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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-40321
$10,000,000 (MAXIMUM) $500,000 (MINIMUM)
SOVEREIGN CREDIT FINANCE II, INC.
11% NOTES DUE FEBRUARY 15, 2002
Sovereign Credit Finance II, Inc., a Texas corporation (the "Company"), a
newly organized, single purpose subsidiary of Sovereign Auto Finance Holdings,
Inc., a Texas corporation ("SAFH"), is hereby offering up to $10,000,000 in
principal amount of its 11% notes due February 15, 2002 (the "Notes"). The Notes
bear interest, payable monthly, at a stated annual rate of 11%. The effective
yield of the Notes will be 10.95%.
The Company will purchase, at a discount, retail installment sales contracts
(the "Contracts") and notes secured by used automobiles and light trucks (the
"Financed Vehicles") using (a) the net proceeds from the sale of the Notes
offered hereby, (b) possible additional borrowing (as described herein), and (c)
as long as no Event of Default (as defined under "Description of the
Notes--Additional Indenture Provisions--Events of Default") exists, the net
collection proceeds from previously purchased Contracts. The Notes are subject
to redemption at any time at the option of the Company at a redemption price of
100% of the outstanding principal amount thereof, together with accrued
interest, without any premium or penalty. Sovereign Auto Finance, Inc. (the
"Administrator"), an affiliate of SAFH, will administer and manage the ongoing
operations of the Company. The Company has contracted with Sovereign Associates,
Inc. (the "Servicer"), which is owned and managed separately from the
Administrator, SAFH and the Company, to provide necessary purchasing and
collecting services. The Contracts will be originated by automobile dealers
("Dealers"). The Company anticipates that it will purchase its Contracts
primarily from Fiesta Motors, a Dealer owned and operated by Fiesta Motors, LLC,
a Texas limited liability company ("Fiesta Motors"). Fiesta Motors is also an
affiliate of SAFH. At least 84.5% of the gross proceeds of the offering will be
available for the purchase of Contracts.
The Company's only business will be the purchase and collection of the
Contracts, and the Company's most significant assets will be the Contracts and
related motor vehicle collateral. No other party will insure or guarantee
payment of the Notes. Noteholders may look only to the Company's assets as a
source of payment on the Notes. The Notes will be unsecured, and Noteholders'
rights in the Contracts will be junior to the rights of any senior lending
source (the "Additional Lender").
The offering will terminate on January 31, 1999, unless sooner terminated by
the Company for certain reasons. See "Plan of Distribution". The Notes are
offered in minimum subscription amounts of $4,000 ($2,000 for Individual
Retirement Accounts) for each investor, and will be issued without any minimum
denominations.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NO PUBLIC MARKET IS EXPECTED TO DEVELOP FOR THESE SECURITIES. INVESTORS
SHOULD EXPECT TO RETAIN OWNERSHIP OF THE NOTES AND BEAR THE ECONOMIC RISKS OF
THEIR INVESTMENT FOR THE ENTIRE TERM OF THE NOTES.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK, INCLUDING RISKS
OF DEFAULT ON THE CONTRACTS. THESE ARE SPECULATIVE SECURITIES. SEE "RISK
FACTORS" AT PAGE 9 OF THIS PROSPECTUS. DEBT SECURITIES OFFERED WITH HIGH
INTEREST OR YIELD GENERALLY INVOLVE MORE RISK THAN MANY OTHER MEDIUM TERM DEBT
INSTRUMENTS WITH LOWER INTEREST OR YIELD.
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PRICE TO BROKERS COMMISSIONS PROCEEDS TO
PUBLIC AND EXPENSES(1) COMPANY(2)
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Per Note.............................................. 100% 8% 92%
Total Minimum......................................... $500,000 $40,000 $460,000
Total Maximum......................................... $10,000,000 $800,000 $9,200,000
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(1) Payable by the Company to participating licensed broker-dealers. See "Plan
of Distribution".
(2) Before deduction of up to 2% of the offering proceeds for the payment of
offering and organizational expenses incurred by the Company, and the
administration fee (the "Administration Fee") payable by the Company to the
Administrator for its services in administering and managing the ongoing
operations of the Company equal to 5.5% of the gross proceeds from the sale
of the Notes (5.0% of the gross proceeds in excess of $9,000,000). See "The
Company-- General".
--------------------------
The Notes are being sold on a "best efforts" basis on behalf of the Company
by one or more licensed broker-dealers that are members of the National
Association of Securities Dealers, Inc. that may hereafter be engaged by the
Company. As of the date of this Prospectus, the Company has not identified any
broker/dealers who have agreed to participate in this offering of the Notes.
Investor funds will be held in an escrow account at Overton Bank and Trust, N.A.
until a minimum of $500,000 in principal amount of the Notes are sold. In the
event the minimum amount of Notes is not subscribed on or before April 30, 1998,
the offering will be terminated and the escrowed funds, plus any interest earned
thereon, will be promptly returned to the investors by the escrow agent. Upon
the subscription by investors for the minimum amount of Notes, the escrowed
funds (less interest thereon which will be paid to investors) will be released
to the Company. Affiliates of the Company will not purchase Notes in the
offering. Interest will not accrue on the Notes until the escrowed funds are
released to the Company. Any subsequent sales proceeds from Notes will be
immediately available for use by the Company. All subscriptions are subject to
the right of the Company to reject any subscription in whole or in part.
--------------------------
This Prospectus is dated March 3, 1998.
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The Company has filed a Form SB-2 Registration Statement under the
Securities Act of 1933, as amended, with the Securities and Exchange Commission
(the "Commission") with respect to the Notes offered pursuant to this
Prospectus. This Prospectus, which forms a part of the Registration Statement,
does not contain all of the information included in the Registration Statement
and the exhibits thereto. For further information, reference is made to the
Registration Statement and amendments thereof and to the exhibits thereto, which
are available for inspection without charge at the office of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of
the Commission at Seven World Trade Center, 12th Floor, New York, New York
10048, and at 500 West Madison Street, Suite 1400, Chicago, IL 60661, and copies
of which may be obtained from the Commission at prescribed rates.
The Company became a reporting company as of the date of this Prospectus.
The reports and other information filed by the Company may be inspected and
copied at the public reference facilities of the Commission in Washington D.C.,
and at the above Regional Offices, and copies of such material can be obtained
from the Public Reference Section of the Commission in Washington D.C. at
prescribed rates. The Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding issuers that
file electronically with the Commission. The address of such site is
http://www.sec.gov.
------------------------
REPORTS TO NOTEHOLDERS
The Company will furnish to the Noteholders annual reports of the Company
containing audited financial statements. The Company will also furnish to the
Noteholders quarterly unaudited summary information regarding the Contracts. An
IRS Form 1099 will be mailed to each Noteholder by January 31 of each year for
interest paid during the previous year.
------------------------
MINIMUM SUITABILITY STANDARDS
Subscribers must represent that the amount of their investment does not
exceed 10% of their net worth, such net worth to be determined exclusive of the
subscriber's principal residence and its furnishings and personal use
automobiles. Additional minimum suitability requirements have been established
for residents of certain states. Indiana, Missouri, New Mexico, South Dakota,
Texas, Virginia and Wisconsin subscribers must further represent that they have
either (a) an annual gross income of at least $45,000 and a net worth of at
least $45,000 exclusive of the subscriber's principal residence and its
furnishings and personal use automobiles; or (b) a net worth of at least
$150,000, exclusive of the subscriber's principal residence and its furnishings
and personal use automobiles. California, Iowa, Kansas, and Michigan subscribers
must further represent that they have either (a) an annual gross income of at
least $60,000 and a net worth of at least $60,000 exclusive of the subscriber's
principal residence and its furnishings and personal use automobiles; or (b) a
net worth of at least $225,000, exclusive of the subscriber's principal
residence and its furnishings and personal use automobiles. In the case of sales
to a subscriber which is a fiduciary account, the foregoing standards must be
met by the beneficiary, the fiduciary account, or by the donor or grantor who
directly or indirectly supplies the funds to purchase the securities if the
donor or grantor is the fiduciary.
------------------------
The mailing address of the Company's principal executive offices is 4015
Beltline Road, Building B, Dallas, Texas 75244, and its telephone number is
(972) 960-5500.
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SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus. See "Definitions at
the end of this prospectus for the meanings of certain terms used herein.
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Company............... Sovereign Credit Finance II, Inc. (the "Company") has been formed
for the purpose of purchasing, collecting and servicing retail
installment sales contracts and notes secured by motor vehicles (the
"Contracts"). Except as set forth under "Capitalization", it does
not have, and does not expect to have in the future, any significant
assets other than the Contracts and proceeds thereof.
The Company's principal executive offices are located at 4015
Beltline Road, Building B, Dallas, Texas 75244 and its telephone
number is (972) 960-5500. The Company is a newly organized, single
purpose subsidiary of Sovereign Auto Finance Holdings, Inc.
("SAFH"). Sovereign Auto Finance, Inc. (the "Administrator"), which
serves as Administrator of the Company, is an affiliate of SAFH by
virtue of common ownership. Sovereign Associates, Inc. (the
"Servicer"), which provides purchasing and collecting services on
behalf of the Company, is owned and managed separately from the
Administrator, SAFH and the Company. See "The Company".
Notes................. 11% Notes due February 15, 2002 (the "Notes") to be issued subject
to the terms of a trust indenture agreement (the "Indenture")
between the Company and the Trustee.
Offering Amount....... Up to $10,000,000 in principal amount of the Notes. Investor funds
will be held in escrow until subscriptions for a minimum amount of
$500,000 in principal amount of the Notes have been received.
Interest Payments to
Noteholders......... Each Note will bear interest at 11% per annum on its outstanding
principal, payable monthly on the 15th day of each month during the
term of the Note (for interest accruing through the last day of the
prior month) beginning with the second full calendar month following
the calendar month in which the Note is issued (the "Payment
Dates"). For example, if a Note is issued to an investor in March,
1998, such investor will receive the first interest payment on May
15, 1998, which will be for interest accruing through April 30,
1998.
Interest will not accrue on the Notes, nor will the Notes be issued,
until release of escrowed subscription funds to the Company, which
will not occur until the minimum of $500,000 of the Notes is sold.
Investors in this offering will receive an IRS Form 1099 following
the end of each calendar year which will state the amount of
interest on which to calculate income taxes.
The record date for each payment of interest on the Notes is the
close of business on the first day of the month of the Payment Date
for that payment. At all times while the Notes remain outstanding,
the monthly interest payments on the Notes must be fully satisfied
before the collection proceeds from the Contracts may be used to
purchase additional Contracts.
Effective Yield....... The effective interest rates of the Notes will be 10.95%. This is
lower than the stated interest rates of the Notes because each
payment of interest will be paid 15 days after the end of the month
during which it accrued, and because
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interest is computed on the basis of a 360-day year, comprised of
twelve 30-day periods.
Principal Payments.... The Notes will mature on February 15, 2002, at which time all
outstanding and accrued principal and interest will be finally due
and payable.
Maturity.............. February 15, 2002
Additional
Borrowing........... In addition to the Notes, the Company intends to pursue an
additional lending source (the "Additional Lender") to borrow funds
(the "Additional Borrowing") with which to purchase additional
Contracts. The Additional Lender may be a bank or an institutional
lender such as an insurance company. The Company anticipates that
any borrowings from the Additional Lender will be secured by first
priority security interests in all the Contracts owned by the
Company. The Additional Borrowings will be utilized to purchase
additional Contracts. As of the date of this Prospectus, the Company
has not obtained a commitment for Additional Borrowing from an
Additional Lender, and no assurance can be made that any Additional
Borrowing will be obtained. The Notes are unsecured, and will be
subject to any first priority security interests in the Company's
Contracts that may be granted to any Additional Lender. Such first
priority of the Additional Lender in the Contracts will result in
the Noteholders being placed in a junior position with respect to
the Contracts. Subject to the first priority of the Additional
Lender, the Noteholders may look to any Contracts purchased from the
proceeds of the Additional Borrowing, in addition to other Contracts
purchased by the Company, as sources of payment on the Notes.
The Contracts......... The Contracts will consist of retail installment sales contracts and
promissory notes. The Contracts will be secured by liens on used
automobiles and light trucks (the "Financed Vehicles") and will be
purchased by the Company, at a discount, using (i) the net proceeds
from the sale of Notes, and (ii) possible Additional Borrowing from
the Additional Lender and (iii) so long as no Event of Default
exists, any remaining net collection proceeds from previously
purchased Contracts. The Contracts will be purchased and serviced,
on behalf of the Company, under the terms of a Master Contract
Purchasing Agreement and a Servicing Agreement (collectively, the
"Servicing Agreement") between the Company and the Servicer. The
Contracts will be originated by automobile dealers ("Dealers"). The
Company anticipates that it will purchase its Contracts primarily
from Fiesta Motors, a Dealer owned and operated by Fiesta Motors,
LLC, a Texas limited liability company ("Fiesta Motors"). Fiesta
Motors is an affiliate of SAFH by virtue of common ownership. The
Company may also purchase Contracts which are lease agreements for
Financed Vehicles.
The Contract
Proceeds............ All proceeds from the Contracts will be paid directly by the
obligors on the Contracts ("Obligors"), or deposited by the
Servicer, to a lockbox account maintained by the Servicer in the
Company's name (the "Collections Account"). On at least a weekly
basis, the Company is required to transfer all amounts in the
Collections Account attributable to the Contracts to a commercial
bank account maintained by the Company (the "Operating Account"). So
long as no Event of Default exists and subject to the receipt by the
Trustee of any required certificates, and subject further to any
restrictions imposed by any Additional Lender, the Company will have
the right to cause
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the funds contained in the Operating Account to be withdrawn or
applied for the following purposes in the following priority: first,
to the payment of any interest and principal due to any Additional
Lender; second, to the payment of any interest due on the
outstanding Notes on each Payment Date; third, to any amounts due
the Trustee for its fees and expenses; fourth, except during an
Event of Default, to the payment of any other allowed expenses
("Allowed Expenses"), as certified by the Company; fifth, to the
deposit into the trust account established in the name of the
Trustee (the "Trust Account") for payment of principal owing on the
Notes on the maturity date; and, sixth, except during an Event of
Default, to the purchase of additional eligible Contracts, as
certified by the Company and the Servicer. Otherwise, the Company is
prohibited from withdrawing any funds from the Operating Account.
The Trustee will be provided regular reports by which the use of
such funds may be monitored and will have the right to make any
required transfers of funds. Allowed Expenses include servicing,
trustee, bank, legal and accounting fees, taxes, repossession,
repair and liquidation expenses, insurance premiums and vehicle
warranty service contract charges. See "Description of the
Notes--The Contract Proceeds and Operating Account".
The Trust Account..... On or before each Payment Date, the Company will transfer funds from
the Operating Account to the Trust Account in an amount sufficient
to pay all interest on the Notes due on such date. On or before the
maturity date of the Notes, the Company will transfer funds from the
Operating Account to the Trust Account in an amount sufficient to
pay the principal of the Notes due on such date. There is no
schedule of minimum payments required to be made into the Trust
Account. All transfers to the Trust Account will be subject to the
priority rights of the Additional Lender, if any.
Purchase of
Contracts........... The Company will purchase Contracts using (i) the net proceeds from
the sale of Notes, (ii) possible Additional Borrowings from the
Additional Lender, and (iii) so long as no Event of Default exists,
any remaining net collection proceeds from previously purchased
Contracts, after deduction for payments of interest and Allowed
Expenses. On a monthly basis, the Company and the Servicer will
certify to the Trustee, among other things, that the Contracts
satisfy certain purchasing criteria established by the Indenture and
the Servicing Agreement. See "Purchase and Collection of
Contracts--Contract Purchase Criteria". The Company's cost for each
Contract will equal the purchase price payable to the Dealer for the
Contract. The Company must also pay a fee per purchased Contract
equal to the lesser of $500, or 5% of the total amount of
installments due under the Contract as of the date of purchase (the
"Purchase Administration Fee") to the Servicer for its purchase
administration services.
Although direct purchases from Dealers are expected to be the norm,
the Company may also purchase Contracts that the Servicer or one or
more Securitization Subsidiaries has previously purchased. In order
to determine the cost to the Company for each such Contract, the
Servicer will first determine the original purchaser's initial
internal rate of return on its investment in the Contract as of its
purchase from the Dealer, assuming that the Contract was paid in
full in accordance with its scheduled installments. The cost to the
Company will then be (i) an amount determined so that it will
experience the same internal rate of return on its investment in the
Contract, assuming that
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the Contract is paid in full in accordance with its scheduled
installments, plus (ii) the Purchase Administration Fee paid by the
original purchaser with respect to such Contract. Contracts
purchased from affiliates of the Servicer or the Administrator may
not be in default at the time of purchase.
Through application of the purchasing criteria, the Company will
endeavor to purchase Contracts from Dealers (i) at prices involving
an initial payment to the Dealer (A) of no more than 90% of
principal plus accrued interest (pay-off balance) of such Contract
at the time of purchase, and (B) limited to the average retail value
plus tax, title, license and warranty, (ii) having maturities that
are less than the remaining useful lives of the Financed Vehicles,
and (iii) under which down payments (in cash or trade-in vehicle) of
at least approximately 10% of the Dealer's cost (excluding sale
preparation expenses) have been paid by the Obligors. In addition,
the Servicer has established certain criteria with respect to
Dealers from which Contracts will generally be purchased. Fiesta
Motors meets all of these criteria. The Servicer does not
specifically limit the number of Contracts originated by any one
Dealer, including Fiesta Motors, that may be included in the
Contracts inventory at any one time. The Company may purchase
Contracts from Dealers subject to the requirement that the selling
Dealer repurchase any Contract that becomes overdue for more than 60
days, although the terms of any such requirement for any particular
Dealer or group of Contracts purchased will be determined by the
Servicer and such Dealer. See "Purchase and Collection of
Contracts".
Redemption of Notes... The Company may elect on any Payment Date to redeem the Notes in
whole or in part, thus reducing the term of the Notes. The
redemption price for the Notes is 100% of the outstanding principal
amount of the Notes, together with accrued interest through the date
of redemption, without any premium or penalty. In the event that
prior to 180 days following the termination date of the offering the
Company has been unable to invest the net proceeds from the sale of
the Notes in suitable Contracts, the uninvested net proceeds at such
date will be utilized for a mandatory partial redemption of the
Notes within 45 days following such date. See "Description of the
Notes--Redemption".
Servicer.............. Sovereign Associates, Inc. (the "Servicer"), a Texas corporation,
whose principal offices are located at 4015 Beltline Road, Building
B, Dallas, Texas 75244. The Servicer is owned and managed separately
from the Administrator, SAFH and the Company. The Servicer is
obligated pursuant to the Servicing Agreement, subject to the
limitations set forth therein, to provide services for the
purchasing and collecting of the Contracts on behalf of the Company,
and to repurchase certain of the Contracts under certain
circumstances. For its services with regards to the collection of
the Contracts, the Servicer will be entitled to a monthly servicing
fee of $20 for each Contract that is not assigned for repossession
(the "Contract Servicing Fee") and a fee of $125 for each Financed
Vehicle assigned for repossession. See "Purchase and Collection of
Contracts".
The Servicer provides purchasing and collecting services on behalf
of a number of other entities administered by the Administrator (the
"Securitization Subsidiaries") which have issued notes to investors
and used the net proceeds thereof to purchase consumer contracts and
notes created by the retail sale and financing of used automobiles
and light trucks. The average term remaining, and the average
principal amount, for Contracts in the
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Servicer's servicing portfolio at December 31, 1997 is approximately
21 months and approximately $5,096, respectively. Such Contracts
were originated primarily from Dealers unaffiliated with the
Administrator, the Servicer, or SAFH. For Contracts originated by
Fiesta Motors, the average term remaining, and the average principal
amount, in the Servicer's servicing portfolio at December 31, 1997
is approximately 38 months and approximately $12,229, respectively.
Contracts purchased on behalf of the Company may vary from these
averages. The Servicer expects that (a) its repossession rate, over
the life of the portfolio of all Contracts purchased on behalf of
the Company through its services, will be in the range of 25% to 35%
of such contracts, and (b) the average purchase price payable to
Dealers will be no more than 66% of the original total future
installments payable under the Contracts. See "Information Regarding
the Securitization Subsidiaries--Delinquency, Repossession and
Collections."
Trustee............... Sterling Trust Company, Waco, Texas.
Administrator......... Sovereign Auto Finance, Inc. (the "Administrator"), a Texas
corporation and an affiliate of SAFH, will administer and manage the
ongoing operations of the Company. The Administrator will pay all
general and administrative overhead expenses incurred by the
Company, other than Allowed Expenses. The Administrator will also
pay offering and organization expenses of the Company (other than
commissions to broker-dealers) to the extent such expenses exceed 2%
of the gross proceeds from the sale of the Notes. For such services,
the Company will pay the Administrator the Administration Fee equal
to 5.5% of the gross proceeds from the sale of the Notes (5.0% of
the gross proceeds in excess of $9,000,000). See "Use of Proceeds".
In addition, the Administrator will administer Noteholder payments,
communications and relations. For such services, the Company will
pay the Administrator a monthly fee equal to 1/12 of 0.5% of the
outstanding principal amount of the Notes (the "Investor
Administration Fee"), payable on or before the 15th day of each
month. See "Management--Certain Relationships and Related
Transactions".
Tax Status............ The Notes will be taxable obligations under the Internal Revenue
Code of 1986 as amended, and interest paid or accrued will be
taxable to non-exempt holders of the Notes. Frederick C. Summers,
III, a Professional Corporation, has delivered its opinion to the
Company as to the tax status of the Notes. See "Certain Federal
Income Tax Considerations".
Use of Proceeds....... The Company will use at least 84.5% of the proceeds from the sale of
the Notes for the purchase of Contracts and no more than 15.5% of
such proceeds for commissions, fees and expenses as stated in this
Prospectus. See "Use of Proceeds".
Denominations......... The Notes will be issued in fully registered form, without any
minimum denominations, but subject to a minimum purchase by each
investor of at least $4,000 (or $2,000 for Individual Retirement
Accounts).
No Rating............. The Company has not sought, and is not required by the Indenture or
any other document, to obtain a rating of the Notes by a rating
agency.
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Risk Factors.......... An investment in the Notes entails certain risks, including the
following:
* The Company is a single purpose entity and is not expected to
have any significant assets other than the Contracts, except as set
forth under "Capitalization".
* The Notes are unsecured, and will be subject to any and all
security interests granted to Additional Lender with respect to the
Contracts and the proceeds thereof.
* Obligors under the Contracts are anticipated to be somewhat less
credit-worthy than typical purchasers of automobiles from new car
dealers.
* The Company anticipates that a portion of the Contracts will
become delinquent and require repossession and resale of the related
vehicle.
* No public market for the Notes presently exists and none is
expected to result from this offering.
* The Company will have numerous competitors engaged in the
business of buying new and used motor vehicle retail installment
contracts and notes at a discount, including companies with
greater financial resources than either the Company or the
Servicer.
* There may be conflicts of interest among the Company, the
Servicer, the Administrator and other note purchasing entities which
have contracted with the Servicer for Contract purchasing and
servicing services with respect to allocation of management time,
services, overhead expenses and functions.
For a more complete discussion of the risks involved, see "Risk
Factors".
Plan of
Distribution........ The Notes will be sold on a "best efforts" basis by licensed
broker-dealers who are members of the National Association of
Securities Dealers, Inc. As of the date of this Prospectus, the
Company has not identified any broker/dealers who have agreed to
participate in this offering of the Notes. Investor funds will be
held in a subscription escrow account until the minimum of $500,000
in principal amount of the Notes are sold. If subscriptions for the
minimum amount of Notes are not received on or before April 30,
1998, the offering will be terminated and the escrowed funds, plus
any interest thereon, will be promptly returned to the subscribing
investors by the escrow agent. Upon subscription of the minimum
amount of Notes, the escrowed funds will be released to the Company.
See "Plan of Distribution".
Offering Termination
Date................ January 31, 1999, unless sooner terminated by the Company for
certain reasons. See "Plan of Distribution".
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RISK FACTORS
An investment in the Notes involves certain risks. In considering a purchase
of these securities, prospective investors should carefully consider the risks
involved, including the following:
LIMITED ASSETS; SINGLE PURPOSE NATURE
The Company had no operating history prior to the date of this Prospectus.
The Company has been formed for the sole purpose of purchasing and collecting
retail installment sales contracts and obligations secured by used automobiles
and light trucks. The Company does not have, and is not expected to have, any
significant assets other than the Contracts, except as set forth under
"Capitalization". No other party, including either the Administrator or the
Servicer, will insure or guarantee the Company's obligations under the Notes or
will be obligated to make capital contributions to the Company at any time for
the purpose of paying any delinquencies on the Notes. If an Event of Default
under the Indenture occurs, the holders of the Notes will have no recourse
against the Administrator or the Servicer for payment of the Notes.
Consequently, Noteholders must rely upon payments made on or in respect of the
Contracts for the payment of interest on and principal of the Notes. If such
payments are insufficient to make the payments of interest or principal on the
Notes when due, the Company will have no other significant assets to apply to
payment of the deficiency, except as set forth under "Capitalization". There can
be no assurance that any or all of the Contracts will perform as anticipated, or
that there will not be greater than anticipated defaults on such Contracts.
UNSECURED NATURE OF NOTES
The Notes are unsecured obligations of the Company. Upon the occurrence of
an Event of Default with respect to the Notes, the Trustee will not have the
rights of a secured creditor with respect to the Company's assets, but must
first obtain a judgment against the Company before proceeding to execute against
the Company's assets.
POSSIBLE USE OF LEVERAGE; NOTES TO BE JUNIOR TO ANY ADDITIONAL BORROWINGS
In addition to the proceeds of this offering, the Company may borrow funds
from an Additional Lender, and in conjunction therewith will pledge Contracts
and the proceeds thereof to secure all Additional Borrowings. There is no limit
on the Additional Borrowings. There can be no assurance that the Company will be
able to borrow funds for such purpose. The Notes will be subject to any and all
security interests granted to any Additional Lender with respect to the
Contracts and the proceeds thereof. A default by the Company with respect to any
Additional Borrowings would have a material adverse effect on the interests of
the Noteholders, since the Additional Lender would then have the right to
foreclose on the pledged Contracts. In the event of default by the Company on
any secured debt, the Company may lose its interest in Contracts or the proceeds
thereof which would otherwise be available for payments on the Notes. In
addition, the Additional Lender, as a secured lender, will have priority over
the Noteholders in the event of bankruptcy or dissolution of the Company. Any
such Additional Lender will be unaffiliated with the Company.
PURCHASING AND SERVICING OF CONTRACTS DEPENDENT ON THE SERVICER
The Company's ability to purchase Contracts is dependent on the Servicer for
purchasing services and the Servicer's established network of motor vehicle
dealers (the "Dealers") from which the Contracts will be purchased, including
Fiesta Motors. In addition, the Company's ability to purchase Contracts is
dependent on the availability of Contracts which satisfy the purchasing criteria
employed by the Company, of which there can be no assurance. In the event the
Servicer is unable to effectively service the Contracts owned by the Company,
the Company will need to engage the services of another servicing company, and
9
<PAGE>
there can be no assurance that a qualified servicer could be located or what
such servicer would charge the Company for its services.
Although the Servicer has been engaged almost exclusively in the purchase
and collection of used automobile notes since June, 1993, the Servicer has no
prior experience in purchasing and servicing automobile leases.
NATURE OF CONTRACTS
The Contracts represent Dealer financing for the sale of used motor
vehicles. Unlike companies financing the sale of new automobiles, which are
primarily credit-based lenders, the Dealers from which the Company will purchase
Contracts base their used automobile financing decisions primarily upon the
value of the underlying automobile collateral. The Contracts which the Company
will purchase are generally entered into by Dealers with customers who generally
cannot obtain a loan from a local financial institution or from the credit
facilities of a major automobile manufacturer. The "creditworthiness grade" of
such customers will generally be "D", meaning they cannot finance the purchase
of a new car or a late-model used car, may have spotty employment histories, and
may have had serious problems with credit in the past that may include personal
bankruptcy. Although the Servicer has established certain purchasing criteria in
order to reduce the risk of default, there is no assurance that such customers
will be creditworthy or that loans will ultimately be repaid. In addition, there
is no assurance that the collateral could be sold for sufficient net proceeds to
recoup the Company's investment in the Contracts.
The Servicer does not specifically limit the number of Contracts originated
by any one Dealer that may be included in the Contracts inventory at any one
time. The average term remaining, and the average principal amount, for
Contracts in the Servicer's servicing portfolio at December 31, 1997 is
approximately 21 months and approximately $5,096, respectively. Such Contracts
were originated primarily from Dealers unaffiliated with the Administrator, the
Servicer, or SAFH. For Contracts originated by Fiesta Motors, the average term
remaining, and the average principal amount, in the Servicer's servicing
portfolio at December 31, 1997 is approximately 38 months and approximately
$12,229, respectively.
DEFAULTS ON CONTRACTS AND REPOSSESSIONS
The Company anticipates that a portion of the Contracts will become
delinquent and require repossession and resale of the related vehicle. See
"Information Regarding the Securitization Subsidiaries--Delinquency,
Repossession and Collections." There can be no assurance that the repossession
and collection rates anticipated by the Servicer will in fact be met, since
actual repossession rates and collection rates on the Contracts are impossible
to predict precisely.
If an Obligor defaults under a Contract, and the Servicer must repossess and
liquidate the Financed Vehicle to recover installments due thereon and costs
associated with the repossession and resale, certain factors may limit the
ability of the Company to realize net proceeds sufficient to recover the cost of
the Contract. These factors include, without limitation, the value of the
repossessed Financed Vehicles, the costs of seeking and collecting a deficiency
judgment and limitations imposed by bankruptcy laws or other Federal or state
laws. In general, the Servicer is required to commence repossession of a
Financed Vehicle if the Obligor is delinquent on at least two monthly
installments and has made no payments for a period of 45 days. Nevertheless, the
Servicer may grant extensions or modifications to Obligors or accept partial
payments from Obligors in lieu of commencement or repossession activities. If a
substantial number of such Obligors make no further payments on their Contracts,
the delay in the repossession of the Financed Vehicles could result in a
decrease in repossession proceeds received by the Company and could have an
adverse impact on the Company's ability to pay the Notes.
Although the Company believes that the net collection proceeds from the
Contracts, after deduction of Allowed Expenses, together with any proceeds from
the sale or refinancing of the Contracts, will be sufficient to make the
required payments on the Company's debts, the actual collection rates on the
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<PAGE>
Contracts are impossible to predict precisely and adverse changes in
collectibility rates caused by changes in economic conditions, including
particularly in the Company's primary markets, or other factors beyond the
Company's control could adversely affect the Company's ability to collect on the
Contracts. If the Contracts do not collectively perform as expected by the
Company, the Company's ability to make the required payments on the Notes could
be adversely affected. The Company's expectations of performance are based on
the historical performance of similar Contracts purchased and serviced by the
Servicer, which Contracts were originated primarily from Dealers unaffiliated
with the Administrator, the Servicer, or SAFH.
FINANCIAL DIFFICULTIES OF CERTAIN SECURITIZATION SUBSIDIARIES
Noteholders in certain of the Securitization Subsidiaries have been or will
be asked to reduce interest rates on such notes and to extend the due dates of
their notes in order to provide the particular Securitization Subsidiary which
issued their note more time to repay principal. Such modifications to those
notes were and will be requested due to the fact that the total assets of those
Securitization Subsidiaries are less than necessary to make all note payments as
originally scheduled. In fact, some of these Securitization Subsidiaries have
already failed to make scheduled payments of principal. In addition, some of
these Securitization Subsidiaries have been unable to make scheduled payments of
interest, and the administrator of such entities has caused a portion of such
payments to be made from its own funds, but has not committed to continue to
provide such payments on behalf of these or any other Securitization
Subsidiaries. As of the date of this Prospectus, Securitization Subsidiaries
experiencing financial difficulties include approximately 27 entities with total
principal due investors of $15.4 million. As of December 31, 1997, such entities
held Contracts with a gross receivable amount of $2.7 million. The reasons for
the financial difficulties include the following: the high interest rate paid by
these programs (15% per annum) in relation to their performance; losses incurred
on the Contracts held by these programs were significantly higher than planned;
and repurchase agreements entered into between these programs and certain
unaffiliated Dealers were not honored by the Dealers, although the programs are
pursuing legal recourse against these Dealers. See "Information Regarding the
Securitization Subsidiaries".
RIGHT TO AMEND PURCHASING CRITERIA WITHOUT CONSENT OF NOTEHOLDERS
The Company and the Servicer have the right to amend, without obtaining the
consent of any Noteholder, the purchasing criteria and the purchasing and
servicing obligations of the Servicer under the Servicing Agreement to permit
the institution by the Servicer of new programs to improve the collection rates
on the Contracts that it purchases and services. Nevertheless, the actual
benefits received by the Company following the institution of any such program
may be less than anticipated and the actual costs and detriments to the Company
may be more than anticipated. Consequently, the Company's financial performance
may be adversely affected.
POSSIBLE INSUFFICIENT AMOUNT IN THE TRUST ACCOUNT
The Company and the Servicer are required to transfer to the Trust Account,
on or before each Payment Date, all amounts necessary to pay interest and
principal due on the Notes on such Payment Date. The net collection proceeds
from the Contracts may be insufficient to pay all principal outstanding on the
Notes on February 15, 2002, after payment of all interest, and some refinancing
or sale of the remaining Contracts may be necessary for full repayment of the
Notes on that date, which refinancing or sale cannot be assured. In that event,
unless the Company is able to refinance the Notes through other financing
sources, the Company will be in default under the Indenture, and there can be no
assurance that the proceeds, if any, received by the Trustee as a result of the
exercise of its default remedies will be sufficient to repay the Notes in full
or of the timing of any such payments.
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<PAGE>
LACK OF MARKET FOR NOTES
No public market for the Notes presently exists and none is expected to
result from this offering. Noteholders have no right to require redemption of
the Notes and may not be able to liquidate their investment in the Notes in the
event of an emergency or for any other reason, and the Notes may not be readily
accepted as collateral for loans. Accordingly, the Notes should be purchased
only by persons who have no need for liquidity in their investment.
DELAYS IN CONTRACT PURCHASES
To maximize its investment yields, the Company expects to purchase Contracts
using the net proceeds from the sale of Notes as soon as practicable following
receipt of such proceeds. However, the timing of expenditure of the net proceeds
will be based partly on availability of Contract purchases, and cannot be
predicted with certainty. In addition, it is expected that the Company will
purchase Contracts on a volume basis, thereby potentially further delaying
expenditures of the net proceeds. If unforeseen delays occur in the investment
of the net proceeds from the sale of Notes in the purchase of Contracts, the
Company's overall profitability and ability to repay the Notes could be
adversely affected because the yields of its short-term investment alternatives
for such funds are expected to be less than the yields anticipated to be
received by the Company from the Contracts.
CERTAIN LEGAL MATTERS RELATING TO THE CONTRACTS
PRIORITY LIENS IN FINANCED VEHICLES. Statutory liens for repairs or unpaid
taxes may have priority over 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 a Contract. Notice may not necessarily be
given to the Company or the Servicer in the event such a lien arises or
confiscation occurs.
BANKRUPTCIES AND DEFICIENCY JUDGMENTS. Certain statutory provisions,
including federal and state bankruptcy and insolvency laws, may limit or delay
the ability of the Servicer to repossess and resell Financed Vehicles or enforce
a deficiency judgment. In addition, the Servicer 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 be borne by the Company and may
adversely affect the ability of the Company to repay the Notes. See "Certain
Legal Aspects of the Contracts--Deficiency Judgments and Excess Proceeds."
CONSUMER PROTECTION LAWS. Numerous federal and state consumer protection
laws impose requirements upon the origination and collection of retail
installment contracts and notes. State laws impose finance charge ceilings and
other restrictions on consumer transactions and may require certain contract
disclosures in addition to those required under federal law. These requirements
impose specific statutory liabilities upon creditors who fail to comply with
their provisions. A risk exists that this liability could affect the ability of
the Company, as an assignee of the Contracts, to enforce the Contracts. In
addition, certain of these laws make an assignee of such a contract liable to
the obligor thereon for any violation by the assignor. Accordingly, the Company,
as holder of the Contracts, may be subject to liability to an obligor under one
or more of the Contracts. See "Certain Legal Aspects of the Contracts--Consumer
Protection Laws."
POTENTIAL CONFLICTS OF INTEREST
The Company is a subsidiary of SAFH. In addition, the Administrator, which
will administer and manage the ongoing operations of the Company, is an
affiliate of SAFH by virtue of common ownership.
12
<PAGE>
The Contracts will be purchased primarily from Fiesta Motors, an automobile
dealer owned by Fiesta Motors, LLC, which is affiliated with SAFH by virtue of
common ownership. Consequently, the terms of such purchases, including without
limitation the purchase price or discount and the quality of the Contracts, will
not be determined on an arm's length basis.
The Administrator administers a number of other note purchasing entities
(the "Securitization Subsidiaries"), including entities whose business purposes
are or will be, or may include, the purchase and servicing of used motor vehicle
retail installment contracts and notes. Purchasing and servicing for such
entities will be conducted by the Servicer. Consequently, there may be conflicts
of interest among the Servicer and the Administrator with respect to allocation
of management time, services, and functions. Furthermore the management of the
Administrator and the Servicer are involved in other business enterprises
independent of the Company. The management of the Administrator and the Servicer
intend to resolve any such conflicts in a manner that is fair and equitable to
the Company, but there can be no assurance that any particular conflict will be
resolved in a manner that does not adversely affect Noteholders.
A situation could arise in which the Company and the Securitization
Subsidiaries contemporaneously have funds available to invest in Contract
packages that the Servicer deems appropriate to be purchased by more than one of
such entities. The determination of which entity will purchase or invest in a
particular Contract package and what portion, if any, of such Contract package
will be purchased for such entity will be based upon the respective periods of
time the purchasing entities have been in existence, the cost of the available
Contract package, the amount of their unexpended funds and the need to diversify
their holdings. In such event, the Servicer intends to exercise good faith and
to deal fairly with the respective entities in deciding which entity, if any, is
to purchase or invest in a particular Contract package.
In addition, the Company may purchase Contracts from or sell Contracts to
the Securitization Subsidiaries, as determined by the Servicer as the Contract
purchaser and servicer on behalf of the Company and by the Servicer in that same
role on behalf of the Securitization Subsidiaries. The primary purpose for any
such transaction will be to provide for liquidity to the selling entity for the
payment of principal and/or interest of notes issued by such entity, including
the Notes in the case of the Company. The purchase price for any such Contract
to the purchasing entity (including the Company) will be the Purchase
Administration Fee paid by the original purchaser plus an amount determined so
that the purchasing entity's internal rate of return on its investment in the
Contract from the remaining unpaid installments equals the original purchaser's
initial internal rate of return on its investment in the Contract, as of its
purchase from the Dealer, assuming in both cases that the Contract was paid in
full in accordance with its scheduled installments.
Affiliates of the Administrator provide floor plan or similar financing for
various automobile dealers, including Fiesta Motors. "Floor plan financing"
refers to assistance provided to dealers in financing their purchases of
inventories of automobiles held for sale to customers. The Company may purchase
Contracts from time to time from such dealers. In addition, Reliance Service
Corporation, which is owned by A. Starke Taylor, III, offers and sells
mechanical service agreements to purchasers of automobiles from Fiesta Motors.
Sales of repossessed Financed Vehicles through retail networks may be
conducted by placing the vehicle on the Dealer's lot for sale, or on a lot owned
by Fiesta Motors. In either case, the Company will pay all expenses associated
with the resale of the repossessed Financed Vehicles. In the case of resales
from a lot owned by Fiesta Motors, such expenses will include an allocable
portion of the costs of operating the lot based upon the number of cars sold,
which will include expenses for salaries for person who are also principals of
the Administrator, and repair costs to place the cars in saleable condition
charged at 20% mark-up for parts and $30 per hour for labor. Such expenses will
generally be comparable in amount to that which would be charged to the Company
for resales through unaffiliated lots owned by franchised dealerships providing
comparable services.
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<PAGE>
LACK OF DAMAGE INSURANCE
The owners of the Financed Vehicles may fail to maintain physical damage
insurance. As a consequence, in the event any theft or physical damage to a
Financed Vehicle occurs and no such insurance exists, the Company may suffer a
loss unless the owner is otherwise able to pay for repairs or replacement or its
obligations under the related Contract. If the Company incurs significant losses
from uninsured Financed Vehicles, its ability to repay the Notes may be
adversely affected.
REDEMPTION OF NOTES; YIELD CONSIDERATIONS
The Company may elect on any Payment Date to redeem the Notes in whole or in
part, thus reducing the term of the Notes. See "Description of the
Notes--Redemption". Since prevailing interest rates are subject to fluctuation,
there can be no assurance that investors in the Notes will be able to reinvest
payments thereon at yields equaling or exceeding the yields on the Notes. It is
possible that yields on any such reinvestments will be lower, and may be
significantly lower, than the yields on the Notes.
COMPETITION
The Company will have numerous competitors engaged in the business of buying
new and used motor vehicle retail installment contracts and notes at a discount,
including affiliates of the Company. In addition, the Company competes to some
extent with providers of alternative financing services such as floor plan lines
of credit from financial institutions, lease financing and dealer
self-financing. National and regional rental car companies, auction houses,
dealer groups or other firms with greater financial resources than the Company
could elect to compete with the Company in its market. These competitive factors
could have a material adverse effect upon the operations of the Company.
SALE OF SMALL AMOUNT OF NOTES
The offering may be consummated by the Company with the sale of as little as
$500,000 in principal amount of the Notes. In the event The Company sells only a
small portion of Notes, fewer individual Contracts will be purchased by the
Company, and the performance of such smaller pool of Contracts will 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. In addition, although most of the Allowed
Expenses of the Company will generally vary with the amount of Contracts or
Notes, certain fixed fees and expenses payable to the Trustee and for on-going
banking, accounting and legal services may not vary in proportion with the
amount of Contracts and may be relatively higher if only a small portion of the
Notes is sold than if a larger portion of the Notes is sold. Moreover, in the
event the fixed Allowed Expenses are higher than expected, the Company's ability
to repay a small amount of Notes may be adversely affected. See "Description of
the Notes--The Contract Proceeds and Operating Account".
LACK OF PARTICIPATING BROKER/DEALERS
The Company has not identified any broker/dealers who have agreed to
participate in this offering of the Notes. The failure of the Company to obtain
the agreements of a significant number of broker/dealers to participate in this
offering may increase the likelihood that less than all of the Notes will be
sold. The sale of only a small amount of the Notes may adversely affect
Noteholders. See "Sale of Small Amount of Notes" above.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997, and as adjusted to reflect the sale of the Notes offered
hereby.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
------------------------------------
AS ADJUSTED
-------------------------
ACTUAL MINIMUM MAXIMUM
--------- ---------- -------------
<S> <C> <C> <C>
LIABILITIES
Notes Due February 15, 2002................................................ -- $ 500,000 $ 10,000,000
SHAREHOLDER'S EQUITY
Common stock, $.01 par value, authorized 50,000 shares, 1,000 shares issued
and outstanding.......................................................... $ 10 $ 10 $ 10
Additional paid-in capital................................................. $ 990 $ 990 $ 990
Deficit.................................................................... $ (20) $ (20) $ (20)
--------- ---------- -------------
TOTAL SHAREHOLDER'S EQUITY................................................... $ 980 $ 980 $ 980
--------- ---------- -------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY................................... $ 980 $ 500,980 $ 10,000,980
--------- ---------- -------------
--------- ---------- -------------
</TABLE>
The capitalization of the Company reflects its asset based security
structure. The Company's only significant assets will be the Contracts. The
costs of the Company's ongoing operations during the term of the Notes, other
than Allowed Expenses, will be borne by the Administrator.
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<PAGE>
USE OF PROCEEDS
The following table sets forth the estimated application by the Company of
the anticipated proceeds of the sale of the Notes:
<TABLE>
<CAPTION>
MINIMUM OFFERING MAXIMUM OFFERING
----------------------- --------------------------
Use of Proceeds AMOUNT PERCENT AMOUNT PERCENT
- ----------------------------------------------------------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Sales Commissions to Broker-Dealers (1).................... $ 40,000 8.00% $ 800,000 8.00%
Offering and Organization Expenses (2)..................... $ 10,000 2.00% $ 200,000 2.00%
Administration and Management Fee (3)...................... $ 27,500 5.50% $ 545,000 5.45%
Purchase of Contracts (including the Purchase
Administration Fee)....................................... $ 422,500 84.50% $ 8,455,000 84.50%
---------- ----------- ------------- -----------
Total...................................................... $ 500,000 100.00% $ 10,000,000 100.00%
---------- ----------- ------------- -----------
---------- ----------- ------------- -----------
</TABLE>
- ------------------------
(1) The Company will pay to each participating broker-dealer sales commissions
of 8% of the principal amount of the Notes sold by such broker-dealer.
(2) The Company will use up to 2% of the gross proceeds from the sale of the
Notes to pay offering and organization expenses, including filing and
registration fees, legal fees of the Company's counsel, accounting fees,
trustee's fees, escrow agent's fees, "blue sky" expenses and printing
expenses. The Administrator has agreed to pay such expenses to the extent
they exceed 2% of the gross proceeds from the sale of the Notes.
(3) The Company will pay to the Administrator a fee equal to 5.5% of the gross
proceeds from the sale of the Notes (5.0% of the gross proceeds in excess of
$9,000,000) for administering and managing the ongoing operations of the
Company.
Other than the foregoing expenses of the Company and the Purchase
Administration Fee payable to the Servicer, no other fee, remuneration or
reimbursement of expenses will be paid by the Company to the Administrator or
the Servicer from the proceeds of this offering.
Each of the Contracts will be a retail installment sales contract or note
originated by a used motor vehicle dealer ("Dealer") and purchased by the
Company through the Servicer and will be secured by a used automobile or
light-duty truck (a "Financed Vehicle"). The Contracts will be purchased by the
Company using (i) the net proceeds from the sale of Notes, (ii) possible
Additional Borrowing from the Additional Lender, and (iii) so long as no Event
of Default exists, any remaining net collection proceeds from any previously
purchased Contracts. Although direct purchases from Dealers are expected to be
the norm, the Company may also purchase Contracts that the Servicer or a
Securitization Subsidiary has previously purchased. See "Risk Factors--Potential
Conflicts of Interest".
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DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued pursuant to an Indenture dated as of March 3, 1998
(the "Indenture") between the Company and Sterling Trust Company, as trustee
(the "Trustee"), a copy of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The following
summaries of certain provisions of the Indenture do not purport to be complete
and are subject to, and qualified in their entirety by reference to, the
provisions of the Indenture. However, all material terms of the Notes and the
Indenture are described in this Prospectus.
The Notes are general unsecured obligations of the Company and the holders
of the Notes will have recourse against the assets of the Company for payment of
the Notes, subject to any and all security interests granted to the Additional
Lender, if any. Substantially all of the Company's assets will be the Contracts,
except as set forth under "Capitalization". The Company has not sought, and is
not required by the Indenture or any other document to obtain a rating of the
Notes by a rating agency. No person or entity will guarantee payment of the
Notes, and the holders of the Notes will have no contractual recourse against
the Administrator or the Servicer for payment of the Notes. The Trustee will
initially act as the Paying Agent and Registrar.
ISSUANCE OF NOTES; TRANSFERS
The Notes will be issued in an aggregate principal amount of up to
$10,000,000 in fully registered form without any minimum denominations.
(Indenture, Section 2.3) The minimum subscription amount for each investor is
$4,000 (or $2,000 for Individual Retirement Accounts). The Company may charge a
reasonable fee for any transfer or exchange of a Note, except in certain limited
circumstances, or for any change of address. (Indenture, Section 2.7)
MATURITY OF THE NOTES
The Notes will mature on February 15, 2002 (the "Maturity Date"), at which
time all outstanding and accrued principal and interest will be fully due and
payable.
PAYMENTS OF INTEREST
Each Note will accrue interest on its outstanding principal balance from the
date of issuance at the rate of 11% per annum (computed on the basis of a
360-day year, comprised of twelve 30-day periods). The Company will be required
to make monthly payments of interest, paid in arrears. Payments of interest will
be due and payable on the 15th day of each successive calendar month during the
term of the Note (for interest accruing through the last day of the prior month)
commencing with the second full calendar month following the month during which
the Note was issued (the "Payment Date") and upon the Maturity Date. Any
installment of interest which is not paid when and as due will accrue interest
at the lesser of (i) 11% per annum or (ii) the highest lawful rate of interest
from the date due to the date of payment, but only to the extent payment of such
interest is lawful and enforceable. The effective interest rate of the Notes
will be lower than their stated interest rate because each payment of interest
will be paid 15 days after the month over which it accrued.
SOURCES OF FUNDS FOR PAYMENT; ACCOUNTS
The Company expects to use the amounts collected under the Contracts to make
the required payments under the Notes. All installments and other proceeds from
the Contracts will be deposited in the Collections Account maintained by the
Servicer in the Company's name (as described under "The Contract Proceeds and
Operating Account" below). (Indenture, Sections 4.1 and 12.2) The Servicer will
cause to be issued to each Obligor on a Contract a payment book together with
instructions to mail
17
<PAGE>
remittances directly to the Collections Account. The Servicer has agreed to
deposit all installments and other proceeds, including proceeds from sales of
repossessed vehicles, into the Collections Account. If the Collections Account
is a lock-box account, the Indenture requires the Servicer to transfer to the
Company's Operating Account all amounts in the Collections Account on a periodic
basis. (Indenture, Section 12.2)
Payments of interest on the Notes will be made on each Payment Date by the
Trustee or the Paying Agent of the Company out of funds in the Trust Account
controlled by the Trustee (as described under "The Trust Account" below).
(Indenture, Section 4.1) On or prior to the Business Day immediately preceding
each Payment Date occurring prior to February 15, 2002, the Company will
transfer to the Trust Account from the Company's Operating Account an amount
which, together with any funds in the Trust Account, is sufficient to pay the
accrued interest due on the outstanding Notes on such Payment Date. Such
transfer must be made before any remaining funds in the Operating Account may be
applied by the Company to any other purpose, other than principal and interest
payments on Additional Borrowing, if any. (Indenture, Section 4.1)
On or prior to the business day next preceding February 15, 2002 (the
Maturity Date of the Notes), the Company shall cause to be transferred from the
Operating Account to the Trust Account an amount which, together with any funds
then held in the Trust Account, is sufficient to pay the accrued interest due,
and principal owing, on the Notes on such Payment Date. (Indenture, Section 4.1)
RECORD DATES
All principal and interest payments will be made by check mailed by the
Trustee or Paying Agent to Noteholders registered as of the close of business on
the first day of the month of the Payment Date (the "Record Dates") at their
addresses appearing on the Note Register, except that the final payment of
principal and interest on each Note will be made only upon presentation and
surrender of such Note at the office of the Paying Agent. (Indenture, Section
5.1)
REDEMPTION
On any Payment Date, the Company may exercise its right to redeem the Notes,
in whole or in part, in accordance with the Indenture. (Indenture, Section 3.1)
Any redemption of a Note will be at 100% of the outstanding principal amount
thereof, together with interest accrued to the date of redemption, without any
premium or penalty. Notice will be given to the Noteholders by first class mail,
postage prepaid, mailed not less than 30 days prior to the redemption date. The
notice will set forth the redemption date, the redemption price and the name and
address of the Paying Agent and will state that the Notes must be delivered to
the Paying Agent and that interest on the Notes ceases to accrue on and after
the redemption date. (Indenture, Section 3.1)
In the event that prior to 180 days following the termination date of the
offering the Company has been unable to invest the total net proceeds from the
sale of the Notes in suitable Contracts, the uninvested net proceeds at such
date will be utilized for a mandatory partial redemption of the Notes within 45
days following such date. In such a case, Notes will be redeemed on a random
basis, by lot.
THE TRUST ACCOUNT
The Company has established, in the name of the Trustee, a trust account at
Sterling Trust Company (the "Trust Account") into which it will deposit interest
and principal payments on the Notes. The Trust Account will relate solely to the
Notes. Funds in the Trust Account will not be commingled with any other monies
of the Servicer or the Company. All moneys deposited from time to time in the
Trust Account will be held for the benefit of the Trustee. Withdrawals of any
funds from the Trust Account will be controlled by the Trustee. All payments of
amounts due and payable with respect to the Notes which are to be made from
amounts withdrawn from the Trust Account will be made on behalf of the Company
by the Trustee or
18
<PAGE>
by a Paying Agent, and no amounts so withdrawn from the Trust Account will be
paid over to the Company. The funds in the Trust Account will be employed by the
Trustee or the Paying Agent to pay interest on the Notes on each Payment Date
and to make principal payments on the Notes on February 15, 2002 (the Maturity
Date of the Notes). Funds in the Trust Account may be invested in Eligible
Investments, as directed by the Company, and, during the continuance of an Event
of Default, as determined by the Trustee, within the restrictions established in
the Indenture. (Indenture, Sections 4.1 and 4.2)
THE CONTRACT PROCEEDS AND OPERATING ACCOUNT
The Servicer has established an account (the "Collections Account") in the
name of the Company and for the sole benefit of the Company. All payments made
on or with respect to the Contracts will be deposited in the Collections
Account. The Collections Account may be a "lock-box" account at a financial
institution where all remittance checks, drafts and other instruments for the
Contracts will be deposited for collection by the financial institution as agent
for the Company. All Obligors will be requested, through correspondence and/or
delivery of payment books, to remit payments under their Contracts directly to
the Collections Account. The Servicer has also agreed to deposit in the
Collections Account any payment proceeds received directly by the Servicer,
including any proceeds from resales of returned or repossessed Financed Vehicles
and any recoveries from insurance claims on Financed Vehicles. If the
Collections Account is a lock-box account, the Indenture requires the transfer
of all of the Company's funds from the Collections Account into a commercial
bank account maintained by the Company (the "Operating Account") in its own name
for use in holding the Company's funds and in paying the Company's expenditures.
Any funds in the Operating Account may be invested daily by the Company in
Eligible Investments, subject to the Indenture. (Indenture, Section 4.1)
Subject to the requirement to pay interest and principal to any Additional
Lender, and provided that no Event of Default exists, the Company will have the
right to cause the funds contained in the Operating Account to be withdrawn or
applied for the following purposes in the following priority; first, through a
direct transfer to the Trust Account, to the payment of any interest due on the
outstanding Notes on each Payment Date; second, to any amounts due the Trustee
for its fees and expenses; third, to the payment of any other Allowed Expenses;
fourth, to the deposit to the Trust Account for payment of any principal due on
the outstanding Notes on February 15, 2002 (the Maturity Date of the Notes);
and, fifth, to the purchase of eligible Contracts, as certified by the Company
and the Servicer. The Contract proceeds must be sufficient to satisfy fully any
application having higher priority before they may be applied to a use having a
lower priority. (Indenture, Section 4.1) The Company and the Servicer will
provide monthly reports to the Trustee certifying to the Trustee as to
purchasing and servicing activities in relation to the Contracts, the amounts of
Allowed Expenses paid from the Operating Account and a reconciliation of
deposits and withdrawals from the Operating Account. (Indenture, Section 4.1,
12.9 and 12.10)
On or before the business day immediately preceding each Payment Date, the
Company will cause to be transferred directly from the Operating Account to the
Trust Account an amount which, together with any funds in the Trust Account, is
sufficient to make all interest payments on the Notes outstanding on such
Payment Date. On or prior to the business day immediately preceding February 15,
2002 (the Maturity Date of the Notes), the Company shall cause to be transferred
from the Operating Account to the Trust Account an amount which, together with
any funds then held in the Trust Account, is sufficient to pay the accrued
interest due, and principal owing, on the Notes on such Payment Date. See
"Sources of Funds for Payment; Accounts" above.
The Company may disburse funds from the Operating Account for purposes of
payment of Allowed Expenses (including fees payable to the Servicer) except
during an Event of Default, in which event only the payment of the fees and
expenses of the Trustee will be permitted. On a monthly basis, the Company must
provide a report in which it itemizes the Allowed Expenses and certifies that
any payments from the Operating Account conform with the Indenture. (Indenture,
Section 4.1)
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<PAGE>
The "Allowed Expenses" of the Company will be limited to the expenses and
fees of the Trustee under the Indenture, fees charged by the Servicer under the
Servicing Agreement (including the Contract Servicing Fee, the Purchase
Administration Fee and all repossession fees)(the "Servicing Fees"), the
Investor Administration Fee charged by the Administrator, title transfer fees,
federal, state and local taxes (including corporate franchise taxes and any
payment to any of its affiliates as reimbursements for tax payments made by such
affiliate on the Company's behalf or benefits accruing from tax losses of such
affiliate that are used to offset the taxable income of the Company), legal and
accounting fees and printing expenses (excluding offering and organization
expenses, but including those otherwise incurred to comply with reporting and
other requirements under Federal and state securities laws and for reports,
compliance certificates and opinions required by the Indenture), premiums for
vehicle value, vendor single interest (VSI), auto loan default, gap or other
insurance for the benefit of the Company, charges for vehicle warranty service
contracts (including fees paid to Dealers), bank service charges and account
fees (including such charges and fees incurred for the subscription escrow
account established for the receipt of the proceeds from the offering and sale
of the Notes, and for the Collections Account), expenses of repossessing,
repairing and liquidating motor vehicle collateral (as to each vehicle, not to
exceed the liquidation proceeds from the vehicle), and any insurance proceeds
applied to vehicle repairs or required to be refunded to Obligors (collectively
the "Allowed Expenses"). See "Management--Certain Relationships and Related
Transactions". The Administrator will pay all other general administrative and
overhead expenses incurred by the Company. The following table summarizes the
Company's estimates of its anticipated Allowed Expenses. See "Purchase and
Collection of Contracts--Collection Payments".
SUMMARY OF ESTIMATED ALLOWED EXPENSES
<TABLE>
<CAPTION>
ALLOWED EXPENSES ESTIMATED AMOUNT
- ------------------------------------------ ----------------------------------------------------------------------
<S> <C>
Servicing Fees (paid to the Servicer)
Contract Servicing Fee $20 per month per Contract not assigned for repossession, paid to the
Servicer
Purchase Administration Fee The lesser of $500 per Contract purchased, or 5% of the total amount
of installments due under the Contract as of the date of purchase,
paid to the Servicer
Investor Administration Fee (paid to the
Administrator, an affiliate of the
Company) 1/12th of 0.5% of the aggregate outstanding principal amount of the
Notes, paid monthly to the Administrator ($208.33 or $4,166.67 per
month if minimum or maximum amount, respectively, of Notes is sold)
Trustee Fees
Acceptance Fee (payable upon execution
of Indenture) $7,000
Annual Administration Fee
(billed quarterly) $7,500
Paying Agent/Registrar
Services $4 per year per Note
Note Register Revisions, Transfers,
Exchanges and Replacement Notes
(chargeable to Noteholders) $10 each
Out-of-Pocket Costs Estimated to be minimal
Expedited Delivery (per delivery, in
addition to out-of-pocket) $10 each
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
ALLOWED EXPENSES ESTIMATED AMOUNT
- ------------------------------------------ ----------------------------------------------------------------------
Bank Fees
<S> <C>
Collections Account $3,000 to $4,000 (varies with volume) per month
Operating Account $2,000 per year (varies with number of transactions)
Subscription Escrow Account $5,000
Accounting Fees
Annual Audit $20,000
Annual Tax Return $3,500
Annual Compliance Certificate $3,500
Printing & Mailing $2,500
Repossession, Repair and Liquidation
Expenses $125 per Financed Vehicle paid to the Servicer, plus expenses
estimated to average from $1000 to $1500 for each repossessed vehicle
Vehicle Warranty Repair
Service Contract Average of $750 per Contract (purchased at Obligor's option and
usually financed through Contract)
Federal Income Taxes Varies with taxable income
Texas Franchise Taxes 4.5% of taxable income allocated to Texas
</TABLE>
To the extent collected funds are not needed to fund the payments on the
Notes or the Additional Borrowing, if any, the purchase of additional Contracts,
or the payment of Allowed Expenses of the Company, such funds will remain in the
Company's Operating Account.
Prepayments by Obligors on the Contracts will be treated in the same manner
as collection proceeds on the Contracts. Consequently, such prepayments may be
used to purchase additional Contracts and will not be required to be passed
through to Noteholders as principal payments. See "Risk Factors-- Collections
and Repossessions; Performance of Contracts". The Company and, consequently,
Noteholders will benefit from any prepayments because the loss of the interest
portion of any prepaid installments should be more than offset by the
substantial discounts off of principal at which the Contracts were purchased.
The following chart illustrates the flow of Contract proceeds from the
Obligors through the Collections Account and Operating Account to the
applications thereof and the priority of the various applications of such
proceeds.
FLOW OF CONTRACT PROCEEDS AND PRIORITY OF APPLICATIONS
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Contract Installments Collections Weekly Operating Monthly Proceeds
Obligors >>>> Account >>>> Account >>>> Applications(1)
</TABLE>
(1) Priority of Monthly Proceeds Applications
1. Interest and principal on the Notes are paid by Company to Trust Account
from Operating Account on or before the business day immediately
preceding each Payment Date.
2. Interest and principal on the Notes are paid by Trustee to Noteholders
from transfers to Trust Account.
3. Trustee's fees and expenses are paid by Company from Operating Account.
4.* Other Allowed Expenses are paid by Company from Operating Account.
5.* Any remaining proceeds are used to purchase additional eligible
Contracts.
- ------------------------
* Applications described in 4 and 5 above are prohibited during an Event of
Default.
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<PAGE>
ADDITIONAL INDENTURE PROVISIONS
MODIFICATION OF INDENTURE. With the consent of the holders of at least a
majority of the aggregate principal amount of the outstanding Notes, the Trustee
and the Company may amend or supplement the Indenture or the Notes, except as
provided below. Notice of any such amendment of the Indenture or the Notes will
be mailed to all holders of the Notes by the Company promptly after the
effectiveness thereof. Without the additional consent of the holder of each
Outstanding Note affected, however, no supplemental indenture will, among other
things, (a) reduce the amount of Notes whose holders must consent to an
amendment, supplement or waiver, (b) reduce the rate of or extend the time for
payment of interest on any Note, (c) reduce or extend the maturity of the
principal of any Note, or (d) make any Note payable in money other than that
stated in the Note. (Indenture, Section 9.2) For the purpose of consents of
Noteholders, the term "Outstanding" excludes Notes held by the Company or its
Affiliates. (Indenture, Section 1.1)
The Company and the Trustee may also amend or supplement the Indenture or
the Notes, without obtaining the consent of Noteholders, to cure ambiguities or
make minor corrections and, among other things, to make any change that does not
materially adversely affect the interests of the Noteholders. (Indenture,
Section 9.1)
EVENTS OF DEFAULT. An event of default ("Event of Default") with respect to
the Notes is defined in the Indenture as being: (a) a failure by the Company to
make any interest payment on the Notes within 30 days after it becomes due; (b)
a failure by the Company to make any principal payment on the Notes at maturity
or otherwise within 30 days after it becomes due; (c) the impairment of the
validity or effectiveness of the Indenture, the improper amendment or
termination of the Indenture, or the failure of the Company to comply with any
of the covenants of the Company in the Indenture, and the continuance of any
such default for a period of 30 days after notice to the Company by the Trustee
or to the Company and the Trustee by the registered holders of Notes
representing at least 25% of the aggregate principal amount of the outstanding
Notes; (d) the incorrectness in any material respect of a representation or
warranty of the Company in the Indenture (exclusive of representations and
warranties as to individual Contracts that the Servicer is obligated to, and
does, repurchase from the Company) and the failure to cure such circumstances or
condition within 30 days of notice thereof to the Company by the Trustee or the
registered holders of Notes representing at least 25% of the aggregate principal
amount of the outstanding Notes; or (e) certain events of bankruptcy of the
Company. (Indenture, Section 6.1)
RIGHTS UPON EVENT OF DEFAULT. In case an Event of Default should occur and
be continuing, the Trustee may, or at the direction of the registered holders of
Notes representing at least 25% of the principal amount of the outstanding Notes
will, declare the Notes due and payable. Upon such declaration, the Notes will
immediately become due and payable in an amount equal to their remaining
principal amount plus accrued interest at such time. Such declaration may under
certain circumstances be rescinded by the registered holders of a majority of
the aggregate principal amount of the outstanding Notes. (Indenture, Section
6.2)
If, following an Event of Default, the Notes have been declared due and
payable, the Trustee may exercise one or more of its remedies including, in its
discretion, the right to make demand and institute judicial proceedings in
equity or law for the collection of all amounts then payable on the Notes, or
under the Indenture, whether by declaration or otherwise, enforce all judgments
obtained, and collect from the Company moneys adjudged due. (Indenture, Section
6.3)
The registered holders of a majority of the aggregate principal amount of
the outstanding Notes will have the right to direct the time, method, and place
of conducting any proceedings for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee. The Trustee may refuse,
however, to follow any such direction that conflicts with law or the Indenture,
that is unduly prejudicial to the rights of Noteholders not joining in such
direction or that would involve the Trustee in personal liability. (Indenture,
Section 6.5) The registered holders of a majority of the aggregate principal
amount of
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<PAGE>
the outstanding Notes may also waive any default, except a default in respect of
a covenant or provision of the Indenture which cannot be modified without the
waiver or consent of each holder of Notes affected. (Indenture, Section 6.4)
No holder of Notes will have the right to pursue any remedy with respect to
the Indenture or the Notes, unless (a) such holder gives to the Trustee written
notice of a continuing Event of Default, (b) the registered holders of a
majority of the aggregate principal amount of the outstanding Notes have made a
written request to the Trustee to pursue such remedy, and have offered the
Trustee indemnity satisfactory to the Trustee against loss, liability or
expense, (c) the Trustee does not comply with the request within 60 days, and
(d) the Trustee has received no contrary direction during such 60-day period
from the registered holders of Notes representing a majority of the principal
amount of the outstanding Notes. (Indenture, Section 6.6)
RESTRICTIONS ON BUSINESS ACTIVITIES AND ADDITIONAL INDEBTEDNESS. The
Company has made certain covenants in the Indenture that restrict its business
activities and prohibit certain transactions by the Company. The Company has
agreed, among other things, that, without the consent of the registered holders
of a majority of the aggregate principal amount of the Notes then outstanding,
it will not (i) engage in any business or activity other than or in connection
with the purchase, collection and servicing of the Contracts, the repossession
and resale of the Financed Vehicles and the raising of debt and equity capital,
and any other incidental businesses or activities or (ii) create, incur, assume
or in any manner become liable in respect of any indebtedness other than the
Notes, any Allowed Expenses, and Additional Borrowing and any other amounts
incurred in the ordinary course of the Company's business. In addition, the
Company has agreed not to dissolve or liquidate in whole or in part or to merge
or to consolidate with any corporation, partnership or other entity other than
another direct or indirect wholly-owned subsidiary of an affiliate of the
Company or the Servicer whose business is restricted in the same manner as the
Company's business under clause (i) above. (Indenture, Section 5.9)
ANNUAL ACCOUNTANTS' REPORT. The Company will be required to file annually
with the Trustee a report of a firm of independent public accountants as to
their examination of the financial statements of the Company. (Indenture,
Section 5.7)
TRUSTEE'S ANNUAL REPORT. The Trust Indenture Act of 1939 requires the
Trustee to mail annually to all holders of Notes a brief report if any of
certain events occur. These events include any change in the Trustee's
eligibility and qualifications to continue as the Trustee under the Indenture,
any amounts advanced by it under the Indenture, the amount, interest rate and
maturity date of certain indebtedness, if any, owing by the Company to the
Trustee in its individual capacity, and any action taken by it which materially
affects the Notes and which has not been previously reported. (Indenture,
Section 7.6)
SATISFACTION AND DISCHARGE OF THE INDENTURE. The Indenture will be
discharged, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment or redemption of all of the Notes. The duties of the
Company to the holders of Notes will cease upon such deposit. (Indenture,
Section 8.1)
DUTIES OF TRUSTEE. If an Event of Default has occurred and is continuing,
the Trustee is obligated, under the Indenture, to exercise such of its rights
and powers and to use the same degree of care and skill in the exercise of such
rights and powers as a prudent man would exercise or use under the circumstances
in his own affairs. Except during an Event of Default known to the Trustee, the
Trustee may rely, in the absence of bad faith, on certificates and opinions
furnished to it. Generally, the Trustee is not relieved from liability for its
own negligence or willful misconduct except that it is not liable (i) if it
acted in good faith in accordance with a direction from the Holders of not less
than a majority in principal amount of the Notes, or (ii) for any error in
judgment made in good faith and without negligence in ascertaining the pertinent
facts. The Trustee may refuse to perform any duty or exercise any right or power
unless it receives indemnity satisfactory to it against any loss, liability or
expense. (Indenture, Section 7.1) The Trustee may refuse to exercise any right
or power at the request or direction of the holders of Notes, unless
23
<PAGE>
such holders offer to the Trustee reasonable security or indemnity against the
costs, expenses or liabilities that might be incurred by it in compliance with
such request or direction. (Indenture, Section 7.2)
THE TRUSTEE. Sterling Trust Company, a trust company organized and existing
under the laws of the State of Texas, is the Trustee under the Indenture for the
Notes. The Company is obligated to pay the fees and expenses of the Trustee
relating to the Notes. (Indenture, Section 7.7)
THE SERVICING AGREEMENT
The Company anticipates that it will grant to the Additional Lender, if any,
a security interest in all of its rights under the Servicing Agreement. In
addition, the Company anticipates that, in the event of the occurrence and
continuation of a default under the Servicing Agreement by the Servicer, the
Additional Lender may direct the Company to, and the Company will, terminate all
of the rights and powers of the Servicer under the Servicing Agreement. Upon
such termination, all rights, powers, duties, obligations and responsibilities
of the Servicer with respect to the related Contracts (except for any obligation
of the Servicer to indemnify the Company) will vest in and be assumed by the
Company or any servicing agent that the Company may designate; provided,
however, that the Servicer will continue to be obligated to transfer funds of
the Company to the Operating Account.
POSSIBLE ADDITIONAL BORROWING
In addition to the Notes, the Company intends to pursue another lending
source (the "Additional Lender") to borrow funds (the "Additional Borrowing")
with which to purchase additional Contracts. The Additional Lender may be a bank
or an institutional lender such as an insurance company. The Company anticipates
that any borrowings from the Additional Lender will be secured by first priority
security interests in all the Contracts owned by the Company, and that both
interest on and principal of such borrowings will be repaid from collection
proceeds of such Contracts. As of the date of this Prospectus, the Company has
not obtained a commitment for Additional Borrowing from an Additional Lender,
and no assurance can be made that any Additional Borrowing will be obtained.
To secure the Additional Borrowing, the Company will grant a security
interest or lien in collateral which may consist of the Company's right, title
and interest in any or all of the following: (a) the Contracts (including
Contracts purchased with the net proceeds of this offering), together with all
payments and instruments received with respect thereto, (b) the Servicing
Agreement, (c) the Operating Account and all funds (including investments)
therein, (d) all repossessed or returned Financed Vehicles, and (e) all proceeds
of the conversion, voluntary or involuntary, of any of the foregoing into cash
or other liquid property. The security interest granted to the Additional Lender
in the Contracts will be perfected by delivery of such Contracts and related
title documents to the Additional Lender, or other financial institution
appointed by the Additional Lender to act as custodian and bailee of the
Contracts and related title documents for the benefit of the Additional Lender.
Such Additional Borrowing may also be accomplished by placing the Contracts into
a wholly-owned, limited purpose subsidiary which would be formed for the sole
purpose of serving as the borrower.
NOTE ISSUED BY ADMINISTRATOR
Sovereign Auto Finance, Inc., the Administrator of the Company, has issued
its unsecured promissory note to the Company, payable on demand solely upon the
occurrence of an Event of Default with respect to the investor Notes, in the
principal amount of $250,000. The note was issued as a credit enhancement in
order to satisfy state securities regulatory requirements with respect to this
offering. The note, which bears no interest, is payable only if and when the
note is called. Such note is enforceable by the Company in accordance with its
terms. As of February 12, 1998, the Administrator had $350,000 in cash, no
liabilities except for the contingent liability evidenced by the aforementioned
note, and stockholders' equity of $350,000. There can be no assurance as to the
ability of the Administrator to pay the note if it is ever called.
24
<PAGE>
THE COMPANY
GENERAL
Sovereign Credit Finance II, Inc. (the "Company") was incorporated in the
state of Texas on October 9, 1997. The Company is a subsidiary of Sovereign Auto
Finance Holdings, Inc., a Texas corporation. The principal offices of the
Company are located at 4015 Beltline Road, Building B, Dallas, Texas 75244. The
telephone number is (972) 960-5500.
Sovereign will administer and manage the ongoing operations of the Company.
Other than the Allowed Expenses, the Administrator will pay all general
administrative and overhead expenses incurred by the Company. The Company will
pay to the Administrator a fee equal to 5.5% of the gross proceeds from the sale
of the Notes (5.0% of the gross proceeds in excess of $9,000,000) for its
services to the Company.
BUSINESS OF THE COMPANY
The Company was established for the sole purposes of purchasing, collecting
and servicing motor vehicle retail sales installment contracts and obligations,
obtaining capital through borrowings or through sale of debt or equity
securities in order to invest in such contracts and obligations, and all related
business activities. The motor vehicle retail installment contracts and notes to
be purchased by the Company (the "Contracts") will be purchased at discounts
ranging generally from 25% to 45% of the aggregate remaining unpaid installments
thereof and will be secured by used automobiles and light trucks (the "Financed
Vehicles"). The Contracts will be originated by automobile dealers ("Dealers").
The Company anticipates that it will purchase its Contracts primarily from
Fiesta Motors, a Dealer owned and operated by Fiesta Motors, LLC, a Texas
limited liability company ("Fiesta Motors"). Fiesta Motors is an affiliate of
SAFH, of which the Company is a wholly-owned subsidiary. The Contracts may also
be purchased from a network of other Dealers organized by the Servicer and
currently located primarily in metropolitan areas in Texas and in Tennessee. The
Company will not participate in or directly finance the retail sales by the
Dealers of the Financed Vehicles from which the Contracts will arise. The
Dealers generate the Contracts and offer them for sale on a non-exclusive basis
to the Company. The Dealers forego some profit on each Contract sold to the
Company in exchange for an immediate return of their invested capital.
The funds necessary to purchase the Contracts will initially be provided
from the sale of the Notes offered hereby. Subject to the prior payment of
interest and principal due upon the Notes and the Additional Borrowing, if any,
and Allowed Expenses, the collection proceeds from the Contracts will be used to
purchase additional Contracts so long as no Event of Default exists. Upon the
payment in full of all principal and interest on the Notes, the Indenture will
terminate. While the Notes remain outstanding, the Company will be prohibited
from engaging in any business other than the purchase, collection and servicing
of the Contracts (including repossession and resale of the vehicle collateral)
and from incurring any additional indebtedness other than the Additional
Borrowing, Allowed Expenses and any other amounts incurred in the ordinary
course of its business.
The Contracts purchased by the Company will relate primarily to Financed
Vehicles in the middle range of the market for used automobiles and light-duty
trucks, where consumer retail prices range from $5,000 to $18,500. Consumer used
motor vehicle receivables are management and collection intensive and require
constant supervision, review and knowledge of repossession and resale services.
The Servicer, and its contractors, will attempt to provide this industry
expertise. In this regard, the Servicer will utilize predetermined purchasing
and collection criteria established in the Indenture and the Servicing Agreement
with respect to the Contracts.
The Company has no material properties, assets (except as set forth under
"Capitalization"), operating history or pending legal proceedings. The Company
and the Servicer intend to obtain any licenses that may be required in any state
where it purchases and collects Contracts. The Servicer has
25
<PAGE>
registered, and the Company will register, with the Texas Consumer Credit
Commissioner as a holder of motor vehicle retail installment contracts.
BUSINESS OF THE ADMINISTRATOR, THE SERVICER AND THE SECURITIZATION SUBSIDIARIES
Beginning in January 1991, Sovereign Credit Corporation ("SCC"), which prior
to February 6, 1998 was beneficially owned and managed by the beneficial owners
and management of the Administrator, organized various limited partnerships (the
"Limited Partnerships") which have engaged in the business of acquiring notes,
accounts receivable and other evidences of indebtedness from the RTC, the FDIC,
credit unions, lending institutions and other sources. Beginning in October
1993, SCC organized a number of other entities (the "Securitization
Subsidiaries") which have issued notes to investors and used the net proceeds
thereof to purchase consumer contracts and notes created by the retail sale and
financing of used automobiles and light trucks. See "Information Regarding the
Securitization Subsidiaries." SCC also served as the administrator of each of
the Limited Partnerships and Securitization Subsidiaries. As used herein, the
term "Securitization Subsidiaries" does not include the Company. The assets of
the Company are legally separate from those of the Securitization Subsidiaries,
and are not subject to any of the liabilities of the Securitization
Subsidiaries.
The offering and sale of securities is subject to the requirements that the
securities be registered under federal securities laws, unless an exemption
therefrom is available. The securities offerings of the Securitization
Subsidiaries were conducted pursuant to the Regulation D exemption. SCC believes
that the Securitization Subsidiaries fully complied with all the requirements of
the Regulation D exemption. However, it is possible that investors in the
Securitization Subsidiaries, in the event they were ever unsatisfied with their
investments, would bring legal actions arguing that the offerings constituted
one single offering and that the Regulation D exemption was unavailable on the
grounds that the Securitization Subsidiaries are under common control and were
all sponsored by SCC, the Regulation D offerings were conducted in close
proximity to one another, and collections from the Contracts of the various
Securitization Subsidiaries are deposited by SAI in a single gross collections
account (albeit under separate trust agreements with each Securitization
Subsidiaries). If such investors were successful in court with such argument,
they would be entitled to the rescission of their investments (subject to
available legal offsets). However, even if such investors were successful with
such argument, the Company believes that most and possibly all claims would be
barred by the applicable statute of limitations.
The Servicer was formed as a Texas corporation in January 1991 for the
purpose of purchasing, servicing and collecting various financial notes on
behalf of the Limited Partnerships and the Securitization Subsidiaries. As of
the date of this Prospectus, these are the only activities conducted by the
Servicer. Prior to February 6, 1998, the Servicer was also managed and
beneficially owned primarily by the management and beneficial owners of the
Administrator.
The Administrator was formed as a Texas corporation in January 1998. On
February 6, 1998, SCC transferred all the administration functions of SCC with
respect to the Limited Partnerships and Securitization Subsidiaries to the
Administrator, and the beneficial owners of SCC and the Servicer sold their
beneficial ownership interest therein to a third party. The Servicer and SCC are
both now owned and managed separately from the Administrator, the Limited
Partnerships and the Securitization Subsidiaries. The Servicer continues to
purchase, service and collect financial notes on behalf of the Limited
Partnerships and the Securitization Subsidiaries, and SCC no longer has any role
with respect to those entities.
The Administrator and the Servicer both maintain their offices at 4015 Belt
Line Road, Building B, Dallas, Texas 75244. The telephone number is (972)
960-5500.
PURCHASE AND COLLECTION OF CONTRACTS
The Contracts will be purchased and serviced on behalf of the Company by the
Servicer under the Master Contract Purchase Agreement and the Servicing
Agreement, each dated as of March 3, 1998
26
<PAGE>
(collectively, the "Servicing Agreement"), between the Company and the Servicer.
A copy of each of the documents constituting the Servicing Agreement has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. In addition, the Servicer has joined in the execution of the Indenture for
the purpose of making certain agreements and representations regarding the
purchasing and servicing of the Contracts with the Trustee for the benefit of
Noteholders. The following summaries do not purport to be complete and are
subject to and qualified in their entirety by reference to, the provisions of
the Servicing Agreement and the Indenture, and where particular provisions or
terms used in the Servicing Agreement or the Indenture are referred to, the
actual provisions (including definitions of terms) are incorporated by reference
as part of such summaries. References herein to the "Servicer" are to the
Servicer and any successor or permitted assignee of the Servicer performing the
duties of the Servicer under the Servicing Agreement.
GENERAL
Pursuant to the Servicing Agreement, the Company may request the Servicer to
solicit from Dealers offers to sell to the Company eligible Contracts, and the
Servicer is obligated to use reasonable efforts to solicit from Dealers offers
to sell to the Company eligible Contracts upon receiving any such request. The
Company will be obligated to purchase all Contracts offered for sale by Dealers
through the Servicer up to the dollar amount specified in the Company's request
if the offered Contracts satisfy the purchasing criteria set forth in the
Servicing Agreement. The Company's cost for each Contract will equal the
purchase price payable to the Dealer for the Contract, including any incentives
paid to the Dealer on a per Contract basis such as a volume bonus.
The Servicing Agreement and the Indenture establish certain criteria to
govern Contract purchases. (Master Contract Purchase Agreement, Exhibit B;
Indenture, Exhibit A) The Servicing Agreement also establishes criteria to
govern Contract servicing, including the performance of certain collection and
collateral management activities. If the Servicer fails to comply with these
criteria, the Company may terminate the Servicing Agreement and may appoint
another servicer. (Servicing Agreement, Exhibit A and Section 9) The Servicing
Agreement allows the Servicer to contract with industry-qualified third parties
to perform its obligations thereunder. The performance by any third party will
not relieve the Servicer from liability for its obligations under the Servicing
Agreement. (Servicing Agreement, Section 1)
CONTRACT PURCHASE CRITERIA
The Company has designed certain criteria as to the price, purchase
discount, term, down payment, installments and interest rate for the Contracts
and the price, cost to the Dealer, average wholesale value, age, mileage and
make of the Financed Vehicles to qualify for purchase by the Company under the
Servicing Agreement and the Indenture. The Company believes that the most
significant of these criteria, in general, are as follows:
a) The purchase price for each Contract must involve an initial payment to
the Dealer (i) of no more than 90% of principal plus accrued interest (pay-off
balance) of such Contract at the time of purchase, and (ii) which does not
exceed the average retail value for the related Financed Vehicle plus tax,
title, license and warranty.
b) The Contracts generally will have original terms that are 44 months or
less, although 54 month terms will be permitted where the Financed Vehicle is a
1991 or later model, or where lower depreciation or stronger credit history
justifies a 54 month term. The Contracts will equally amortize their principal
balance over their respective terms.
c) The age of each Financed Vehicle will generally be seven years or less
for automobiles or eight years or less for trucks, although the Servicer may
purchase Contracts secured by Financed Vehicles which are older, if in its
judgement the economics justify such a purchase.
27
<PAGE>
d) The mileage of each Financed Vehicle may not generally exceed 125,000
miles for automobiles or 135,000 miles for trucks, regardless of the year model.
The mileage limit will be less for later year models. In the event mileage of a
Financed Vehicle exceeds such limits, the Dealer is typically required to
guarantee payments under the applicable Contract.
e) The Obligors on the Contracts are generally required to make a down
payment in cash plus net trade-in allowance of at least approximately 10% of the
Dealers' costs (excluding sale preparation expenses) in the Financed Vehicles,
although there are no express minimum ratios of unpaid installments under the
Contracts at the time of their origination by the Dealers to the retail sale
price or the wholesale value of the Financed Vehicles.
f) The interest rate on the Contracts must not violate any applicable usury
laws.
g) The Obligors on the Contracts must have supplied certain credit
information, and credit verification procedures must have been performed by the
Servicer in a manner commensurate with standard industry practice.
Contracts may be purchased which do not meet the criteria specified in (a)
through (e) above if in the Servicer's good faith judgment, purchasing such
Contracts would be in the best interests of the Company. The Company may pay a
higher purchase price for seasoned Contracts. The Company will not decline to
purchase Contracts offered by the Servicer that do not meet the criteria because
the relationship is not arm's length. Generally, the "creditworthiness grade" of
the Obligors on the Contracts will be "D".
With respect to the credit information to be supplied by the Obligors on the
Contracts, the Company has established certain credit criteria to be satisfied
by each Obligor. In order to satisfy these criteria, an Obligor, among other
things, must be able to provide verifiable personal references, must have a
valid driver's license, must have been a resident of the local area of
origination for a minimum of six months, and must be at least 18 years of age.
In order to verify the foregoing information in accordance with the Company's
expectations of standard industry practice, the Servicer will be required to
obtain from the Dealer a copy of the credit application executed by the Obligor
which contains the necessary information, to verify by telephone or otherwise
the Obligors' addresses, employment and personal references and to obtain a
credit report from a credit reporting agency.
The Company may purchase Contracts from Dealers subject to the requirement
that the selling Dealer repurchase any Contract that becomes overdue for more
than 60 days, although the terms of any such requirement for any particular
Dealer or group of Contracts purchased will be determined by the Servicer and
such Dealer.
The Company may also purchase Contracts which are lease agreements for
Financed Vehicles. The Servicer has not previously purchased lease agreements,
and has not established purchase guidelines therefor.
Although most state laws mandate that owners maintain liability insurance
for damages arising from their use of a motor vehicle, the owners of the
Financed Vehicles may fail to maintain physical damage insurance and the
Servicing Agreement does not require that the Obligors on the Contracts maintain
such insurance as a criterion for Contract purchase. In many cases, the Servicer
or the Company will be named as a loss payee under the Obligor's automobile
insurance policy. The Company may suffer a loss upon any theft or physical
damage of any Financed Vehicles if the Obligor does not maintain physical damage
insurance and is otherwise unable to pay for repairs or replacement or its
obligations under the related Contract. In addition, the Company may not require
verification of physical damage insurance coverage for Financed Vehicles in
connection with certain Contract packages it purchases, and may purchase some
packages knowing that some or all of the related Financed Vehicles are without
physical damage insurance coverage. See "Risk Factors--Lack of Damage
Insurance."
28
<PAGE>
The Servicer represents and warrants in the Servicing Agreement and the
Indenture, among other things, that (i) each Contract met at the time of its
purchase from the originating Dealer in all material respects all purchasing
criteria set forth on Exhibit A of the Master Contract Purchase Agreement; (ii)
at the date of purchase, the Contracts are free and clear of all security
interests, liens, charges and encumbrances and no offsets, defenses, or
counterclaims against the Company or Dealers have been asserted or threatened;
(iii) at the date of purchase, each of the Contracts is or will be secured by a
first security interest in the Financed Vehicle which serves as collateral for
the Contract; and (iv) each Dealer from which the Company purchases Contracts
will be required to represent and warrant to the Company that each Contract, at
the time it was originated, complied, and at the date of purchase of the
Contract, complies in all material respects with applicable federal and state
laws, including consumer credit, truth in lending, equal credit opportunity and
disclosure laws. (Master Contract Purchase Agreement, Section 7; Indenture,
Section 12.16) If the Company, the Servicer or the Trustee discovers that any of
such representations or warranties was incorrect in any material respect with
respect to a Contract, the Servicer is required to cure the defect or purchase
the Contract from the Company. (Indenture, Section 12.17) The Servicer also
covenants in the Indenture that it will take all actions necessary or desirable
to maintain perfection and priority of the security interest granted under the
Contract in the Financed Vehicle. (Indenture, Section 12.1)
DEALER CRITERIA
Contracts will generally be purchased from Dealers who meet the following
criteria:
- A net worth, exclusive of goodwill or other intangible values, of at least
$100,000, or a parent, affiliate or predecessor which meets the net worth
criterion;
- A minimum of one year of successful operation as an automobile dealer, as
evidenced by financial statements or prior tax returns;
- Experienced contract loss rates during the immediately preceding year
acceptable to the Servicer; and
- Verifiable banking references.
The Servicer does not specifically limit the number of Contracts originated
by any one Dealer that may be included in the Contracts inventory at any one
time.
The Company anticipates that it will purchase its Contracts primarily from
Fiesta Motors, an affiliate of SAFH. Fiesta Motors meets each of the above
criteria.
COLLECTION OF PAYMENTS
Under the Servicing Agreement, the Servicer is obligated to exercise
discretionary powers involved in the management, administration and collection
of the Contracts and to bear all costs and expenses incurred in connection
therewith, except as described below under "Servicing Fees and Expenses". The
Servicer is obligated to use the same care and apply the same policies that it
would exercise if it owned the Contracts. (Servicing Agreement, Section 1)
The Servicer is obligated to instruct all Obligors under the Contracts to
make all payments to the Collections Account. (Servicing Agreement, Section 6)
Any material extensions, modifications, or acceptances of partial payments by
Obligors, and any related necessary Contract amendments or default waivers by
the Servicer, must be approved by the chief credit officer or president of the
Servicer. (Servicing Agreement, Exhibit A) Under the Indenture and the Servicing
Agreement, the Servicer is required to pursue repossession, subject to
compliance with all state and federal laws relating thereto, of the Financed
Vehicle securing any Contract whose Obligor (i) is past due by at least three
scheduled installments in the case of bi-weekly or semi-monthly installments or
two scheduled installments in the case of monthly
29
<PAGE>
installments, and (ii) has failed for 30 days, in the case of bi-weekly or
semi-monthly installments, or 45 days, in the case of monthly installments, to
remit any sums against the obligations under the Contract. (Indenture, Section
12.7; Servicing Agreement, Exhibit A) The Servicer may commence repossession
sooner if it deems such activity to be prudent and in the best interests of the
Company and the Servicer. The Servicer is also required to document the reasons
for each chargeoff of any material unpaid amount from an Obligor under any
Contract. (Servicing Agreement, Exhibit A) As indicated by the foregoing
repossession requirements, to maximize its return, the Company prefers to
continue collecting installments on the Contract despite a missed installment by
the Obligor in lieu of repossession of the vehicle. See "Risk
Factors--Collections and Repossessions; Performance of Contracts".
The Servicer is required to deliver monthly to the Company a report
certifying that all Contracts managed by the Servicer were serviced in material
accordance with the Servicing Agreement and that the Servicer is not in default
under the Servicing Agreement. The report also will contain collection
information on each Contract since the date of the last such report and a
reconciliation of the deposits into and withdrawals from the Operating Account.
(Indenture, Exhibit B) If the Servicer fails to remit collections on the
Contracts to the Collections Account when due, and continues such failure for
five business days, or to service and collect amounts due from the Obligors in
accordance with the servicing criteria established by the Servicing Agreement,
or if certain bankruptcy or insolvency proceedings occur, the Company has the
right to terminate all rights and obligations of the Servicer under the
Servicing Agreement and to transfer servicing rights to a successor servicer.
(Servicing Agreement, Section 10)
SERVICING FEES AND EXPENSES
The Servicer is entitled under the Servicing Agreement to receive a fee (the
"Contract Servicing Fee") of $20 per month per outstanding Contract that has not
been assigned for repossession, plus all late fees. (Servicing Agreement,
Section 3) Such fee will also be paid to the Servicer with respect to Contracts
serviced or collected by third parties with which the Servicer has contracted.
The Contract Servicing Fee is intended to compensate and reimburse the Servicer
for administering the collection of the Contracts, including collecting and
posting all payments, responding to inquiries of Obligors on the Contracts,
investigating delinquencies, sending payment coupons to Obligors, reporting any
required tax information to Obligors, paying costs of collections and policing
the Financed Vehicles. The Contract Servicing Fee will also compensate the
Servicer for furnishing monthly and annual statements to the Company and the
Trustee with respect to expenditures and receipts, and generating information
necessary for the Company to prepare all required federal and state income tax
returns. The Company will reimburse the Servicer for all direct charges incurred
in connection with servicing the Contracts, perfecting the Company's security
interest in collateral securing the Contracts and protecting the interests of
the Company in the event of default on any of the Contracts, including without
limitation, amounts required to pay prior liens that must be paid, local, state
or federal taxes pertaining to the collateral, the costs of maintaining,
perfecting and obtaining liens and/or foreclosing thereon, and attorneys fees in
connection with the foregoing.
Under the Indenture, the Servicer will also be entitled to reimbursement, as
an Allowed Expense, of its expenses incurred in the repossession, repair and
sale of any Financed Vehicle to the extent of the related proceeds from its sale
or from any recovery on a related insurance policy. (Indenture, Section 12.7) In
addition, subject to prior payment of any amounts owing on the Notes or to the
Trustee, the Servicer will be paid, as an Allowed Expense, the lockbox fees,
account fees and bank service charges relating to the Collections Account.
The Servicer will receive a monthly fee (the "Purchase Administration Fee")
from the Company equal to the lesser of $500, or 5% of the total amount of
installments due under the Contract as of the date of purchase for the Company,
for each Contract purchased during the preceding calendar month period. The
Purchase Administration Fee is intended to compensate and reimburse the Servicer
for administrating the
30
<PAGE>
purchase of the Contracts, including receipt and approval of dealer drafts and
Contract transfer documents, monitoring compliance with purchase criteria,
creation of Contract files, communications with selling Dealers, and other
related activities.
The Servicer may charge a processing fee to the various Dealers, other than
Fiesta Motors, from which it purchases Contracts on behalf of the Company, which
fee is currently $275 per Contract purchased. The Servicer may pay a portion of
such fee, in the amount of $50 per Contract purchased, to one or more third
parties as a finder's fee in connection with the purchase of each Contract. The
Servicer eserves the right to increase the amount of the processing fee which it
charges from time to time, and to increase or decrease the amount of the
finder's fee.
In some cases, the Servicer may contract with third parties, including the
Dealers which originated the Contracts, to perform certain servicing and/or
collection services with respect to some Contracts. The Servicer may also
maintain offices for collection and servicing purposes at the premises of
Dealers from which the Company purchases Contracts.
The Servicer will make reasonable efforts to collect all payments due with
respect to the Contracts in a manner consistent with the Servicing Agreement.
Consistent with its normal procedures, the Servicer may, in its discretion,
arrange with the Obligor on a Contract to defer or modify the payment schedule.
When the Servicer determines that eventual payment in full of a Contract is
unlikely, it will follow its normal practices and procedures to realize upon the
Contract, including the repossession of the Financed Vehicle securing the
Contract, or the taking of any other action permitted by applicable law. In this
regard, the Company will pay the Servicer a fee equal to $125 for each
repossession of a Financed Vehicle.
DEALERS
The Dealers will originate the motor vehicle retail installment contracts
and notes to be purchased by the Company. The economic incentive motivating a
Dealer to sell Contracts to the Company is maximization of return on the
Dealer's invested capital. Although the Dealer may make less profit per
transaction, because the cost of the automobile to the Dealer is recouped
immediately upon sale of the contract or note, and the Dealer does not have to
wait for future installment payments on the contract or note, the Dealer can
purchase and sell more automobiles and increase net profit through increased
inventory turnover.
The Company anticipates that it will purchase its Contracts primarily from
Fiesta Motors, a Dealer owned and operated by Fiesta Motors, LLC, a Texas
limited liability company. Fiesta Motors is an affiliate of SAFH.
The Company believes that Fiesta Motors, together with other Dealers with
which the Servicer presently conducts business, should generate sufficient
eligible Contracts for purchase by the Company. The Company believes that the
Servicer will be able to adequately handle the servicing of all Contracts
purchased by the Company with the net proceeds from the sale of the Notes.
THE SERVICER
Sovereign Associates, Inc. is the Servicer under the Servicing Agreement.
The Servicer is owned and managed separately from the Company, the
Administrator, and SAFH. See "Management--Certain Relationships and Related
Transactions". The Servicer was incorporated in January, 1991 and commenced
purchasing and servicing of motor vehicle retail installment contracts in June,
1993.
31
<PAGE>
INFORMATION REGARDING
THE SECURITIZATION SUBSIDIARIES
DELINQUENCY, REPOSSESSION AND COLLECTIONS
The following table sets forth delinquency, repossession, collections, and
other information regarding the Securitization Subsidiaries from June 1, 1993
(the date the Servicer began servicing motor vehicle retail installment sales
contracts) through December 31, 1997. There can be no assurance that the future
performance of the Contracts purchased by the Company, including future
delinquency and loss experience, will be similar to that set forth in the
following tables. The information shown in the first table is for Contracts
purchased primarily from Dealers unaffiliated with the Administrator, the
Servicer, or SAFH. The Servicer no longer purchases Contracts from many of these
Dealers. The information shown in the second table is derived from the first
table, and is for Contracts purchased from Fiesta Motors. The Company intends to
purchase its Contracts primarily from Fiesta Motors.
DELINQUENCIES OF ALL MOTOR VEHICLES
RETAIL INSTALLMENT SALES CONTRACTS
AS OF DECEMBER 31, 1997 (1)
<TABLE>
<CAPTION>
NUMBER OF UNPAID
ACTIVE PERCENT INSTALLMENTS PERCENT
TOTAL DAYS PAST DUE (2) CONTRACTS OF TOTAL (3) OF TOTAL
- ---------------------------------------------- ----------- --------- --------------- ---------
<S> <C> <C> <C> <C>
0 - 30........................................ 2,987 55.21% $ 20,362,116 58.59%
31 - 60....................................... 858 15.86% $ 4,848,067 13.95%
61 - 90....................................... 405 7.49% $ 2,977,408 8.57%
over 91....................................... 1,160 21.44% $ 6,567,430 18.90%
----- --------- --------------- ---------
All Active Contracts.......................... 5,410 100.00% $ 34,755,021 100.00%
----- --------- --------------- ---------
----- --------- --------------- ---------
</TABLE>
(1) The information shown is for Contracts purchased primarily from Dealers
unaffiliated with the Administrator, the Servicer, or SAFH.
(2) It is the Servicer's general policy to initiate repossession efforts after
obligors (i) are past due by at least three scheduled installments in the
case of bi-weekly or semi-monthly installments or two scheduled installments
in the case of monthly installments, and (ii) have failed for 30 days, in
the case of bi-weekly or semi-monthly installments, or 60 days, in the case
of monthly installments, to remit any sums against the obligations under the
contract. Accordingly, some contracts are shown as active even though
repossession efforts have commenced.
(3) Includes principal and remaining finance charges.
DELINQUENCIES OF MOTOR VEHICLES
RETAIL INSTALLMENT SALES CONTRACTS PURCHASED FROM FIESTA MOTORS
AS OF DECEMBER 31, 1997 (1)
<TABLE>
<CAPTION>
UNPAID
INSTALLMENTS
TOTAL DAYS PAST DUE (2) CONTRACTS TOTAL (3) TOTAL
- ----------------------------------------- ------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
0 - 30................................... 453 75.63% $ 7,918,130 76.92%
31 - 60.................................. 64 10.68% $ 1,074,854 10.44%
61 - 90.................................. 23 3.84% $ 365,739 3.55%
over 91.................................. 59 9.85% $ 935,851 9.09%
--- ---------- --------------- ----------
All Active Contracts..................... 599 100.00% $ 10,294,573 100.00%
--- ---------- --------------- ----------
--- ---------- --------------- ----------
</TABLE>
(1) The information shown is derived from the above table, and is for Contracts
purchased from Fiesta Motors.
32
<PAGE>
ADDITIONAL SELECTED DATA FOR ALL MOTOR VEHICLE
RETAIL INSTALLMENT SALES CONTRACTS FROM
JUNE 1, 1993 THROUGH DECEMBER 31, 1997 (1)
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
NUMBER TOTAL AMOUNT TOTAL
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Writeoffs (2)................................... 2,492 17.50% $ 20,137,181 16.83%
Repossessions (3)............................... 2,768 19.44% $ 21,511,559 17.98%
Proceeds from Repossessions (4)................. 2,118 14.87% $ 12,256,602 10.24%
Inventory of Repossessions (5).................. 372 2.61% $ 458,745 0.38%
Total Contracts Purchased (6)................... 14,241 $ 119,667,606
</TABLE>
(1) The information shown is for Contracts purchased primarily from Dealers
unaffiliated with the Administrator, the Servicer, or SAFH. In addition, the
information shown is cumulative, rather than annual, because annual historic
information concerning writeoffs is unavailable without unreasonable burden
and expense
(2) "Writeoffs" are those contracts which have been written off as uncollectible
as bad debts, and include (i) those which are subject to Chapter 13
Bankruptcy proceedings (ii) those for which the vehicle serving as
collateral has been destroyed, and (iii) those where the obligor has
"skipped" (i.e., neither the obligor nor the vehicle serving as collateral
can be found). "Amount" represents the total unpaid installments of the
Contracts at the time they are classified as "Writeoffs".
(3) "Amount" represents the total unpaid installments of the related Contracts
at the time of repossession plus repossession and reconditioning fees and
expenses.
(4) "Amount" represents total unpaid installments of Contracts originated from
sales of repossessed vehicles and any insurance proceeds, if applicable,
before deduction for repossession and reconditioning fees and expenses.
(5) "Inventory of Repossessions" are repossessed vehicles in inventory awaiting
resale as of December 31, 1997. "Amount" represents wholesale values of
repossessed vehicles at the time of repossession plus repossession and
reconditioning fees and expenses.
(6) "Amount" represents the total unpaid installments of the Contracts at the
time of purchase.
The average term remaining, and the average principal amount, for Contracts
in the Servicer's servicing portfolio at December 31, 1997 is approximately 21
months and approximately $5,096, respectively. Such Contracts were originated
primarily from Dealers unaffiliated with the Administrator, the Servicer, or
SAFH. For Contracts originated by Fiesta Motors, the average term remaining, and
the average principal amount, in the Servicer's servicing portfolio at December
31, 1997 is approximately 38 months and approximately $12,229, respectively. The
Servicer expects that (a) its repossession rate, over the life of the portfolio
of all Contracts purchased on behalf of the Company through its services, will
be in the range of 25% to 35% of such Contracts, and (b) the average purchase
price payable to motor vehicle dealers will be no more than 66% of the original
total future installments payable under the Contracts.
33
<PAGE>
CERTAIN FINANCIAL INFORMATION
The following table sets forth certain information regarding the
Securitization Subsidiaries from June 1, 1993 (the date the Servicer began
servicing motor vehicle retail installment sales contracts) through December 31,
1997. There can be no assurance that the future performance of the Contracts
purchased by the Company will be similar to that set forth in the following
table.
<TABLE>
<CAPTION>
PRINCIPAL
BALANCE MATURITY VALUE PAYOFF BALANCE
OF INVESTOR CASH COLLECTED OF ACTIVE OF ACTIVE
NOTES FROM CONTRACTS CONTRACTS
NAME OF SECURITIZATION AS OF 12/31/97 10/1/97 TO AS OF 12/31/97 AS OF 12/31/97
SUBSIDIARY (1) (2) DUE DATE (3) 12/31/97 (4) (5)
- ------------------------------- --------------- ------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
SAM 94-1....................... $ 363,850 07/15/00 $ 20,238 $ 13,999 $ 10,586
SAM 94-3....................... $ 728,142 03/31/98 $ 50,330 $ 175,106 $ 155,327
SAM 95-1....................... $ 603,036 10/15/98 $ 88,968 $ 269,941 $ 220,486
SAM 95-2....................... $ 874,959 03/15/99 $ 133,964 $ 885,209 $ 701,425
Sovereign Acceptance I......... $ 217,167 05/15/00 $ 7,737 $ 10,934 $ 7,592
Sovereign Acceptance II........ $ 401,333 07/15/00 $ 7,993 $ 0 $ 0
Sovereign Acceptance III....... $ 500,431 08/15/00 $ 30,335 $ 110,514 $ 93,618
Sovereign Acceptance IV........ $ 672,260 09/15/00 $ 49,674 $ 174,837 $ 140,736
Sovereign Acceptance V......... $ 614,537 09/30/00 $ 44,663 $ 317,775 $ 253,795
Sovereign Acceptance VI........ $ 587,000 10/15/00 $ 49,570 $ 146,994 $ 130,259
Sovereign Acceptance VII....... $ 606,276 11/15/00 $ 53,727 $ 242,098 $ 197,184
Sovereign Acceptance VIII...... $ 704,100 12/31/00 $ 61,266 $ 202,982 $ 162,025
Sovereign Acceptance IX........ $ 536,245 01/31/01 $ 56,768 $ 225,544 $ 187,840
Sovereign Acceptance X......... $ 594,000 01/31/01 $ 86,516 $ 259,649 $ 204,966
Sovereign Acceptance XI........ $ 579,000 02/28/01 $ 60,723 $ 181,221 $ 149,644
Sovereign Acceptance XII....... $ 625,000 02/28/01 $ 52,364 $ 302,137 $ 242,162
Sovereign Acceptance XIII...... $ 600,000 03/31/01 $ 68,815 $ 308,559 $ 267,894
Sovereign Acceptance XIV....... $ 544,143 03/31/01 $ 27,778 $ 97,131 $ 81,073
Sovereign Acceptance XV........ $ 612,000 04/30/01 $ 37,719 $ 167,965 $ 141,021
Sovereign Acceptance XVI....... $ 563,000 04/30/01 $ 41,568 $ 85,900 $ 77,644
Sovereign Acceptance XVII...... $ 716,000 05/31/01 $ 50,406 $ 230,816 $ 184,922
Sovereign Acceptance XVIII..... $ 733,053 05/31/01 $ 40,895 $ 212,369 $ 188,762
Sovereign Acceptance XIX....... $ 523,500 06/30/01 $ 33,874 $ 18,410 $ 17,108
Sovereign Acceptance XX........ $ 619,635 06/30/01 $ 56,870 $ 244,510 $ 214,776
Sovereign Acceptance XXI....... $ 606,000 09/15/98 $ 42,810 $ 56,431 $ 47,584
Sovereign Acceptance XXII...... $ 465,000 09/15/98 $ 19,299 $ 53,544 $ 45,172
Sovereign Acceptance XXIII..... $ 498,000 10/15/98 $ 39,556 $ 96,106 $ 75,031
Sovereign Acceptance XXIV...... $ 615,000 10/15/98 $ 69,303 $ 279,793 $ 225,591
Sovereign Acceptance XXV....... $ 531,000 11/15/98 $ 35,888 $ 171,420 $ 138,458
Sovereign Credit Acceptance I.. $ 813,000 01/15/99 $ 50,525 $ 327,486 $ 286,348
Sovereign Credit Acceptance
II........................... $ 515,000 03/15/99 $ 61,323 $ 325,072 $ 264,676
Sovereign Credit Acceptance
III.......................... $ 456,000 05/15/99 $ 56,705 $ 451,572 $ 398,668
Sovereign Credit I............. $ 992,000 12/15/98 $ 55,276 $ 345,896 $ 276,465
Sovereign Credit II............ $ 767,350 03/15/99 $ 67,995 $ 432,688 $ 344,552
Sovereign Credit III........... $ 944,915 03/15/99 $ 136,919 $ 795,457 $ 639,522
Sovereign Credit IV............ $ 79,000 04/15/99 $ 4,334 $ 50,043 $ 39,219
Sovereign Credit V............. $ 1,171,723 05/15/99 $ 377,475 $ 846,161 $ 694,496
Sovereign Credit VI............ $ 1,018,047 06/15/99 $ 154,761 $ 853,402 $ 705,906
Sovereign Credit VII........... $ 1,189,140 06/15/99 $ 118,605 $ 674,714 $ 561,436
Sovereign Credit VIII.......... $ 925,875 07/15/99 $ 82,462 $ 405,086 $ 328,478
Sovereign Credit IX............ $ 662,500 11/15/99 $ 96,792 $ 645,066 $ 521,980
Sovereign Credit X............. $ 766,888 12/31/99 $ 90,795 $ 704,705 $ 588,496
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL
BALANCE MATURITY VALUE PAYOFF BALANCE
OF INVESTOR CASH COLLECTED OF ACTIVE OF ACTIVE
NOTES FROM CONTRACTS CONTRACTS
NAME OF SECURITIZATION AS OF 12/31/97 10/1/97 TO AS OF 12/31/97 AS OF 12/31/97
SUBSIDIARY (1) (2) DUE DATE (3) 12/31/97 (4) (5)
- ------------------------------- --------------- ------------ --------------- --------------- ---------------
Sovereign Credit XI............ $ 741,000 12/31/99 $ 90,277 $ 673,124 $ 547,781
<S> <C> <C> <C> <C> <C>
Sovereign Credit XII........... $ 752,000 03/31/00 $ 104,520 $ 707,901 $ 576,896
Sovereign Credit XIV........... $ 1,040,312 03/31/00 $ 182,809 $ 908,277 $ 755,460
Sovereign Credit XV............ $ 649,449 04/30/00 $ 59,128 $ 566,901 $ 471,036
Sovereign Credit XVI........... $ 1,348,890 04/30/00 $ 208,537 $ 1,206,899 $ 945,832
Sovereign Credit XVII.......... $ 601,000 05/31/00 $ 126,403 $ 634,060 $ 496,930
Sovereign Credit XVIII......... $ 990,996 06/30/00 $ 200,082 $ 845,711 $ 705,520
Sovereign Credit XIX........... $ 1,344,025 06/30/00 $ 280,484 $ 1,449,424 $ 1,192,599
Sovereign Credit XX............ $ 1,341,092 08/31/00 $ 221,716 $ 1,196,678 $ 958,637
Greenbriar Credit I............ $ 912,167 10/31/00 $ 112,901 $ 1,056,668 $ 788,833
Greenbriar Credit II........... $ 879,500 11/30/00 $ 58,085 $ 965,287 $ 685,512
Sovereign Credit Finance I..... $ 8,397,496 02/15/01 $ 940,769 $ 11,341,165 $ 8,648,360
</TABLE>
- --------------------------
(1) Each Securitization Subsidiary is a limited liability company with the
exception of Sovereign Acceptance I, which is a limited partnership, and
Greenbriar Credit I and Sovereign Credit Finance I, which are both
corporations. Of all the Securitization Subsidiaries listed, Sovereign
Credit Finance I, which publicly offered its notes to investors until
January 31, 1998, is structured most similarly to the Company. The
information shown is for Contracts purchased primarily from Dealers
unaffiliated with the Administrator, the Servicer, or SAFH, with the
exception of Greenbriar Credit I and II, both of which purchase Contracts
primarily from Fiesta Motors.
(2) The amount shown includes institutional debt in the amount of $320,672 for
Sovereign Credit V, $81,918 for Sovereign Credit XVIII, and $235,196 for
Sovereign Credit XIX.
(3) Principal on the notes issued by each program is required to be repaid in
six equal monthly installments ending on the due date.
(4) Maturity Value of Active Contracts represents the sum of all future
installments of principal and interest, less amounts owed to Dealers at
maturity of the contracts.
(5) Payoff Balance of Active Contracts represents the payoff balance of the
contracts as of the date shown.
Noteholders in certain of the Securitization Subsidiaries have been or will
be asked to reduce interest rates on such notes from 15% to 12% per annum, and
to extend the due dates of their notes for three years in order to provide the
particular Securitization Subsidiary which issued their note more time to repay
principal. Such modifications to those notes were and will be requested due to
the fact that the total assets of those Securitization Subsidiaries are less
than necessary to make all note payments as originally scheduled. In fact, some
of these Securitization Subsidiaries have already failed to make scheduled
payments of principal. In addition, some of these Securitization Subsidiaries
have been unable to make scheduled payments of interest, and the administrator
thereof has caused such payments to be made from its own funds, but has not
committed to continue to provide such payments on behalf of these or any other
Securitization Subsidiaries.
In order to induce the holders of such notes to agree to such modifications,
the administrator of each Securitization Subsidiary has assigned its interest
therein (other than Greenbriar Credit I, Greenbriar Credit II, and Sovereign
Credit Finance I) into a special purpose entity, and directed that all net
proceeds from the Contracts of each such Securitization Subsidiary, after
repayment of its debts (including amounts owed to both noteholders and senior
lenders, if any), be applied towards the repayment of the notes of the
Securitization Subsidiaries that would otherwise be in default. The net proceeds
of such Contracts, to the extent available for such purpose, will be applied on
a pro rata basis. Such net proceeds will not be available to Noteholders
purchasing Notes pursuant to this offering. There can be no assurance that the
net proceeds of such Contracts will be sufficient to repay all notes of the
Securitization Subsidiaries.
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<PAGE>
As of the date of this Prospectus, Securitization Subsidiaries experiencing
financial difficulties include approximately 27 entities with total principal
due investors of $15.4 million. As of December 31, 1997, such entities held
Contracts with a gross receivable amount of $2.7 million. The reasons for the
financial difficulties include the following: the high interest rate paid by
these programs (15% per annum) in relation to their performance; losses incurred
on the contracts held by these programs were significantly higher than planned;
and repurchase agreements entered into between these programs and certain
unaffiliated Dealers were not honored by the Dealers, although the programs are
pursuing legal recourse against these Dealers. See "Risk Factors--Financial
Difficulties of Certain Securitization Subsidiaries".
As of the date of this Prospectus, the note modifications have been
requested for Securitization Subsidiaries with notes due during 1997 and the
first half of 1998, and it is anticipated that such note modifications will be
requested for at least some additional Securitization Subsidiaries with notes
due during 1998. The notes issued by each of these Securitization Subsidiaries
provide that default on the notes only occurs upon 30 days prior written notice
of nonpayment to the Securitization Subsidiary by the holders of at least 25% of
the aggregate principal amount of the outstanding notes issued by such
Securitization Subsidiary. In addition, such notes provide that any declaration
of default by the minimum number of noteholders may be rescinded by the holders
of a majority of the aggregate principal amount of the outstanding notes. Thus,
in the event more than 75% in principal amount of the noteholders of any
Securitization Subsidiary accept the modification offer, such acceptance will
effectively preclude any noteholders of such Securitization Subsidiary from
declaring a default during the three year extension period. As of the date of
this Prospectus, all Securitization Subsidiaries for which note modifications
have been requested and for which principal is finally due have exceeded this
75% threshold, with the exception of one Securitization Subsidiary that is at
73%.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of October 15, 1997 relating
to the beneficial ownership of the Company's Common Stock by any person or
"group", as that term is used in Section 13(d)(3) of the Securities and Exchange
Act of 1934 (the "Exchange Act"), known to the Company to own beneficially 5% or
more of the outstanding shares of Common Stock, and known to the Company to be
owned by each director of the Company and by all officers and directors of the
Company as a group. Except as otherwise indicated, each of the persons named
below is believed by the Company to possess sole voting and investment power
with respect to the shares of Common Stock beneficially owned by such person.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL
OWNERSHIP(1)
-----------------------------------------
NAME OF DIRECTOR OR PERCENTAGE OF CLASS
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES OUTSTANDING
- ----------------------------------------------------------------- ------------------ ---------------------
<S> <C> <C>
Sovereign Auto Finance Holdings, Inc. (2) ....................... 1,000 100%
4015 Beltline Road
Building B
Dallas, Texas 75244
A. Starke Taylor, III ........................................... 0(2) --
William P. Glass ................................................ 0(2) --
Diane D. Taylor, Trustee ........................................ 0(2) --
4015 Beltline Road
Building B
Dallas, Texas 75244
All officers and directors as a group (2 persons)................ 0(3) --
</TABLE>
- ------------------------
(1) The information as to beneficial ownership of Common Stock has been
furnished by the respective shareholders, directors and officers of the
Company.
(2) The directors of Sovereign Auto Finance Holdings, Inc. ("SAFH") could be
deemed to share voting and investment powers over the shares owned of record
by SAFH. The directors of SAFH are A. Starke Taylor, III and William P.
Glass. Austin Taylor Family Limited Partnership owns 90% of SAFH's common
stock, and Forestberg Partners, L.P. owns the remaining 10%. The general
partner of Austin Taylor Family Limited Partnership is AST III Corp., of
which Mr. Taylor serves as the President and sole director, and the limited
partners primarily include Mr. Taylor and various trusts of which Diane D.
Taylor, the wife of Mr. Taylor, serves as trustee. The general partner of
Forestberg Partners, L.P. is beneficially owned by Mr. Glass. The business
address for each of these entities, Mr. and Mrs. Taylor and Mr. Glass is
SAFH's address.
(3) This amount excludes shares owned directly by SAFH.
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<PAGE>
MANAGEMENT
BUSINESS BACKGROUND AND EXPERIENCE
The names, ages, backgrounds and principal occupations of the directors and
executive officers of the Company, Sovereign Auto Finance Holdings, Inc.
("SAFH"), and Sovereign Auto Finance, Inc. ("the "Administrator") are set forth
below:
<TABLE>
<CAPTION>
NAME POSITION
- --------------------------------------------------- ---------------------------------------------------
<S> <C>
A. Starke Taylor, III.............................. President and Director: the Company, SAFH and the
Administrator
William P. Glass................................... Vice President and Director of the Company and
SAFH; Vice President of Marketing and Director: the
Administrator
</TABLE>
A. STARKE (TRACY) TAYLOR, III, age 54, has been President and a director of
the Company, SAFH, and the Administrator since the formation of such companies.
Prior to February 6, 1998, Mr. Taylor was President and a director of the
Servicer. In addition, prior to such date, Mr. Taylor was President and a
director of Sovereign Credit Corporation, which prior to such date conducted
substantially the same business as the Administrator is presently conducting.
Mr. Taylor also serves as manager of Fiesta Motors, LLC, which owns and operates
Fiesta Motors.
Mr. Taylor used his experience in the pension investment field as a
springboard into a diversified financial career. As a principal of the Watson
and Taylor Companies, he was involved in the development and management of self
storage facilities, business centers, shopping centers, real estate holdings
nationwide and real estate notes. He is a co-general partner in partnerships
holding approximately four and one-half million square feet of self storage
facilities.
Mr. Taylor was a partner in Lyco Acquisitions Number One, a company which
purchased all of the oil and gas properties of Bethlehem Steel. Later, he was a
principal in Tex-Feld Petroleum Company, which operated a significant drilling
program in the Southwest.
Mr. Taylor has been a general partner in over 100 limited partnerships which
involved real estate or oil and gas investments, with total original investor
contributions of approximately $150 million. The investment objectives of these
partnerships differed significantly from those of the Company. Many of these
partnerships have experienced adverse business developments and conditions. In
the late 1980's, real estate revenues were adversely affected by the overall
decline in the economy. The properties owned by five of the partnerships, with
aggregate investor capital of $13,525,980, were foreclosed upon or otherwise
acquired by their lenders.
Mr. Taylor has also served as a general partner or chief executive officer
for 35 partnerships formed to acquire financial notes.
Mr. Taylor is a past Chairman of the Board of Priority One, an international
missionary organization, is on the Board of Trustees of the Dallas Theological
Seminary, is a past member of the Dallas County Advisory Board of the Salvation
Army, is a board member of the Northeast Texas Regional Board of Young Life, and
was the founding Chairman of the Board of the Park Central Athletic Association.
He is past President of the Dallas Fire Fighters Association, past President of
the North Dallas Chamber of Commerce and a past member of the Board of Directors
of the MBank Lincoln Center and MBank Preston. Mr. Taylor was recognized in 1983
by D Magazine as one of Dallas' ten most outstanding young business leaders.
Mr. Taylor is married and has five children.
38
<PAGE>
WILLIAM P. GLASS, age 39, has been Vice President of Marketing and a
director of the Administrator since its formation and Vice President and a
director of the Company and SAFH since the formation of such companies. Mr.
Glass is responsible for all marketing and investor relations activities for the
Company. Prior to February 6, 1998, Mr. Glass was Vice President and a director
of Sovereign Credit Corporation, which prior to such date conducted
substantially the same business as the Administrator is presently conducting.
He attended Baylor University, and was drafted by the Cincinnati Bengals of
the National Football League in 1980. Mr. Glass began his business career in
1981 with Hank Dickerson & Co. Realtors. In his position as a Sales Associate he
led the Office Division in sales for two of the three years he was employed with
Hank Dickerson & Co.
In 1983, Mr. Glass formed BGI Commercial Real Estate Inc., specializing in
commercial real estate brokerage and the syndication and real estate properties.
Mr. Glass was Venture Manager in over 30 general partnerships. In 1989, Mr.
Glass sold BGI Commercial Real Estate and joined Cornerstone Commercial Real
Estate, Ltd., as Senior Vice President. Cornerstone is a sister company to the
Trammel Crow Development Company. In April, 1990, Mr. Glass left Cornerstone and
became a Vice President of Sovereign Credit Corporation.
Mr. Glass is on the Executive Committee of the Board of Directors of his
father's prison ministry, the Bill Glass Evangelistic Association. He is former
board member of Young Life of Southwest Dallas County. He is a member of Hope
Community Church in Cedar Hill. He is a member of Oak Cliff Country Club in
Dallas. Mr. Glass resides in DeSoto, Texas, with his wife and three children.
The directors and executive officers of the Company have served in their
respective offices since the organization of the Company. All directors hold
office until the next annual meeting of stockholders or the election and
qualification of their successors. No director or executive officer of the
Company has received any compensation from the Company since its formation, nor
will they receive any compensation from the Company prior to satisfaction in
full of the Notes. See "Description of the Notes--The Contract Proceeds and
Operating Account". However, see "Certain Relationships and Related
Transactions" below for a description of certain transactions between the
Administrator and the Company from which such persons may indirectly benefit
through indirect ownership and/or compensation from the Administrator.
Except as stated above, there are no family relationships among the
directors and any of the executive officers of the Company. None of the
Company's directors holds any directorship in any company with a class of
securities registered pursuant to Section 12 of the Exchange Act or subject to
the requirements of Section 15(d) of the Exchange Act or any company registered
as an investment company under the Investment Company Act of 1940.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is a subsidiary of Sovereign Auto Finance Holdings, Inc.
("SAFH"). The Administrator is an affiliate of SAFH by virtue of common
ownership. Austin Taylor Family Limited Partnership owns 90%, and Forestberg
Partners, L.P. owns 10%, respectively, of both SAFH and the Administrator. The
general partner of Austin Taylor Family Limited Partnership is AST III Corp., of
which Mr. Taylor serves as the President and sole director, and the limited
partners primarily include Mr. Taylor and various trusts of which Diane D.
Taylor, the wife of Mr. Taylor, serves as trustee. The general partner of
Forestberg Partners, L.P. is beneficially owned by Mr. Glass.
All Contract purchasing and servicing on behalf of the Securitization
Subsidiaries is conducted by the Servicer, which is owned and managed separately
from the Company, the Administrator and SAFH. All administrative functions on
behalf of the Securitization Subsidiaries are conducted by the Administrator.
Management of the Servicer and the Administrator will devote as much of their
time to the business of the Company as in their judgment is reasonably required.
The Servicer and the Administrator may have
39
<PAGE>
conflicts of interest in allocating management time, services, overhead and
functions among the Company and the Securitization Subsidiaries. Management of
the Administrator and the Servicer intend to resolve any such conflicts in a
manner that is fair and equitable to the Company, but there can be no assurance
that any particular conflict may be resolved in a manner that does not adversely
affect Noteholders.
Under the terms of the Servicing Agreement, the Servicer will be paid the
Servicing Fees and a $125 per vehicle repossession fee, and will be entitled to
reimbursement for its expenses incurred in connection with the repossession and
resale of Financed Vehicles out of the proceeds from such resales. The Servicer
will retain the Purchase Administration Fee as compensation and reimbursement
for its services in administering the purchase of Contracts.
The Company will pay the Administrator a monthly fee (the "Investor
Administration Fee") equal to 1/12th of 0.5% of the aggregate outstanding
principal amount of the Notes, which fee shall reimburse the Administrator for
expenses incurred in the administration of Noteholder payments, communications
and relations for the Company.
The Servicer has in the past, and may in the future, purchase and service
motor vehicle retail sales installment contracts and obligations for itself, its
affiliates and the Securitization Subsidiaries and other unrelated parties. The
Company has the right to purchase additional Contracts through the Servicer from
the net collection proceeds on its existing Contracts except during the
continuance of an Event of Default. Management of the Servicer will have a
conflict of interest in determining whether to purchase any retail sales
installment contracts and notes on behalf of the Company or one or more other
parties for whom it purchases contracts and notes or to retain the contracts and
notes for its own benefit. The determination of which entity will purchase or
invest in a particular Contract package and what portion, if any, of such
Contract package will be purchased for such entity will be based upon the
respective periods of time the purchasing entities have been in existence, the
cost of the available Contract package, the amount of their unexpended funds and
the need to diversify their holdings. In such event, the Servicer intends to
exercise good faith and to deal fairly with the respective entities in deciding
which entity, if any, is to purchase or invest in a particular Contract package.
The Servicer will give priority to purchases on behalf of the Servicer or other
parties. The Company expects that the Servicer will not knowingly retain lower
risk contracts and notes for itself or its other customers and sell higher risk
contracts and notes to the Company.
The Contracts will be purchased primarily from Fiesta Motors ("Fiesta
Motors"), an automobile dealer which finances the sale of used automobiles and
light trucks. Fiesta Motors is owned by Fiesta Motors, LLC. Fiesta Motors, LLC,
a Texas limited liability company, was formed on February 2, 1995. Austin Taylor
Family Limited Partnership owns 90%, and Forestberg Partners, L.P. owns 10%,
respectively, of the membership interests, and thus voting rights, in Fiesta
Motors, LLC. The general partner of Austin Taylor Family Limited Partnership is
AST III Corp., of which Mr. Taylor serves as the President and sole director,
and the limited partners primarily include Mr. Taylor and various trusts of
which Diane D. Taylor, the wife of Mr. Taylor serves as trustee. The general
partner of Forestberg Partners, L.P. is beneficially owned by Mr. Glass. Mr.
Taylor serves as the sole manager of Fiesta Motors, LLC. The officers of Fiesta
Motors, LLC are Diane D. Taylor, President; and A. Starke Taylor, III, Chairman.
Contracts may also be purchased from unaffiliated Dealers. The economic
incentive motivating any Dealer, including Fiesta Motors, to sell Contracts to
the Company is maximization of return to the Dealer. Although the Dealer may
make less profit on the sale of an automobile by selling the related Contract,
the Dealer can purchase and sell more automobiles and increase net profit
through increased inventory turnover because the cost of the automobile to the
Dealer is recouped immediately upon sale of the Contract and the Dealer does not
have to wait for future installment payments on the Contract.
The Company may purchase Contracts from the Servicer or the Securitization
Subsidiaries, but only if such Contracts are not in default and satisfied the
purchasing criteria established in the Indenture and the Servicing Agreement at
the time of their purchase from the originating Dealer. Any qualifying Contracts
40
<PAGE>
will be sold by the Servicer or the Securitization Subsidiaries to the Company
at a price for each Contract equal to the Purchase Administration Fee paid by
the original purchaser plus an amount determined to provide the Company an
internal rate of return on its investment in the Contract from the remaining
unpaid installments equal to the original purchaser's initial internal rate of
return on its investment in the Contract, as of its purchase from the Dealer,
assuming in both cases that the Contract was paid in full in accordance with its
scheduled installments. Such seller will retain any installments received by it
prior to the purchase by the Company and any profits resulting from the
difference between such installments and the reduction in the purchase price
paid to such seller by the Company from the price paid by such seller to the
Dealer.
Affiliates of the Administrator provide floor plan or similar financing for
various automobile dealers, including Fiesta Motors. "Floor plan financing"
refers to assistance provided to dealers in financing their purchases of
inventories of automobiles held for sale to customers. The Company may purchase
Contracts from time to time from such dealers.
In addition, Reliance Service Corporation, ("Reliance"), which is owned by
A. Starke Taylor, III, offers and sells mechanical service agreements to
purchasers of automobiles from Fiesta Motors. These agreements are sold to
Obligors, at their option, and are usually financed through their Contracts. The
agreements are sold for an average of $750, with the amount actually being
remitted to Reliance being based upon the discount the Company pays for the
Contract. Reliance then remits all but $250 to Fiesta Motors as a commission.
The Company will use up to 2% of the gross proceeds from the sale of the
Notes to pay offering and organizational expenses. The Administrator has agreed
to pay any such expenses to the extent they exceed 2% of the gross proceeds from
the sale of the Notes. The Company will also pay to the Administrator a fee
equal to 5.5% of the gross proceeds from the sale of the Notes (5.0% of the
gross proceeds in excess of $9,000,000) for administering and managing the
ongoing operations of the Company.
Sales of repossessed Financed Vehicles through retail networks may be
conducted by placing the vehicle on the Dealer's lot for sale, or on a lot owned
by Fiesta Motors. In either case, the Company will pay all expenses associated
with the resale of the repossessed Financed Vehicles. In the case of resales
from a lot owned by Fiesta Motors, such expenses will include an allocable
portion of the costs of operating the lot based upon the number of cars sold,
which will include expenses for salaries for person who are also principals of
the Administrator, and repair costs to place the cars in saleable condition
charged at 20% mark-up for parts and $30 per hour for labor. Such expenses will
generally be comparable in amount to that which would be charged to the Company
for resales through unaffiliated lots owned by franchised dealerships providing
comparable services.
By way of example, the Servicer would earn the following compensation with
respect to a Contract assuming (i) the total amount of installments due under
the Contract as of the date of purchase by the Company are equal to $21,486;
(ii) the total amount of principal due under the Contract as of the date of
purchase is equal to $14,566; (iii) the Contract is for a term of 46 months;
(iv) the Contract is outstanding throughout its term; (v) the related Financed
Vehicle is not in repossession; (vi) the Contract was purchased for a price of
$12,090 (83% of principal); (vii) the Contract is purchased from Fiesta Motors;
(viii) the net proceeds from the sale of the Notes are used to purchase the
Contract rather than the collection proceeds from another Contract or the
proceeds of Additional Borrowing; and (ix) such Notes are outstanding for 48
months: the Contract Servicing Fee would be a total of $920 (46 x $20) over the
life of the Contract, together with all late fees; and the Purchase
Administration Fee would be $500. In addition, the Servicer would receive a fee
of $125 in the event the related Financed Vehicle is ever assigned for
repossession, in which event the Contract Servicing Fee would then cease
accruing. In addition, the Administrator would earn the following compensation:
the Administration Fee of up to $820 (5.5% x principal amount of Notes needed to
purchase Contract (($12,090 + $500) divided by 84.5%)) payable out of the
proceeds of the sale of the Notes (less certain expenses incurred or to be
incurred by the
41
<PAGE>
Administrator. In this regard, the Administrator has agreed to pay all general
and administrative overhead expenses incurred by the Company, other than Allowed
Expenses, and pay offering and organization expenses of the Company (other than
commissions to broker-dealers) to the extent such expenses exceed 2% of the
gross proceeds from the sale of the Notes); and the Investor Administration Fee
would be a total of $298 ( 1/12 x 0.5% x 48 x $14,899 (($12,090 + $500) divided
by 84.5%)) over the life of the Contract. In addition, since the Contract would
be purchased from Fiesta Motors, Fiesta Motors would likely receive a benefit
from the sale of the Contract to the Company equal to its profit on the sale.
The terms of the foregoing arrangements between the Company on the one hand
and the Administrator or Fiesta Motors on the other were not negotiated at arm's
length but were determined unilaterally by the management of the Administrator
and Fiesta Motors.
The Company's Board of Directors has adopted a resolution to the effect that
all transactions with officers, directors and affiliates must be on terms which
would be reasonable and appropriate with unaffiliated parties.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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 to purchase the
initial Contracts. See "Use of Proceeds". While the Notes remain outstanding,
the Company will be prohibited from engaging in any business other than the
purchase, collection and servicing of the Contracts (including repossession and
resale of the vehicle collateral) and from incurring any additional indebtedness
other than the Additional Borrowing, if any, Allowed Expenses and any other
amounts incurred in the ordinary course of its business.
The Company's use of the net collection proceeds from the Contracts will be
restricted to payments on the Notes and the Additional Borrowing, if any, and,
so long as there is no Event of Default, to payments of Allowed Expenses and to
purchase of additional eligible Contracts. See "Description of the Notes--The
Contract Proceeds and Operating Account".
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary sources of funds for repayment of the Notes will be
proceeds from the Contracts, any income on the reinvestment of such proceeds and
any proceeds from sale or refinancing of the remaining Contracts at the maturity
of the Notes. The Company does not have, nor is it expected to have in the
future, any significant source of capital for payment of the Notes and the
expenses incurred by it other than such sources. Payment of the principal or
interest on the Notes is not guaranteed by any other person or entity. See "Risk
Factors--Limited Assets; Single Purpose Nature". Although 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 and
to repay the principal amount of the Notes in full prior to or at maturity,
there can be no assurance that such sources will be sufficient to repay the
Notes in full. See "Risk Factors--Nature of Contracts", "--Defaults on Contracts
and Repossessions" and
"--Possible Insufficient Amount in the Trust Account".
The Company anticipates that a portion of the Contracts will become
delinquent and require repossession and resale of the related vehicle. Based on
the experience of the Servicer and its employees with respect to similar
contracts, the Company and the Servicer expect that (i) the Company's portfolio
of Contracts will experience a repossession rate, over the life of the
portfolio, in the range of 25% to 35% of such Contracts and (ii) aggregate gross
collections from all Contracts will be in the range of approximately 75% to 85%
of the original total future installments for the Contracts at the time of their
purchase, including sales proceeds from repossessed vehicles, but without taking
into account costs associated with the resale of such repossessed vehicles.
However, there can be no assurance that these expectations will in
42
<PAGE>
fact be met, since actual repossession rates and collection rates on the
Contracts are impossible to predict precisely.
If an Obligor defaults under a Contract, and the Servicer must repossess and
liquidate the Financed Vehicle to recover installments due thereon and costs
associated with the repossession and resale, certain factors may limit the
ability of the Company to realize net proceeds sufficient to recover the cost of
the Contract. These factors include, without limitation, the value of the
repossessed Financed Vehicles, the costs of seeking and collecting a deficiency
judgment and limitations imposed by bankruptcy laws or other Federal or state
laws. In general, the Servicer is required to commence repossession of a
Financed Vehicle if the Obligor is delinquent on at least two monthly
installments and has made no payments for a period of 45 days. Nevertheless, the
Servicer may grant extensions or modifications to Obligors or accept partial
payments from Obligors in lieu of commencement or repossession activities. If a
substantial number of such Obligors make no further payments on their Contracts,
the delay in the repossession of the Financed Vehicles could result in a
decrease in repossession proceeds received by the Company.
The actual collection rates on the Contracts are impossible to predict
precisely and adverse changes in collectibility rates caused by changes in
economic conditions, including particularly in the Company's primary markets, or
other factors beyond the Company's control could adversely affect the Company's
ability to collect on the Contracts. If the Contracts do not collectively
perform as expected by the Company, which expectations are based on the
historical performance of similar contracts purchased and serviced by the
Servicer, the Company's ability to make the required payments on the Notes could
be adversely affected.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
SECURITY INTERESTS IN FINANCED VEHICLES
Under the UCC as adopted in most states, retail installment sale contracts
and notes such as the 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 the
vehicle is located. In most states, a security interest in a motor vehicle is
perfected by notation of the secured party's lien on the vehicle's certificate
of title.
Upon the purchase of the Contracts, pursuant to the Servicing Agreement, the
originating Dealers will assign the 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 certificates 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. The Servicer
will deliver possession of the Contracts and related title documents to the
Company or, in the event there is an Additional Lender, then to the Additional
Lender or other financial institution appointed by the Company and the
Additional Lender to act as custodian and bailee for the Additional Lender and
the Company. For any Contracts (and the security interest arising thereunder in
the Financed Vehicles) purchased by the Company from the Servicer. The Servicer
will assign the Contracts to the Company and will amend any certificates of
title showing the Servicer as lienholder to identify the Company as the new
lienholder.
Under the laws of most states, liens for repairs performed on a motor
vehicle and liens for certain unpaid taxes take priority over even a perfected
security interest in a vehicle. The Internal Revenue Code of 1986 also grants
priority to certain federal tax liens over the lien of a secured party. Certain
state and federal laws permit the confiscation of motor 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 motor vehicle.
Upon the purchase of each Contract by the Company, the selling Dealer will
warrant that the Contract creates a valid, subsisting and enforceable first
priority security interest in the Financed
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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 a Contract. In
addition, Fiesta Motors or any other Dealer which refurbishes repossessed
Financed Vehicles for resale will have a lien for repair expenses it may incur
in order to put repossessed Financed Vehicles into marketable condition. No
notice will be given to the Company in the event any such lien arises or
confiscation occurs.
If the owner of a Financed Vehicle relocates to another state, under the
laws of most states the perfected security interest in the Financed Vehicle
would continue for four months after such relocation and thereafter, in most
instances, until the owner re-registers the Financed Vehicle in such state.
Almost all states generally require surrender of a certificate of title to
re-register a titled vehicle. 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 errors or fraud, notice of surrender of the
certificate of title because the Company will be listed as 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 motor
vehicle, re-registration could defeat perfection. In the ordinary course of
servicing the Contracts, the Servicer takes steps to effect such re-perfection
upon receipt of notice of re-registration or other information from the Obligor
as to relocation. Similarly, when an Obligor under a 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 Contact before release of the lien. See "Transfers of Vehicles" below.
Under the Servicing Agreement and the Indenture, the Servicer is obligated to
maintain the continuous perfection of the security interest represented by each
Contract in the related Financed Vehicle.
REPOSSESSION
In the event of default by an Obligor on a Contract, the holder of the
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 Obligor under a
Contract voluntarily surrenders a vehicle, self-help repossession, by an
individual independent repossession specialist engaged by the Servicer, is the
method usually employed by the Servicer when an Obligor defaults. Self-help
repossession is accomplished by retaking possession of the Financed Vehicle. If
a breach of the peace is likely to occur, or if applicable state law so
requires, the Servicer must obtain a court order from the appropriate state
court and repossess the vehicle in accordance with that order.
Pursuant to the Agreement, the Company will pay the Servicer a fee equal to
$125 for each repossession of a Financed Vehicle. Repossessed vehicles are
generally resold by the Servicer through retail automobile networks. Such
resales may also be conducted by utilizing wholesale automobile networks, or
auctions which are attended principally by dealers. In many cases, when a
repossessed Financed Vehicle is sold from a Dealer's lot, the balance due under
the related Contract is not repaid in cash but is replaced with a new Contract
executed by the purchaser of the Financed Vehicle.
Sales of repossessed Financed Vehicles through retail networks may be
conducted by placing the vehicle on the Dealer's lot for sale, or on a lot owned
by Fiesta Motors. In either case, the Company will pay all expenses associated
with the resale of the repossessed Financed Vehicles. In the case of resales
from a lot owned by Fiesta Motors, such expenses will include an allocable
portion of the costs of operating the lot, although such expenses will generally
be comparable in amount to that which would be charged to the Company for
resales through unaffiliated lots.
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NOTICE OF SALE; REDEMPTION RIGHTS
In the event of default by the Obligor, some jurisdictions require that the
Obligor be notified of the default and be given a time period within which the
Obligor 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 Obligor 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 Obligor waives his rights after default, the Obligor has
the right to redeem the collateral prior to actual sale by paying the secured
party the unpaid installments (less any required discount for prepayment) of the
Contract plus reasonable expenses for repossessing, holding, and preparing the
collateral for disposition and arranging for its sale, plus in some
jurisdictions, reasonable attorneys' fees, or, in some states, by payment of
delinquent installments.
DEFICIENCY JUDGMENTS AND EXCESS PROCEEDS
Fiesta Motors or any other Dealer that resells a repossessed Financed
Vehicle generally will apply the proceeds of resale of the repossessed vehicles
first to reimburse itself for its expenses of resale and repossession, together
with any expenses incurred for repairs, if necessary, to put the vehicle into
marketable condition and any commissions paid to Dealers for the resale of the
vehicle, and then to the satisfaction of the obligations of the Obligor on the
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
Contract obligations, most states allow a deficiency judgment to be sought. A
deficiency judgment is a personal judgment against the Obligor for the
difference between the amount of the obligations of the Obligor under the
Contract and the net proceeds from resale of the collateral. A defaulting
Obligor on a Contract typically lacks capital or income following the
repossession of the Obligor's Financed Vehicle. Therefore, the Servicer may
determine in its discretion that pursuit of 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.
Certain statutory provisions, including federal and state bankruptcy and
insolvency laws, may limit or delay the ability of the Servicer to repossess and
resell the Financed Vehicles or enforce a deficiency judgment. 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,
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 vehicle and payment of all expenses and
obligations, there is a surplus of funds. In that case, the UCC requires the
secured party to remit the surplus to the former Obligor.
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related regulations
impose substantial requirements upon lenders and servicers involved in consumer
finance. These laws include, but are not limited to, the Truth-in-Lending Act,
the Equal Credit Opportunity Act, the Federal Trade Commission Act, the Fair
Credit Billing Act, the Fair Credit Reporting Act, the Fair Debt Collection
Practices Act, the Magnuson-Moss Warranty Act, the Federal Reserve Board's
Regulations B and Z, state adaptations of the National Consumer Act and of the
Uniform Consumer Credit Code, state motor vehicle retail installment sales acts,
retail installment sales acts, and other similar laws. Also, state laws impose
finance charge ceilings and other restrictions on consumer transactions and
require contract disclosures in addition to those required under federal law.
These requirements impose specific statutory liabilities upon creditors who fail
to comply with their provisions. In some cases, this liability could affect an
assignee's ability to enforce consumer finance contracts such as the Contracts.
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The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC Rule"), the provisions of which are generally duplicated by the
Uniform Consumer Credit Code, other state statutes, or the common law in certain
states, is intended to defeat the ability of the transferor of a consumer credit
contract (such as the Contracts), which transferor is the seller of the goods
that gave rise to the transaction, to transfer such contract free of notice of
claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the Obligor under
the contract could assert against the seller of the goods. Most of the Contracts
will be subject to the requirements of the FTC Rule. Accordingly, the Company,
as holder of the Contracts, may be subject to any claims or defenses that the
purchaser of the Financed Vehicle may assert against the seller of the Financed
Vehicle. Such claims are limited to a maximum liability equal to the amounts
paid by the Obligor on the Contract. The Obligor, however, may also assert the
rule to offset remaining amounts due on the Contract as a defense against any
claim brought by the Company against such Obligor.
Under most state motor vehicle dealer licensing laws, sellers of motor
vehicles are required to be licensed to sell motor vehicles at retail sale.
Furthermore, federal odometer regulations promulgated under the Motor Vehicle
Information and Cost Savings Act require that all sellers of new and used
vehicles furnish a written statement signed by the seller certifying the
accuracy of the odometer reading. If a seller is not properly licensed or if an
odometer disclosure statement was not provided to the purchaser of a Financed
Vehicle, the Obligor may be able to assert a defense against the seller of the
vehicle.
Courts have imposed general equitable principles on secured parties pursuing
repossession of collateral or litigation involving deficiency balances. These
equitable principles may have the effect of relieving an Obligor from some or
all of the legal consequences of a default.
In several cases, obligors have asserted that the self-help remedies of
secured parties under the UCC and related laws violate the due process
protection provided under the 14th Amendment to the Constitution of the United
States. Courts have generally upheld the notice provisions of the UCC and
related laws as reasonable or have found that the repossession and resale by the
creditors do not involve sufficient state action to afford constitutional
protection to consumers.
The selling Dealers will warrant that each Contract, at the time of its
purchase by the Company, complies with all requirements of law in all material
respects. Accordingly, if an Obligor has a claim or defense against the Company
for violation of any law and such claim or defense materially and adversely
affects the Company's interest in a Contract, such violation would constitute a
breach of warranty under the purchase agreements and would create an obligation
of the Dealer to repurchase or replace the Contract unless the breach is cured.
OTHER LIMITATIONS
In addition to the laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including federal bankruptcy laws and
related state laws, may interfere with or affect the ability of a secured party
to realize upon collateral or enforce a deficiency judgment. For example, in a
Chapter 13 proceeding under the federal bankruptcy law, a court may prevent a
lender from repossessing a motor vehicle, and, as part of the rehabilitation
plan, reduce the amount of the secured indebtedness to the market value of the
motor vehicle at the time of bankruptcy (as determined by the court), leaving
the party providing financing a general unsecured creditor for the remainder of
the indebtedness. A bankruptcy court may also reduce the monthly payments due
under a Contract or change the rate of interest and time of repayment of the
indebtedness.
TRANSFERS OF VEHICLES
The terms of each Contract prohibit the sale or transfer of the Financed
Vehicle securing the Contract without the secured party's consent and allow for
the acceleration of the maturity of the Contract upon a sale or transfer without
its consent. In most circumstances, the Servicer will not consent to a sale or
transfer of a Financed Vehicle by an Obligor unless the Obligor prepays the
Contract. Because the transfer
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may be sought by the Obligor as a result of Obligor's inability to make the
scheduled payments, such failure to consent may result in a default by the
Obligor and force the Servicer to initiate default procedures.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
SCOPE AND LIMITATIONS
The following discussion is a general summary of the federal income tax
matters of general application relating to an investment in the Notes. Frederick
C. Summers, III, a Professional Corporation, has delivered its opinion to the
Company as to all material tax consequences of an investment in the Notes. These
material tax consequences are as follows:
(i) The Notes will be taxable obligations under the Internal Revenue Code of
1986 as amended (the "Code"), and interest paid or accrued will be taxable to
non-exempt holders of the Notes.
(ii) Interest on the Notes will be excluded from the definition of unrelated
business taxable income.
There can be no assurance that the Internal Revenue Service (the "Service")
will take a similar view as to any of the tax consequences described below. The
discussion is based upon current provisions of the Code, existing Treasury
regulations promulgated thereunder and administrative and judicial
interpretations thereof, all of which are subject to change.
The discussion does not purport to describe all aspects of federal income
taxation that may be relevant to an investor in the Notes in light of the
investor's particular tax status and other income, deductions and credits and
does not discuss any state, local or foreign tax matters. Moreover, certain
investors (including insurance companies and foreign persons) may be subject to
special rules not discussed below. EACH POTENTIAL INVESTOR IN THE NOTES SHOULD
CONSULT THE INVESTOR'S OWN TAX ADVISOR AS TO THE PARTICULAR CONSEQUENCES OF AN
INVESTMENT IN THE NOTES.
STATED INTEREST
A Noteholder must report stated interest earned on a Note as ordinary income
in accordance with such Noteholder's method of tax accounting. Noteholders
reporting their income on a cash basis must include such interest in their gross
income in the taxable year in which it is received, either actually or
constructively, whereas accrual basis Noteholders must include such interest in
their gross income in the taxable year in which it is earned.
PURCHASE OF NOTES BY EXEMPT PLANS AND OTHER EXEMPT ORGANIZATIONS
Generally, organizations described in Section 401(a) of the Code (trusts
forming part of a stock bonus, pension or profit sharing plan) and Section
501(c) of the Code, individual retirement accounts and individual retirement
trusts are exempt from federal income tax (collectively, "Exempt
Organizations"). However, this exemption does not apply where "unrelated
business taxable income" is derived by the Exempt Organizations from the conduct
of any trade or business which is not substantially related to the exempt
function of the entity. If an Exempt Organization receives unrelated business
taxable income, the Exempt Organization will be subject to a tax imposed by
Section 511 of the Code as well as alternative minimum tax on the unrelated
business taxable income portion of its income.
Generally, interest, dividends, royalties and certain other income are
excluded from the definition of unrelated business taxable income ("Excluded
Income"). Thus, generally, an Exempt Organization which invests in the Notes
will not be taxed on amounts received as interest or prepayment of principal as
a result of its investment.
However, if Excluded Income constitutes "unrelated debt-financed income"
then such income would not be excluded from the computation of unrelated
business taxable income. For this purpose, a percentage of the gross income
attributable to property with "acquisition indebtedness" will be treated as
unrelated business taxable income, generally, in proportion to the ratio of such
indebtedness to the basis of
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the property. Generally, "acquisition indebtedness" is indebtedness incurred to
acquire property. Therefore, if an Exempt Organization borrows funds to acquire
or hold the Notes, the interest received on such Notes may be reclassified as
unrelated business taxable income. However, as described above, if an Exempt
Organization does not borrow money to acquire or hold the Notes, it should not
realize unrelated business taxable income by virtue of its investment in the
Notes.
This summary does not address any rules or regulations enacted or
promulgated by the Department of Labor under "ERISA". Any investor subject to
ERISA or Department of Labor regulations relating to benefit plans should make
certain that it is eligible to purchase the Notes.
PLAN OF DISTRIBUTION
The Company is offering up to $10,000,000 in aggregate principal amount of
the Notes. The Notes are being offered by participating broker-dealers which are
members of the National Association of Securities Dealers, Inc. ("NASD"). Under
selling agreements with the Company, such broker-dealers will solicit
subscriptions for the Notes on a "best efforts" basis, meaning that they will
make no legal commitment to sell to investors, or to buy as dealer, any specific
amount of the Notes. The Company will pay to each soliciting broker-dealer, in
consideration for its services, a sales commission of 8% of the principal amount
of all Notes sold through their efforts. Of that amount, a portion may
constitute an unallocated due diligence and marketing fee. The Company will
indemnify the broker-dealers against certain liabilities, including liabilities
under applicable securities laws. As of the date of this Prospectus, the Company
has not identified any broker/dealers who have agreed to participate in this
offering of the Notes.
Investor funds will be held in a subscription escrow account with Overton
Bank and Trust, N.A., as escrow agent, until a minimum of $500,000 in principal
amount of the Notes are sold. In the event that the minimum amount of Notes is
not subscribed for before April 30, 1998 (or any earlier termination of the
offering ), the offering will be terminated and the escrowed funds, plus any
interest thereon, will be promptly returned to the subscribing investors by the
escrow agent. Upon the subscription of the minimum amount of Notes, the escrowed
funds will be released to the Company. Interest on the Notes will not accrue
until the excrowed funds are released to the Company. Any subsequent sales
proceeds from the sale of additional Notes will be immediately available for use
by the Company to purchase additional Contracts. All subscriptions are subject
to the right of the Company to reject any subscription in whole or in part.
Subscribers must represent that the amount of their investment does not
exceed 10% of their net worth, such net worth to be determined exclusive of the
subscriber's principal residence and its furnishings and personal use
automobiles. Additional minimum suitability requirements have been established
for residents of certain states. Indiana, Missouri, New Mexico, South Dakota,
Texas, Virginia and Wisconsin subscribers must further represent that they have
either (a) an annual gross income of at least $45,000 and a net worth of at
least $45,000 exclusive of the subscriber's principal residence and its
furnishings and personal use automobiles; or (b) a net worth of at least
$150,000, exclusive of the subscriber's principal residence and its furnishings
and personal use automobiles. California, Iowa, Kansas and Michigan subscribers
must further represent that they have either (a) an annual gross income of at
least $60,000 and a net worth of at least $60,000 exclusive of the subscriber's
principal residence and its furnishings and personal use automobiles; or (b) a
net worth of at least $225,000, exclusive of the subscriber's principal
residence and its furnishings and personal use automobiles. In the case of sales
to a subscriber which is a fiduciary account, the foregoing standards must be
met by the beneficiary, the fiduciary account, or by the donor or grantor who
directly or indirectly supplies the funds to purchase the securities if the
donor or grantor is the fiduciary.
The offering will terminate on January 31, 1999, unless sooner terminated by
the Company upon the failure to achieve the minimum subscription amount, upon
the sale of all of the Notes or if the Company believes that suitable Contracts
will not be available for purchase by the Company or that additional selling
efforts will be unsuccessful. Early termination of the offering may result in
the Company selling less than
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$20 million in aggregate principal amount of the Notes and may expose prior
purchasers of Notes to certain risks. See "Risk Factors--Sale of Small Amount of
Notes".
The Company intends to accept in the order received properly completed
subscriptions and payments for subscription amounts from qualified investors
meeting the applicable suitability standards. The Company may elect to treat as
accepted subscriptions from certain otherwise qualified investors (for example,
IRA's) whose subscription funds are being paid by a trustee or other institution
which has confirmed to the Company that the funds will be paid. Upon achievement
of the maximum subscription amount ($10,000,000) for the Notes, any subsequently
received subscription will not be accepted by the Company and will be promptly
returned.
COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Section 7(b) of the form of broker-dealer selling agreement to be used by
the Company provides generally that each broker-dealer will indemnify and hold
harmless the Company and its control persons against any loses, liabilities,
claims, damages or expenses they may become subject, under the Securities Act of
1933 (the "Act"), the Securities Exchange Act of 1934 or otherwise, insofar as
such losses, liabilities, claims, damages or expenses (or actions in respect
thereof) arise out of or are based upon untrue statements of material facts in
connection with the public offering of the Notes or the omission to state a
material fact in connection with the public offering of the Notes. Article XI of
the Articles of Incorporation of the Company provides generally that no director
shall be liable to the Company or its shareholders for monetary damages for an
act or omission in such director's capacity as a director. Article VII of the
By-Laws of the Company and Section 2.02-1 of the Texas Business Corporation Act
provide generally that the Company will indemnify each director and officer in
connection with any legal proceeding in which he is a respondent or defendant by
reason of his serving or having served in such capacity.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Company of expenses incurred or paid by a director,
officer or controlling person of the Company in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
EXPERTS
The financial statements of the Company included in this Prospectus have
been audited by Belew Averitt LLP, independent certified public accountants,
whose report thereon appears elsewhere herein, and have been so included in
reliance upon the report and authority of such firm as experts in auditing and
accounting.
LEGAL MATTERS
Certain matters with respect to the validity of the Notes have been passed
upon for the Company by Frederick C. Summers, III, a Professional Corporation,
Dallas, Texas. Frederick C. Summers, III, a Professional Corporation, has also
delivered its opinion to the Company as to the federal income tax matters
discussed under "Certain Federal Income Tax Considerations".
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DEFINITIONS
ADDITIONAL LENDER. Any additional lending source from which the Company
borrows funds in order to purchase additional Contracts, which may be senior to
the Notes and which may be a bank or an institutional lender.
ADDITIONAL BORROWING. Funds borrowed from an Additional Lender in order to
purchase additional Contracts.
ADMINISTRATION FEE. A fee equal to 5.5% of the gross proceeds from the sale
of the Notes (5.0% of the gross proceeds in excess of $9,000,000) which the
Company will pay to the Administrator for agreeing to (i) administer and manage
the ongoing operations of the Company, (ii) pay all general and administrative
overhead expenses incurred by the Company, other than Allowed Expenses, and
(iii) pay offering and organization expenses of the Company (other than
commissions to broker-dealers) to the extent such expenses exceed 2% of the
gross proceeds from the sale of the Notes.
ADMINISTRATOR. Sovereign Auto Finance, Inc., a Texas corporation and an
affiliate of SAFH by virtue of common ownership, which will administer and
manage the ongoing operations of the Company.
ALLOWED EXPENSES. The expenses and fees of the Trustee under the Indenture,
fees charged by the Servicer under the Servicing Agreement (including the
Contract Servicing Fee, the Purchase Administration Fee and all repossession
fees), the Investor Administration Fee charged by the Administrator, title
transfer fees, federal, state and local taxes (including corporate franchise
taxes and any payment to any of the Company's affiliates as reimbursements for
tax payments made by such affiliate on the Company's behalf or benefits accruing
from tax losses of such affiliate that are used to offset the taxable income of
the Company), legal and accounting fees and printing expenses (excluding
offering and organization expenses, but including those otherwise incurred to
comply with reporting and other requirements under Federal and state securities
laws and for reports, compliance certificates and opinions required by the
Indenture), premiums for vehicle value, vendor single interest (VSI), auto loan
default, gap or other insurance, charges for vehicle warranty service contracts
(including fees paid to Dealers), bank service charges and account fees
(including such charges and fees incurred for the subscription escrow account
established for the receipt of the proceeds from the offering and sale of the
Notes, and for the Collections Account), expenses of repossessing, repairing and
liquidating motor vehicle collateral (as to each vehicle, not to exceed the
liquidation proceeds from the vehicle), and any insurance proceeds applied to
vehicle repairs or required to be refunded to Obligers.
COLLECTIONS ACCOUNT. A bank account maintained by the Servicer in the
Company's name for the deposit of Contract payments and collections.
COMPANY. Sovereign Credit Finance II, Inc., a Texas corporation.
CONTRACTS. Retail installment sales contracts and notes secured by the
Financed Vehicles to be purchased by the Company at a discount.
CONTRACT SERVICING FEE. A servicing fee of $20 per month per outstanding
Contract that is not assigned for repossession and a fee of $125 for each
Financed Vehicle assigned for repossession, together with all late fees, which
the Company will pay to the Servicer for its services with regards to the
collection of the Contracts.
DEALERS. The used automobile dealers which will originate the Contracts.
EVENT OF DEFAULT. An event of default with respect to the Notes, defined in
the Indenture as: (a) a failure by the Company to make any interest payment on
the Notes within 30 days after it becomes due; (b) a failure by the Company to
make any principal payment on the Notes at maturity or otherwise within 30 days
after it becomes due; (c) the impairment of the validity or effectiveness of the
Indenture, the
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improper amendment or termination of the Indenture, or the failure of the
Company to comply with any of the covenants of the Company in the Indenture, and
the continuance of any such default for a period of 30 days after notice to the
Company by the Trustee or to the Company and the Trustee by the registered
holders of Notes representing at least 25% of the aggregate principal amount of
the outstanding Notes; (d) the incorrectness in any material respect of a
representation or warranty of the Company in the Indenture (exclusive of
representations and warranties as to individual Contracts that the Servicer is
obligated to, and does, repurchase from the Company) and the failure to cure
such circumstances or condition within 30 days of notice thereof to the Company
by the Trustee or the registered holders of Notes representing at least 25% of
the aggregate principal amount of the outstanding Notes; or (e) certain events
of bankruptcy of the Company.
FIESTA MOTORS. A Dealer owned and operated by Fiesta Motors, LLC, a Texas
limited liability company and an affiliate of SAFH by virtue of common
ownership, from which the Company anticipates that it will purchase most of its
Contracts.
FINANCED VEHICLES. The used automobiles and light trucks which secure the
Contracts.
INDENTURE. The trust indenture agreement dated as of March 3, 1998 between
the Company and Sterling Trust Company, as trustee pursuant to which the Notes
will be issued.
INVESTOR ADMINISTRATION FEE. A monthly fee equal to 1/12 of 0.5% of the
outstanding principal amount of the Notes, payable on or before the 15th day of
each month, which the Company will pay to the Administrator for its services in
administering Noteholder payments, communications and relations.
MATURITY DATE. February 15, 2002, the date the Notes will mature.
NOTES. 11% Notes due February 15, 2002 to be issued subject to the terms of
the Indenture.
OBLIGORS. The obligors on the Contracts.
OPERATING ACCOUNT. A commercial bank account maintained by the Company into
which the Servicer will cause to be transferred, on a regular basis, all amounts
in the Collections Account, if the Operating Account is a separate account from
the Collections Account.
PAYMENT DATE. The 15th day of each month during the term of each Note.
PURCHASE ADMINISTRATION FEE. A fee per purchased Contract equal to the
lesser of $500, or 5% of the total amount of installments due under the Contract
as of the date of purchase which the Company will pay to the Servicer for its
purchase administration services.
RECORD DATE. The close of business on the first day of the month of any
Payment Date, on which date the registered Noteholders will be determined for
purposes of payment of principal and interest on such Payment Date.
SERVICER. Sovereign Associates, Inc., a Texas corporation, with which the
Company has contracted with to provide necessary purchasing and collecting
services.
SAFH. Sovereign Auto Finance Holdings, Inc., a Texas corporation and the
parent of the Company.
SECURITIZATION SUBSIDIARIES. A number of affiliated entities which have
issued notes to investors and used the net proceeds thereof to purchase consumer
contracts and notes created by the retail sale and financing of used automobiles
and light trucks for which the Servicer provides purchasing and collecting
services.
SERVICING FEES. The Contract Servicing Fee, the Purchase Administration Fee
and all repossession fees.
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SERVICING AGREEMENT. The Master Contract Purchase Agreement and the
Servicing Agreement between the Company and the Servicer, each dated as of March
3, 1998, pursuant to which the Contracts will be purchased and serviced on
behalf of the Company by the Servicer.
TRUST ACCOUNT. The trust account established in the name of the Trustee to
which the Company is required to transfer, on or prior to the business day
immediately preceding each Payment Date, any amounts necessary for payment of
interest and principal owing on the Notes on such Payment Date.
TRUSTEE. Sterling Trust Company, the trustee under the Indenture.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
December 31, 1997
Balance Sheet of the Company as of December 31, 1997 (unaudited)........................................... F-2
Statement of Operations for the Period from October 9, 1997 (inception) to December 31, 1997 (unaudited)... F-3
Statement of Cash Flows for the Period from October 9, 1997 (inception) to December 31, 1997 (unaudited)... F-4
Statement of Stockholders' Equity for the Period from October 9, 1997 (inception) to December 31, 1997
(unaudited).............................................................................................. F-5
Notes to Financial Statements.............................................................................. F-6
October 9, 1997
Independent Auditor's Report............................................................................... F-8
Balance Sheet of the Company as of October 9, 1997......................................................... F-9
Notes to Financial Statement............................................................................... F-10
</TABLE>
F-1
<PAGE>
SOVEREIGN CREDIT FINANCE II, INC.
BALANCE SHEET
(UNAUDITED)
DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash and cash equivalents......................................................... $ 980
---------
---------
LIABILITIES AND STOCKHOLDER'S EQUITY
STOCKHOLDER'S EQUITY
Common stock, $.01 par value, 50,000 shares authorized, 1,000 shares issued and
outstanding..................................................................... $ 10
Additional paid-in capital........................................................ 990
Deficit........................................................................... (20)
---------
$ 980
---------
---------
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
SOVEREIGN CREDIT FINANCE II, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE PERIOD FROM OCTOBER 9, 1997 (INCEPTION) TO DECEMBER 31, 1997
<TABLE>
<S> <C>
REVENUE...................................................................... $ --
EXPENSES
Service Charges............................................................ 20
NET LOSS..................................................................... $ (20)
---------
---------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
SOVEREIGN CREDIT FINANCE II, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE PERIOD FROM OCTOBER 9, 1997 (INCEPTION) TO DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................................. $ (20)
---------
Net decrease in cash.................................................... (20)
Cash at beginning of period............................................. 1,000
---------
Cash at end of period................................................... $ 980
---------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest.................................................................. $ --
---------
Taxes..................................................................... $ --
---------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
SOVEREIGN CREDIT FINANCE II, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE PERIOD FROM OCTOBER 9, 1997 (INCEPTION) TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
ADDITIONAL
COMMON COMMON PAID-IN
SHARES STOCK CAPITAL DEFICIT TOTAL
----------- ------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at October 9, 1997.................................. 1,000 $ 10 $ 990 $ -- $ 1,000
Net loss.................................................... -- -- -- (20) (20)
----- --- ----- --- ---------
Balance at December 31, 1997................................ 1,000 $ 10 $ 990 $ (20) $ 980
----- --- ----- --- ---------
----- --- ----- --- ---------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
SOVEREIGN CREDIT FINANCE II, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Sovereign Credit Finance II, Inc. (Company) was incorporated in Texas on
October 9, 1997. The Company is a subsidiary of Sovereign Auto Finance Holdings,
Inc. (Parent) and was formed for the purpose of purchasing, collecting and
servicing retail installment sales, lease contracts and notes secured by motor
vehicles (Contracts). The Contracts typically involve consumers who cannot
obtain loans from local financial institutions or from the credit facilities of
major automobile manufacturers. The "creditworthiness grade" of the obligors on
the Contracts is usually "D." The Company does business primarily in the south
and southwest. See Note 3.
MANAGEMENT ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses
during the reporting period. Actual results may vary from such estimates.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments exposed to concentration of credit risk
consist primarily of cash maintained in Federally insured financial institutions
which are considered by the Company to be of high credit quality. Therefore,
management considers concentration of credit risk to be limited.
2. AUTOMOBILE CONTRACT NOTES OFFERING
The Company is offering on a "best efforts" basis, up to $10,000,000 in
principal amount of 11% Notes (Notes) due February 15, 2002. Interest begins to
accrue on the Notes upon release of escrowed subscription funds to the Company,
which will not occur until a minimum of $500,000 of the Notes are sold. All
unpaid principal and accrued interest are payable at maturity. The Notes are
being offered through licensed broker-dealers who will receive sales commissions
of 8% of the principal amount of the Notes sold by such broker-dealers.
The Company will also use up to 2% of the gross proceeds from the sale of
the Notes to pay offering and organizational expenses, including filing and
registration fees, legal, accounting, printing, trustee fees, escrow fees and
other fees and expenses. Sovereign Auto Finance, Inc. (SAF), also a subsidiary
of the Company's Parent, will advance some of these expenses. SAF has agreed to
pay such expenses to the extent such expenses exceed 2% of the gross proceeds
from the sale of the Notes. The Company will also pay an additional 5.5% of the
gross proceeds from the sale of the Notes (5.0% of the gross proceeds in excess
of $9,000,000) to SAF for its services in administering and managing the ongoing
operations of the Company. SAF will also administer noteholder payments,
communications and relations. For such services, the Company will pay SAF a
monthly fee equal to 1/12 of 0.5% of the outstanding principal amount of the
Notes.
Such payments to SAF are contingent upon the successful completion of the
Company's public offering. If the offering is not successful, the Company is not
obligated to reimburse SAF for any expenses incurred. The remainder of the
proceeds from the sale of the Notes (84.5% of the gross proceeds) is to be used
to acquire Contracts. No more than 15.5% of such proceeds is to be used for the
foregoing
F-6
<PAGE>
SOVEREIGN CREDIT FINANCE II, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
DECEMBER 31, 1997
2. AUTOMOBILE CONTRACT NOTES OFFERING (CONTINUED)
commissions, fees and expenses. Proceeds received from the sale of the Notes
will be held in escrow by a third-party escrow agent and will not be available
to the Company until subscriptions for $500,000 in principal amounts of the
Notes have been received.
The Company intends to enter into a note purchasing and servicing agreement
with Sovereign Associates, Inc. (SAI), an unrelated Company. The majority of
Contracts will be originated by Fiesta Motors LLC, an affiliate, which finances
the sale of motor vehicles. SAI will initially be entitled to a monthly
servicing fee of $20 for administering the collection of payments due under the
Contracts for each Contract that is not assigned for repossession. SAI will
receive a fee of $125 for each financed vehicle assigned for repossession. This
fee is paid for overseeing the repossession and resale of the vehicle securing
any Contract in default. SAI will also receive a purchase administration fee for
each Contract purchased, equal to the lesser of $500 or 5% of the total amount
of installments due under the Contract as of the date of purchase.
In addition, the Company intends to enter into an indenture agreement
between the Company and an unrelated trust company, which will govern collection
of the Contract proceeds and repayment of the Notes. See Note 3.
3. SUBSEQUENT EVENT
Effective February 6, 1998, Sovereign Credit Holdings, Inc., the Company's
original parent corporation, sold its investment in the Company to a new
corporation, Sovereign Auto Finance Holdings, Inc. (SAFH). Sovereign Auto
Finance, Inc., an affiliate of SAFH, replaced Sovereign Credit Corporation as
the administrator and manager of the operations of the Company. SAI, the
Company's servicing agent, is no longer an affiliate of the Company. The notes
to financial statements reflect the changes in ownership.
F-7
<PAGE>
BELEW AVERITT LLP
CERTIFIED PUBLIC ACCOUNTANTS
AND CONSULTANTS
A MEMBER OF HORWATH INTERNATIONAL
2020 PLAZA OF THE AMERICAS NORTH
DALLAS, TEXAS 75201-2867
TEL: 214-969-7007 - FAX: 214-953-0722
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Sovereign Credit Finance II, Inc.
We have audited the accompanying balance sheet of Sovereign Credit Finance
II, Inc. as of October 9, 1997. This financial statement is the responsibility
of the Company'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 balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe our audit of the balance sheet 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 Sovereign Credit Finance II, Inc.
as of October 9, 1997 in conformity with generally accepted accounting
principles.
<TABLE>
<S> <C> <C>
By: /s/ BELEW AVERITT LLP
-----------------------------------------
Belew Averitt LLP
</TABLE>
October 9, 1997, except for Note 3, as
to which the date is February 6, 1998
F-8
<PAGE>
SOVEREIGN CREDIT FINANCE II, INC.
BALANCE SHEET
OCTOBER 9, 1997
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash and cash equivalents......................................................... $ 1,000
---------
---------
LIABILITIES AND STOCKHOLDER'S EQUITY
STOCKHOLDER'S EQUITY
Common stock, $.01 par value, 50,000 shares authorized, 1,000 shares issued and
outstanding..................................................................... $ 10
Additional paid-in capital........................................................ 990
---------
$ 1,000
---------
---------
</TABLE>
See accompanying notes to balance sheet.
F-9
<PAGE>
SOVEREIGN CREDIT FINANCE II, INC.
NOTES TO BALANCE SHEET
OCTOBER 9, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Sovereign Credit Finance II, Inc. (Company) was incorporated in Texas on
October 9, 1997. The Company is a subsidiary of Sovereign Auto Finance Holdings,
Inc. (Parent) and was formed for the purpose of purchasing, collecting and
servicing retail installment sales, lease contracts and notes secured by motor
vehicles (Contracts). The Contracts typically involve consumers who cannot
obtain loans from local financial institutions or from the credit facilities of
major automobile manufacturers. The "creditworthiness grade" of the obligors on
the Contracts is usually "D." The Company does business primarily in the south
and southwest.
MANAGEMENT ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses
during the reporting period. Actual results may vary from such estimates.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments exposed to concentration of credit risk
consist primarily of cash maintained in Federally insured financial institutions
which are considered by the Company to be of high credit quality. Therefore,
management considers concentration of credit risk to be limited.
2. AUTOMOBILE CONTRACT NOTES OFFERING
The Company is offering on a "best efforts" basis, up to $10,000,000 in
principal amount of 11% Notes (Notes) due February 15, 2002. Interest begins to
accrue on the Notes upon release of escrowed subscription funds to the Company,
which will not occur until a minimum of $500,000 of the Notes are sold. All
unpaid principal and accrued interest are payable at maturity. The Notes are
being offered through licensed broker-dealers who will receive sales commissions
of 8% of the principal amount of the Notes sold by such broker-dealers.
The Company will also use up to 2% of the gross proceeds from the sale of
the Notes to pay offering and organizational expenses, including filing and
registration fees, legal, accounting, printing, trustee fees, escrow fees and
other fees and expenses. Sovereign Auto Finance, Inc. (SAF), also a subsidiary
of the Company's Parent, will advance some of these expenses. SAF has agreed to
pay such expenses to the extent such expenses exceed 2% of the gross proceeds
from the sale of the Notes. The Company will also pay an additional 5.5% of the
gross proceeds from the sale of the Notes (5.0% of the gross proceeds in excess
of $9,000,000) to SAF for its services in administering and managing the ongoing
operations of the Company. SAF will also administer noteholder payments,
communications and relations. For such services, the Company will pay SAF a
monthly fee equal to 1/12 of 0.5% of the outstanding principal amount of the
Notes.
Such payments to SAF are contingent upon the successful completion of the
Company's public offering. If the offering is not successful, the Company is not
obligated to reimburse SAF for any expenses incurred. The remainder of the
proceeds from the sale of the Notes (84.5% of the gross proceeds) is to be used
to acquire Contracts. No more than 15.5% of such proceeds is to be used for the
foregoing commissions, fees and expenses. Proceeds received from the sale of the
Notes will be held in escrow by a
F-10
<PAGE>
SOVEREIGN CREDIT FINANCE II, INC.
NOTES TO BALANCE SHEET (CONTINUED)
OCTOBER 9, 1997
2. AUTOMOBILE CONTRACT NOTES OFFERING (CONTINUED)
third-party escrow agent and will not be available to the Company until
subscriptions for $500,000 in principal amounts of the Notes have been received.
The Company intends to enter into a note purchasing and servicing agreement
with Sovereign Associates, Inc. (SAI), an unrelated Company. The majority of
Contracts will be originated by Fiesta Motors LLC, an affiliate, which finances
the sale of motor vehicles. SAI will initially be entitled to a monthly
servicing fee of $20 for administering the collection of payments due under the
Contracts for each Contract that is not assigned for repossession. SAI will
receive a fee of $125 for each financed vehicle assigned for repossession. This
fee is paid for overseeing the repossession and resale of the vehicle securing
any Contract in default. SAI will also receive a purchase administration fee for
each Contract purchased, equal to the lesser of $500 or 5% of the total amount
of installments due under the Contract as of the date of purchase.
In addition, the Company intends to enter into an indenture agreement
between the Company and an unrelated trust company, which will govern collection
of the Contract proceeds and repayment of the Notes.
3. SUBSEQUENT EVENT
Effective February 6, 1998, Sovereign Credit Holdings, Inc., the Company's
original parent corporation, sold its investment in the Company to a new
corporation, Sovereign Auto Finance Holdings, Inc. (SAFH). Sovereign Auto
Finance, Inc., an affiliate of SAFH, replaced Sovereign Credit Corporation as
the administrator and manager of the operations of the Company. SAI, the
Company's servicing agent, is no longer an affiliate of the Company. The notes
to balance sheet have been revised to reflect the changes in ownership.
F-11
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION ON OR TO MAKE ANY
REPRESENTATIONS ABOUT THE COMPANY, THE NOTES OR ANY OTHER MATTER REFERRED TO
HEREIN, OTHER THAN THE INFORMATION AND REPRESENTATIONS CONTAINED IN THIS
PROSPECTUS AND ANY SUPPLEMENTS OR AMENDMENTS THERETO. IF ANY OTHER INFORMATION
OR REPRESENTATION IS GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MAY NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF ANY OFFER TO BUY, THE
SECURITIES OFFERED HEREBY IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH
AN OFFER WOULD BE UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 3
Risk Factors.............................................................. 9
Capitalization............................................................ 15
Use of Proceeds........................................................... 16
Description of Notes...................................................... 17
The Company............................................................... 25
Purchase and Collection of Contracts...................................... 26
Information Regarding the Securitization Subsidiaries..................... 32
Security Ownership of Certain Beneficial Owners and Management............ 37
Management................................................................ 38
Management's Discussion and Analysis of Financial Condition............... 42
Certain Legal Aspects of the Contracts.................................... 43
Certain Federal Income Tax Considerations................................. 47
Plan of Distribution...................................................... 48
Commission Position on Indemnification for Securities Act Liabilities..... 49
Experts................................................................... 49
Legal Matters............................................................. 49
Definitions............................................................... 50
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
UNTIL JUNE 1, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, 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 AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
SOVEREIGN CREDIT
FINANCE II, INC.
$10,000,000
11% NOTES
DUE FEBRUARY 15, 2002
---------------------
PROSPECTUS
---------------------
MARCH 3, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
