Time is of the essence in this Agreement.
8.21 ATTORNEYS' FEES. The parties hereby agree that in the event
any of the terms and conditions contained in this Agreement, including the
indemnification provisions contained herein, must be enforced by reason of
any past, existing or future delinquency of payment, of failure of observance
or of performance by any of the parties hereto, in each such instance, the
defaulting party shall be liable for reasonable collection and/or legal fees
(including fees and expenses of in-house counsel and paralegal and support
personnel), trial and appellate levels, any expenses and legal fees incurred,
including time spent in supervision of paralegal work and paralegal time, and
any other expenses and costs incurred in connection with the enforcement of
any available remedy.
8.22 CAPACITY. The Secured Party is entering into this Agreement
solely in its capacity as Trustee under the Indenture and shall be entitled
to the privileges, immunities and protections afforded it thereunder or under
any other agreement or instrument providing indemnity for
B-8
<PAGE>
it in any actions taken by it as Secured Party hereunder. The Secured Party
assumes no duties or obligations except for those expressly set forth herein.
In addition to, and not in limitation of the foregoing, Debtor
agrees (i) to indemnify and hold harmless the Secured Party and the
successors, assigns, employees and agents (hereunder referred to individually
as, an "Indemnitee" and, collectively, as "Indemnitees") from and against any
and all claims, demands, losses, judgments and liabilities of whatsoever kind
or nature, and (ii) to reimburse each Indemnitee for all costs and expenses,
including reasonable attorneys' fees, growing out of or resulting from this
Agreement or the exercise by any Indemnitee of any right or remedy granted to
it hereunder or under any other agreement related to any Indebtedness except,
with respect to clauses (i) and (ii) above, for those arising from such
Indemnitee's gross negligence or willful misconduct. In no event shall
Indemnitee hereunder be liable, in the absence of gross negligence or willful
misconduct on its part, for any matter or thing in connection with this
Agreement other than to account for moneys actually received by it in
accordance with the terms hereof. The indemnity obligations of Debtor
contained in this Section 8.22 shall continue in full force and effect
notwithstanding the full payment of all the Notes issued under the Indenture
and the payment of all other Indebtedness.
IN WITNESS WHEREOF, the parties have executed this Agreement the day and
year first above written.
SENTINEL FINANCING LTD., L.P.,
a Florida limited partnership
By: Sentinel Acceptance Corporation,
a Florida corporation,
its General Partner
By:
---------------------------------------
Jonathon W. Hollandsworth, President
STERLING NATIONAL BANK & TRUST COMPANY
By:
--------------------------------------------
Its:
--------------------------------------------
B-9
<PAGE>
EXHIBIT 1
COLLATERAL ASSIGNMENT
SENTINEL FINANCING LTD., L.P., a Florida limited partnership
("Assignor") hereby collaterally assigns to Sterling National Bank & Company,
as Trustee ("Assignee") the Contract attached hereto (the "Contract"). This
Collateral Assignment shall become absolute upon the occurrence of an Event
of Default as defined in the Security Agreement and the exercise of Secured
Party's rights and remedies thereunder with respect to the Contract, in which
event Assignee shall become the owner of the Contract and shall be entitled
to exercise all of the remedies provided in the Security Agreement with
respect to such Contract.
This Collateral Assignment shall be governed and construed in accordance
with the laws of the State of New York and the provisions of the Security
Agreement, which is incorporated herein.
As used herein, all capitalized terms shall have the same meaning as in
the Assignor's Prospectus dated ___________, 1998.
IN WITNESS WHEREOF, the Assignor has placed its hand and seal as of this
____ day of ________, 1998.
SENTINEL FINANCING LTD., L.P.,
a Florida limited partnership
By: Sentinel Acceptance Corporation,
a Florida corporation,
its General Partner
By:
---------------------------------------
Jonathon W. Hollandsworth, President
B-10
<PAGE>
EXHIBIT 2
COLLATERAL ASSIGNMENT
SENTINEL FINANCING LTD., L.P., a Florida limited partnership
("Assignor") hereby collaterally assigns to Sterling National Bank & Trust
Company, as Trustee ("Assignee") the collateral as set forth in the Security
Agreement between Assignor and Assignee of even date herewith (the
"Collateral"). This Collateral Assignment shall become absolute upon the
occurrence of an Event of Default as defined in the Security Agreement and
the exercise of Secured Party's rights and remedies thereunder with respect
to the Collateral, in which event Assignee shall become the owner of the
Collateral and shall be entitled to exercise all of the remedies provided in
the Security Agreement with respect to such Collateral.
This Collateral Assignment shall be governed and construed in accordance
with the laws of the State of New York and the provisions of the Security
Agreement, which is incorporated herein.
As used herein, all capitalized terms shall have the same meaning as in
the Assignor's Prospectus dated ___________, 1998.
IN WITNESS WHEREOF, the Assignor has placed its hand and seal as of the
____ day of ________, 1998.
SENTINEL FINANCING LTD., L.P.,
a Florida limited partnership
By: Sentinel Acceptance Corporation,
a Florida corporation,
its General Partner
By:
---------------------------------------
Jonathon W. Hollandsworth, President
B-11
<PAGE>
EXHIBIT C
SENTINEL FINANCING LTD., L.P.
SUBSCRIPTION AGREEMENT - SECURED NOTES
The Investor named below, by payment of the purchase price for such Secured
Notes, by the delivery of a check payable to SENTINEL FINANCING LTD., L.P.
- -Escrow Account/_______________ hereby subscribes for the amount of Secured
Notes indicated below (minimum purchase of $2,000) of Sentinel Financing
Ltd., L.P. The Secured Notes may be purchased in increments of $1,000. By
such payment, the named Investor further acknowledges receipt of the
Prospectus and any Supplement and the Subscription Agreement, the terms of
which govern the investment in the Secured Notes being subscribed for hereby.
<TABLE>
<S> <C>
A. INVESTMENT: 1. Amount of Secured Notes Purchased $__________
2. Initial Purchase [ ] Additional Purchase [ ] Date of Investor's check __________
B. REGISTRATION: Mr. Mr.
Mrs. Mrs.
1. Registered Owner: Ms. Co-Owner: Ms.___________________________________________________
2. Mailing Address: City, State & Zip: _____________________________________________
3. Residence Address (if different from above):________________________________________________________________________________
4. Birth Date: _____/_____/_____ 5. Birth Date Co-Owner: _____/_____/_____
6. Please indicate Citizenship Status: 7. Social Security #: _____/_____/_____
U.S. Citizen [ ] Other [ ] Co-Owner SS#: _____/_____/_____
8. Telephone #: (H) (_____) _______________ Corporate or Custodial:
(O) (_____) _______________ Taxpayer ID#: _________-_____-__________
- -----------
C. OWNERSHIP: [ ] Individual Ownership [ ] IRA or Keogh [ ] Joint Tenants With Rights of Survivorship
[ ] Trust/Date of Trust Established Pension Trust ___/___/___ (S.E.P.) [ ] Tenants in Common
[ ] Tenants by the Entirety [ ] Corporate Ownership [ ] Partnership [ ] Other_____________________________________
D. SIGNATURES: By signing below, I/we represent that I/we meet the suitability standards set forth in the Prospectus under
"Suitability Standards."
Signatures - Registered Owner:______________________________ Co-Owner: _________________________________________________
E. Print Names of Custodian or Trustee:__________________________ Authorized Signature: _____________________________________
Date:_______________________________ Witness Signature: ____________________________________________________________
F. PAYMENT SHOULD BE SENT TO (IF DIFFERENT THAN REGISTERED OWNER):
Name: ________________________________________________________________ c/o _____________________________________________
Address: _____________________________________________________________ Account Number: _________________________________
City, State & Zip: ___________________________________________________ Telephone Number: _______________________________
G. BENEFICIAL OWNER(S): All reports and financial statements will normally be sent to the registered owner at the address in
Section B. If reports and financial statements are to be sent to the Beneficial Owner of an IRA or Keogh, insert name of the
Beneficial Owner.
Name of Beneficial Owner Only: _______________________________________ Telephone Number: _______________________________
Address: _____________________________________________________________ City, State & Zip: ______________________________
H. BROKER-DEALER/REGISTERED REPRESENTATIVE DATE: ALL LINES MUST BE COMPLETED. ANY MISSING SIGNATURES MAY DELAY PROCESSING OF
THIS ORDER.
Broker-Dealer NASD Firm Name: ________________________________________ Date: ___________________________________________
Main Office Address: _______________________________________________________________________________________________________
City, State & Zip: ___________________________________________________ Telephone Number: _______________________________
Print or Type Name of Broker-Dealer, Principal or other Authorized Signator: _______________________________________________
Authorized Signature: ______________________________________________________________________________________________________
Print or Type Name of Registered Representative: ___________________________________________________________________________
Signature: _________________________________________________________________________________________________________________
Branch Office Address: _____________________________________________________________________________________________________
City, State & Zip: ___________________________________________________ Telephone Number: _______________________________
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
MAIL TO: Sentinel Financing Ltd., L.P., 601 Gateway Blvd., Suite 260, South San Francisco, CA 94080,
Attention: Jonathon W. Hollandsworth, President
Telephone: (650) 869-3900 FAX: (650) 869-3738
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ALL CHECKS FROM INVESTORS MUST BE TRANSMITTED TO THE ESCROW AGENT
C-1
<PAGE>
BY NOON OF THE NEXT BUSINESS DAY FOLLOWING RECEIPT
C-2
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, THE NOTES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER AT ANY TIME IMPLIES
THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
_____________
TABLE OF CONTENTS
<TABLE>
Page
----
<S> <C>
SUITABILITY STANDARDS. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . 13
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
CERTAIN TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . 29
DESCRIPTION OF THE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . 30
FEDERAL INCOME TAX CONSEQUENCES. . . . . . . . . . . . . . . . . . . . . . 33
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
TRANSFERABILITY OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . 38
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 39
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . F-I
EXHIBIT A - Form of Secured Note
(Face of Security) . . . . . . . . . . . . . . . . . . . . . . A-1
(Back of Security) . . . . . . . . . . . . . . . . . . . . . . A-2
ASSIGNMENT FORM. . . . . . . . . . . . . . . . . . . . . . . . A-5
EXHIBIT B - SECURITY AGREEMENT . . . . . . . . . . . . . . . . . . . . . . B-1
EXHIBIT C - SENTINEL FINANCING LTD., L.P.
SUBSCRIPTION AGREEMENT - SECURED NOTES . . . . . . . . . . . . C-1
</TABLE>
__________________________
UNTIL THE TERMINATION OF THIS OFFERING, AND IN ANY EVENT UNTIL 90 DAYS AFTER
THE DATE OF THIS PROSPECTUS, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES TO WHICH THIS PROSPECTUS RELATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS WITH RESPECT TO THEIR UNSOLD allotments or
subscriptions.
$15,000,000 (MAXIMUM)
$ 1,000,000 (MINIMUM)
SENTINEL FINANCING LTD., L.P.
12% SECURED NOTES DUE 2003
_____________
PROSPECTUS
_____________
______________, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's general partner, its affiliates, shareholders, employees and
agents are indemnified by the Company from and against any and all losses,
liabilities, costs and damages by reason of the management of the Company's
affairs except for conduct that arises from (i) fraud, gross negligence,
gross misconduct or criminal acts; (ii) breach of the Company's Partnership
Agreement; or (iii) a matter unrelated to such partner's management of the
Company's affairs.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses (other than
underwriting discounts) to be borne by the Registrant in connection with the
issuance and distribution of the securities offered hereby:
<TABLE>
<CAPTION>
Total
MINIMUM MAXIMUM
<S> <C> <C>
SEC filing fee. . . . . . . . . . . . . . . . . . . . $ 4,546 $ 4,546
NASD Filing . . . . . . . . . . . . . . . . . . . . . 2,000 2,000
Blue Sky fees and expenses, including legal fees. . . 5,000 5,000
Printing and engraving . . . . . . . . . . . . . . . 7,000 12,000
Legal fees and expenses . . . . . . . . . . . . . . . 106,000 244,000
Accounting fees and expenses. . . . . . . . . . . . . 52,000 52,000
Trustee and Custodian's fees. . . . . . . . . . . . . 22,000 22,000
Miscellaneous . . . . . . . . . . . . . . . . . . . . 1,000 1,000
-------- --------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . $199,546 $342,546
-------- --------
-------- --------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In August, 1997, the Company issued limited partnership interests to
Sentinel Acceptance in connection with the formation of the Company. This
sale was made to a sophisticated investor and without a general
solicitation. The Company believes this transaction was exempt from the
registration provisions of the Securities Act of 1933, as amended pursuant
to Section 4(2) thereof. Sentinel Acceptance transferred its limited
partnership interest to Four Star Financial Services, LLC in December 1997.
II-1
<PAGE>
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
See Exhibit Index following the Signatures page which is incorporated
herein by reference.
(b) FINANCIAL STATEMENT SCHEDULES.
Schedules have been omitted because they are not applicable or are not
required or the information required to be set forth herein is included in
the Financial Statements or notes thereto.
ITEM 27. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director,
II-2
<PAGE>
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
South San Francisco, California on this 12th day of May, 1998
Sentinel Financing Ltd., L.P.
By Sentinel Acceptance Corporation
General Partner
By /s/ Jonathon W. Hollandsworth
-----------------------------
Jonathon W. Hollandsworth
President
i
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registration Statement has been signed by the following persons in the
capacities indicated on the dates indicated.
/s/ Jonathon W. Hollandsworth
- -----------------------------
Jonathon W. Hollandsworth President and Director of
Sentinel Acceptance Corporation May 12, 1998
/s/ Dean Kayes
- -----------------------------
Dean Kayes Director of Sentinel Acceptance May 12, 1998
Corporation
/s/ Dorothy H. Kulpinski
- -----------------------------
Dorothy H. Kulpinski Director, Secretary and May 12, 1998
Treasurer of Sentinel
Acceptance Corporation
/s/ Suzanne Tikkannen
- -----------------------------
Suzanne Tikkannen Director of Sentinel Acceptance May 12, 1998
Corporation
ii
<PAGE>
EXHIBIT INDEX
TO
SENTINEL FINANCING LTD., L.P.
REGISTRATION STATEMENT ON FORM SB-2
<TABLE>
<CAPTION>
Exhibit Seq.
No. Description Page No.
- ------- ----------- --------
<S> <C> <C>
1.1* Form of Placement Agent Agreement
3.1* Limited Partnership Agreement of Registrant
3.2* Amendment to Limited Partnership Agreement
4.1* Security Agreement (included as Exhibit B to Prospectus)
4.3* Indenture of Trust between the Company and Trustee
4.4* Subscription Agreement (included as Exhibit C to Prospectus)
4.5* Escrow Agreement
5.1 Opinion re: Legality
10.1* Portfolio Service Agreement between Sentinel Acceptance
Corporation and Registrant
10.2* Custodian Agreement
23.1(a) Consent of Independent Accountants
23.1(b) Consent of Independent Accountants
23.2 Consent of Legal Counsel (included in Exhibit 5.1)
25.1* Form T-1 Statement of Eligibility of Trustee
</TABLE>
________________
* Previously Filed.
iii
<PAGE>
File Number: S3123-0003
Direct Dial Number: (213) 891-5020
E-Mail Address: [email protected]
May 15, 1998
Sentinel Financing, Ltd., L.P.
601 Gateway Boulevard, Suite 260
South San Francisco, CA 94080
Re: $15,000,000 Maximum Aggregate Principal Amount
of 12% Secured Fixed Rate Notes Due 2003
Ladies and Gentlemen:
We have acted as counsel to Sentinel Financing, Ltd., L.P., a Florida
limited partnership (the "Company"), in connection with the Company's
proposed offering of $1,000,000 minimum up to $15,000,000 maximum aggregate
principal amount of 12% Secured Fixed Rate Notes Due 2003 (the "Securities")
pursuant to the provisions of an Indenture, dated as of May __, 1998, (the
"Indenture") between Sterling National Bank, a national banking association,
as trustee (the "Trustee") and the Company. Terms defined in the Indenture
and not otherwise defined herein are used in this letter with the meanings
ascribed to such terms in the Indenture.
In our capacity as counsel to the Company, we have reviewed and relied
upon originals or copies, certified or otherwise identified to our
satisfaction, of the following documents:
(a) the Securities; and
(b) the Indenture.
The Securities and the Indenture are referred to collectively as the
"Documents."
With your permission, we have reviewed and relied upon an opinion letter
addressed to us, dated May 14, 1998, from Stump, Storey & Callahan, P.A., a
copy of which is attached, as to certain factual and legal matters relevant
to the opinion expressed in this letter, provided, however, that we have made
no independent verification, investigation or inquiry whatsoever as to the
accuracy or completeness thereof.
In addition, we have been furnished with and have examined drafts,
originals or copies, certified or otherwise identified to our satisfaction,
of such corporate records, instruments and
<PAGE>
Sentinel Financing, Ltd., L.P.
May 15, 1998
Page 2
other documents of the Company as we have deemed necessary to require as a
basis for the opinion expressed in this letter. As to questions of fact
material to the opinion expressed in this letter, we have relied solely on
certificates or advice of public officials. In connection with the opinion
expressed in this letter, we have relied only on our examination of the
foregoing documents and certificates, without having undertaken any
independent investigation or verification of the factual matters set forth
therein.
We are authorized to practice law in the State of California and some of
our attorneys are licensed to practice in the State of New York, and we do
not purport to be experts on or to express any opinion herein concerning any
laws other than the laws of the State of California, New York and the laws of
the United States of America.
In addition, we have, with your permission and without independent
investigation as to accuracy, relied upon the following assumptions for the
purposes of furnishing our opinion:
A. All signatures on the Documents and the documents and instruments
referred to therein when executed will be genuine, all documents submitted to
us are genuine, all documents submitted to us as originals are authentic, and
all documents submitted to us as drafts conform to the originals as executed
by the parties.
B. No agreements, understandings or negotiations exist among the
parties to the Documents that would modify the terms thereof or the
respective rights or obligations of the parties thereto.
C. The execution, delivery of and performance under the Documents by
the Trustee have been duly authorized by all necessary corporate and other
action by the Trustee; the Documents when executed will represent the legal,
valid, binding and enforceable obligations of the Trustee and do not involve
a violation by the Trustee of any provision of any applicable law or
regulation; and the Trustee has the capacity and power to enter into, deliver
and perform the Documents.
D. The Trustee is in compliance with the laws of the State of
California, New York and applicable federal laws and any other applicable
laws or regulations to the extent that noncompliance with such laws or
regulations would affect the enforceability of the Documents.
On the basis of the foregoing, and in reliance thereon and subject to
the assumptions, qualifications, exceptions and limitations expressed herein,
we are of the opinion that the Securities, when issued, authenticated and
paid for in accordance with the terms of the
<PAGE>
Sentinel Financing, Ltd., L.P.
May 15, 1998
Page 3
Indenture, and the Indenture will constitute the valid and binding
obligations of the Company, enforceable against the Company in accordance
with their respective terms.
The opinion expressed in this letter is specifically subject to the
following limitations and qualifications as to which we express no opinion:
(a) The validity, binding nature or enforceability of the
Documents as the same may be affected by, subject to or limited by
bankruptcy, insolvency, fraudulent conveyance or transfer, reorganization,
arrangement, moratorium, or other similar laws relating to or affecting the
rights of creditors generally;
(b) The enforceability of the obligations of the Company under the
Documents as the same may be subject to or limited by general principles of
equity, including without limitation, concepts of materiality,
reasonableness, good faith and fair dealing, regardless of whether considered
in a proceeding in equity or at law;
(c) The availability of equitable remedies; and
(d) The enforceability of the indemnification and contribution
provisions in the Indenture insofar as they relate to the United States
securities laws.
In addition, we express no opinion as to the attachment or creation of,
or the perfection of, or the effect of the failure to perfect or maintain
perfected, or the relative priority of, any security interest granted by the
Company to the Trustee for the benefit of the Securityholders pursuant to the
Security Documents.
This opinion is limited to the present laws of the State of New York,
California and of the United States of America, to present judicial
interpretations thereof, and to the facts as they presently exist. We do not
assume any obligation to revise or supplement this opinion should the present
laws of such jurisdictions be changed by legislative action, judicial
decision or otherwise. This opinion is furnished as of the date hereof, and
we do not express any opinion as to, and disclaim any undertaking or
obligation to update this opinion in respect of, changes of circumstances or
events which occur subsequent to this date.
This opinion is solely for your information in connection with the
Securities to be offered pursuant to the Indenture and is not, without the
prior written consent of this firm, to be quoted in full or in part or
otherwise referred to in any documents other than the reference to this firm
in the Prospectus, which is part of the Company's Registration Statement on
Form SB-2
<PAGE>
Sentinel Financing, Ltd., L.P.
May 15, 1998
Page 4
(File No. 333-29067), under the caption "Legal Matters," nor to be filed with
any governmental agency or other persons, other than the Securities and
Exchange Commission (the "SEC") and various state securities administrators
in connection with the qualification of the Securities, to which reference
and filings we hereby consent.
Very truly yours,
Buchalter, Nemer, Fields & Younger
<PAGE>
May 14, 1998
Mark A. Bonenfant, Esquire
BUCHALTER, NEMER, FIELDS & YOUNGER
601 South Figueroa Street, Suite 2400
Los Angeles, California 90017-5704
RE: SENTINEL FINANCING, LTD., L.P.
REGISTRATION STATEMENT FORM OF FORM SB02 (FILE NO. 333-29067) (THE
"REGISTRATION")
Gentlemen:
We have acted as Florida counsel to Sentinel Financing, Ltd., L.P., a
Florida limited partnership (the "Company"), in connection with the Company's
proposed offering of $1,000,000.00 minimum up to $15,000,000.00 maximum
aggregate principal amount of twelve percent (12%) Secured Notes due 2003
(the "Notes").
In our capacity as Florida counsel to the Company, we have reviewed the
following documents:
1. Certificate of Limited Partnership of the Company filed with the
Secretary of State of the State of Florida;
2. The Limited Partnership Agreement of the Company dated 1997, as
amended by the Amendment to Limited Partnership Agreement dated May 7,
1998 (the "L.P. Agreement");
3. Articles of Incorporation (the "Articles") of Sentinel Acceptance
Corp., a Florida corporation, the sole general partner of the Company
(the "General Partner") filed with the Secretary of State of the State
of Florida;
4. Bylaws of the General Partner (the "Bylaws"); and
5. The Action by Written Consent of the Board of Directors of the General
Partner authorizing the General Partner to execute the Notes and other
related documents.
<PAGE>
Mark A. Bonenfant, Esquire
BUCHALTER, NEMER, FIELDS & YOUNGER
May 14, 1998
Page 2
- -----------------------------------
We have examined originals or copies, certified or otherwise identified,
of such other documents, corporate records and instruments necessary or
advisable for the purposes of this opinion. As to matters of fact we have
examined and relied upon the representations of the parties and, where we
have deemed appropriate, representations or certifications of the
representatives of the General Partner.
We have assumed the authenticity of all documents submitted to us as
originals, the genuineness of all signatures, the legal capacity of natural
persons and the conformity to the originals of all documents submitted to us
as copies.
Based upon and subject to the foregoing and to the exceptions,
assumptions and qualifications set forth in this opinion, it is our opinion
that:
1. The Company is a limited partnership duly formed and validly existing
under the laws of the State of Florida;
2. The General Partner is a corporation duly formed and validly existing
under the laws of the State of Florida;
3. The Company has all requisite power and authority to enter into and
perform its obligations under the Notes and has taken all necessary
action to authorize the execution, delivery and performance of the
Notes;
4. No consent, approval or authorization of, or notice to, or filings
with any governmental authority or agency under the laws of the State
of Florida are required or necessary on the part of the Company in
connection with the execution, delivery and performance by the Company
of its obligations under the Notes except filings in connection with
the collateral and filings to and in compliance with Florida State
Securities laws.
The opinions set forth herein are limited to those expressly stated
herein and are rendered only with respect to the matters set forth herein,
and no other opinion or opinions shall be implied as to any other matter of
fact or law. The opinions set forth herein are limited in all respects to
the laws and matters existing on the date hereof. In rendering our opinion,
we do not undertake to assume any obligations to advise you of any changes in
law or any changes in fact which are brought to our attention after the date
hereof.
<PAGE>
Mark A. Bonenfant, Esquire
BUCHALTER, NEMER, FIELDS & YOUNGER
May 14, 1998
Page 3
- -----------------------------------
This opinion is being delivered to you solely for your use in connection
with the Registration. This letter and the opinions expressed herein may not
be used or relied upon by you or your successors and assigns for any other
purpose and may not be relied upon for any purpose by any person or entity
other than you. Except for the use permitted herein, this opinion is not to
be reproduced in whole or in part nor is it to be filed with any governmental
agency or delivered to any other person or entity without the express prior
written consent of this firm.
The opinions herein are limited to the laws of the State of Florida, and
we express no opinion as to the effect of any of the laws of any other
jurisdiction on the matters covered by this opinion.
The foregoing opinions are legal opinions only, and do not constitute a
guaranty or warranty of the matters discussed herein.
Respectfully submitted,
STUMP, STOREY & CALLAHAN, P.A.
By: /s/ W. SCOTT CALLAHAN
----------------------------------
W. Scott Callahan
WSC/lw
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form SB-2 of
our report dated December 31, 1997 on our audit of the financial statements of
Sentinel Acceptance Corporation. We also consent to the reference to our firm
under the caption "Experts."
Millward & Co. CPAs
Fort Lauderdale, Florida
May 12, 1998
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form SB-2 of
our report dated December 31, 1997, on our audit of the financial statements of
Sentinel Financing LTD., L.P. We also consent to the reference to our firm
under the caption "Experts."
Millward & Co. CPAs
Fort Lauderdale, Florida
May 12, 1998
