<PAGE>
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 September 1, 1998. The Notes will
mature on August 31, 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 6
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.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES AGENCY
<PAGE>
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.
<TABLE>
<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
- ------------------------------------------------------------------------------
</TABLE>
(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
will also pay Attkisson, Carter & Akers a non-accountable expense
allowance not to exceed 1.25% of the principal aggregate amount of Notes
sold. See "Plan of Distribution."
(2) Before deduction of a 1% investment banking and marketing fee payable to
Attkisson, Carter Akers and before deducting expenses of approximately
$215,000 to $570,000 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"). The aggregate principal amount of Notes purchased (if
any) by affiliates of the Company will not be included toward satisfying 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 October 31, 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 July 31, 2000, unless sooner terminated by
the Company in its sole discretion.
ATTKISSON, CARTER & AKERS
The date of this Prospectus is July 22, 1998
<PAGE>
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]
2
<PAGE>
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."
3
<PAGE>
THE OFFERING
SECURITIES OFFERED $15,000,000 aggregate principal amount of 12% Secured Notes
due 2003 (the "Notes").
MATURITY August 31, 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"). The aggregate principal amount of Notes
purchased (if any) by affiliates of the Company will not be
included toward satisfying 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 October 31, 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").
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<PAGE>
PLAN OF
DISTRIBUTION 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.
Investors will be required to deliver checks for the
purchase price made payable to Greater Bay Trust Company -
Sentinel Financing Ltd., L.P. Escrow Account. If the
Minimum Subscription Amount is not reached on or before
October 31, 1998, 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."
5
<PAGE>
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.
6
<PAGE>
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
7
<PAGE>
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
8
<PAGE>
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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<PAGE>
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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<PAGE>
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)
<S> <C> <C> <C>
USE OF PROCEEDS
- ----------------
Amount Percent Amount Percent Amount Percent
------ ------- --------- ------- ----------- ---------
Purchase of Installment $ 672,500 67.2% $6,268,750 83.6% $12,742,500 85.0%
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)
Non-Accountable 12,500 1.25 93,750 1.25 187,500 1.25
Expense Allowance(3)
Investment Banking and 10,000 1.0 75,000 1.0 150,000 1.0
Marketing Fee(4)
Other Offering 215,000 21.5 387,500 5.1 570,000 3.8
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."
(3) The Company will pay Attkisson, Carter & Akers a non-accountable expense
allowance equal to 1.25% of the principal amount of each Note. See "Plan
of Distribution."
(4) An investment banking and marketing fee will be paid to Attkisson, Carter &
Akers 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.
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<PAGE>
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 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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<PAGE>
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,
17
<PAGE>
Installment Contract purchase fees, insurance, repossession, repair and
liquidation expenses, enforcement 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
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<PAGE>
customer to keep the Financed Vehicle, while a suitable solution to the
delinquency problem can be 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
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<PAGE>
such states. The Company has no current plans to expand its business into
any jurisdiction where 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.
EMPLOYEES
The Company will not employ any full time employees. Services will be
provided to the Company by four full time employees of SAC.
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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 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.
21
<PAGE>
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 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.
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<PAGE>
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.
23
<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."
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 OUTSTANDING
--------------------------- (1) 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 September 1, 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 August 31, 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
27
<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.
28
<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,
29
<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
30
<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
31
<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
32
<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.
33
<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
October 31, 1998, 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,
34
<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 1% of the sale price of each Note sold will be paid to
Attkisson. The Company will also pay Attkisson 1.25% 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. Investors will be required
to make checks payable for the purchase price to the Greater Bay Trust
Company -- Sentinel Financing Ltd., L.P. Escrow Account. 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.
35
<PAGE>
LEGAL MATTERS
The validity of the Notes offered here will be passed upon by Buchalter,
Nemer, Fields & Younger, a professional corporation, 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.
36
<PAGE>
FINANCIAL STATEMENTS
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITOR'S REPORT . . . . . . . . . . . . . . . . . . . . . . . . . F-2
SENTINEL ACCEPTANCE CORPORATION
BALANCE SHEET, December 31, 1997 and March 31, 1998 (unaudited). . . . . . . F-3
NOTES TO BALANCE SHEET . . . . . . . . . . . . . . . . . . . . . . . . F-4, F-5, F-6
INDEPENDENT AUDITOR'S REPORT . . . . . . . . . . . . . . . . . . . . . . . . . F-7
SENTINEL FINANCING LTD., L.P.
BALANCE SHEET, December 31, 1997 and March 31, 1998 (unaudited) . . . . . . F-8
NOTES TO BALANCE SHEET . . . . . . . . . . . . . . . . . . . . . . . . . . F-9, F-10
</TABLE>
INVESTORS IN THE NOTES ARE NOT ACQUIRING ANY FINANCIAL INTEREST OR LIABILITY
OF THE CORPORATION WHOSE BALANCE SHEET APPEARS ABOVE.
F-1
<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 present 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-2
<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-3
<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.
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.
INVESTORS IN THE NOTES ARE NOT ACQUIRING ANY FINANCIAL INTEREST OR LIABILITY
OF THE CORPORATION WHOSE BALANCE SHEET APPEARS ABOVE.
F-4
<PAGE>
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
INVESTORS IN THE NOTES ARE NOT ACQUIRING ANY FINANCIAL INTEREST OR LIABILITY
OF THE CORPORATION WHOSE BALANCE SHEET APPEARS ABOVE.
F-5
<PAGE>
primary business is described in Note 1 -- "Organization". The following
represents the Company's investment activity:
<TABLE>
<S> <C>
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 1997 and reduction in carrying value 55,074
---------
Balance - December 31, 1997 and March 31, 1998 (unaudited) $ 150,050
---------
---------
</TABLE>
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:
<TABLE>
<S> <C>
Preferred stock $ 110,000
Common stock 10,000
Additional paid-in capital 93,400
---------
$ 213,400
---------
---------
</TABLE>
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-6
<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-7
<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-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)
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
F-9
<PAGE>
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 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>
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<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 AUGUST 31, 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
<PAGE>
(Back of Security)
12% Secured Fixed Rate Notes due August 31, 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 September 1, 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 September 1, 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
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<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 al
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 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
A-3
<PAGE>
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
July 22, 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 September 1, 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
Mid-Pennsula Bank--General Account (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").
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:
<PAGE>
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 named as limited partners therein, dated
July 31, 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").
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<PAGE>
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 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.
B-3
<PAGE>
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.
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
B-4
<PAGE>
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.
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.
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<PAGE>
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 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
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<PAGE>
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. 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.
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<PAGE>
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 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.
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<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:
------------------------------------------
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<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 July 22, 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
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<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 July 22, 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
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<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 Greater Bay Trust Company --
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>
<CAPTION>
<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:_________________________
</TABLE>
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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
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ALL CHECKS FROM INVESTORS MUST BE TRANSMITTED TO THE ESCROW AGENT
BY NOON OF THE NEXT BUSINESS DAY FOLLOWING RECEIPT
<PAGE>
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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>
<CAPTION>
Page
<S> <C>
SUITABILITY STANDARDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . 12
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
CERTAIN TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . 26
DESCRIPTION OF THE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
FEDERAL INCOME TAX CONSEQUENCES. . . . . . . . . . . . . . . . . . . . . . . . . . 30
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
TRANSFERABILITY OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
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.
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$15,000,000 (MAXIMUM)
$ 1,000,000 (MINIMUM)
SENTINEL FINANCING LTD., L.P.
12% SECURED NOTES DUE 2003
_____________
PROSPECTUS
_____________
ATTKISSON, CARTER & AKERS
July 22, 1998
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