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As filed with the Securities and Exchange Commission on November 12, 1999
Registration Statement No. 333-________
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
STEWART FINANCE COMPANY HOLDINGS, INC.
(Name of small business issuer in its charter)
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GEORGIA 6141 58-2413624
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization Classification Code Number) Identification Number)
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610 SIBLEY AVENUE
UNION POINT, GEORGIA 30669
(706) 486-4163
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
JOHN B. STEWART, JR., PRESIDENT
STEWART GEORGIA
610 SIBLEY AVENUE
UNION POINT, GEORGIA 30669
(706) 486-4163
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
copies of all correspondence to:
ALLISON WADE, ESQ.
STANLEY H. POLLOCK, ESQ.
HOLLAND & KNIGHT LLP
1201 WEST PEACHTREE STREET, N.E., SUITE 2000
ATLANTA, GEORGIA 30309
(404) 817-8500
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. :
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. :
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. :
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. :
CALCULATION OF REGISTRATION FEE
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- ---------------------------------------------------------------------------------------------------------------
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING REGISTRATION
PRICE(1) FEE
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Variable Rate Subordinated Debentures........... $20,000,000 100% $20,000,000 $5,560
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(1) Estimated solely for purposes of determining the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
===============================================================================
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PROSPECTUS
STEWART FINANCE COMPANY HOLDINGS, INC.
$20,000,000 VARIABLE RATE SUBORDINATED DEBENTURES
- Stewart Finance Company Holdings, Inc. is a holding company for four
subsidiaries that are engaged primarily in the small loan consumer finance
business in Georgia, Louisiana, Missouri and Illinois. We maintain our
principal executive offices at 610 Sibley Avenue, Union Point, Georgia 30669
and our telephone number is (706) 486-4163.
- The subordinated debentures that we are offering pursuant to this
prospectus will be offered exclusively by the officers of our company on a
best-efforts basis without any underwriting commitment. There is no minimum
amount required to be sold in this offering and none of the proceeds will be
escrowed pending sales of a minimum number of subordinated debentures. We
intend to offer the subordinated debentures continuously until the earlier of
the issuance of all of the subordinated debentures or December 31, 2001. Our
executive officers will receive no commissions on such sales.
- This is our initial public offering and no public market currently
exists for our subordinated debentures. We are not obligated, and we do not
intend, to apply for quotation or listing of any of these securities on the
Nasdaq Stock Market or any national securities exchange.
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Per Debenture Total
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Public Price........................ 100% $20,000,000
Proceeds to Us...................... 100% $20,000,000
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WE URGE YOU TO READ CAREFULLY THE "RISK FACTORS" SECTION BEGINNING ON
PAGE ___, ALONG WITH THE REST OF THIS PROSPECTUS, BEFORE YOU MAKE YOUR
INVESTMENT DECISION.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
The date of this prospectus is ____________, 1999
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY 3
SUMMARY FINANCIAL DATA 4
RISK FACTORS 5
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS 9
THE OFFERING 10
PLAN OF DISTRIBUTION 10
USE OF PROCEEDS 10
CAPITALIZATION 11
DIVIDEND POLICY 11
SELECTED FINANCIAL AND OPERATIONS DATA 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 13
BUSINESS 18
RESCISSION OFFER BY STEWART GEORGIA 26
MANAGEMENT 28
PRINCIPAL SHAREHOLDERS 30
CERTAIN TRANSACTIONS 31
DESCRIPTION OF CAPITAL STOCK 33
VARIABLE RATE SUBORDINATED DEBENTURES 34
DESCRIPTION OF FINOVA CREDIT FACILITY 38
DESCRIPTION OF COMMUNITY BANK AND TRUST CREDIT FACILITY 40
LEGAL MATTERS 42
EXPERTS 42
ADDITIONAL INFORMATION 42
INDEX TO FINANCIAL STATEMENTS F-1
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PROSPECTUS SUMMARY
BACKGROUND OF OUR COMPANY.
Stewart Finance Company Holdings, Inc. ("Stewart Holdings"), is a Georgia
corporation and the sole shareholder of four separate consumer finance
companies, namely:
- Stewart Georgia, a Georgia corporation incorporated in 1984
("Stewart Georgia");
- Stewart Georgia of Louisiana, a Louisiana corporation incorporated
in 1996 ("Stewart Louisiana");
- Stewart Georgia of Missouri, a Missouri corporation incorporated in
1998 ("Stewart Missouri"); and
- Stewart Georgia of Illinois, an Illinois corporation incorporated
in 1998 ("Stewart Illinois").
Stewart Holdings was incorporated in 1998 to serve as a holding company
for each of these subsidiaries. We believe that the holding company structure
will facilitate the growth of the business operations of each subsidiary by
enabling us to obtain and distribute corporate resources on an
organization-wide basis and to consolidate redundant corporate functions. As of
the date of this prospectus, Stewart Holdings has not begun operations, but has
instead relied on Stewart Georgia to support the operations of Stewart
Louisiana, Stewart Missouri and Stewart Illinois by providing them with
funding, resources and accounting services. As of June 30, 1999, these three
subsidiaries owed Stewart Georgia $8,385,137 for repayment of funding
obligations and accounting services. When we refer in this prospectus to
Stewart Holdings or any activities characteristic of Stewart Holdings, we mean
Stewart Holdings and each of its subsidiaries on a consolidated basis unless we
specifically state otherwise.
OUR BUSINESS.
Our business primarily consists of making small balance consumer finance
loans to individuals in relatively small original principal amounts for
relatively short periods of time. We conduct our lending operations in each of
Georgia, Louisiana, Missouri and Illinois exclusively through our subsidiary
incorporated in that state. In Georgia and Louisiana, we also sell credit
related insurance products in connection with making these loans, such as life,
accident and health and automobile insurance. Finally, in Georgia, we sell
memberships in an automobile club, which provides payment or reimbursement of
emergency related automobile expenses, such as towing charges and roadside
repair.
OUR GROWTH STRATEGY.
Since 1991, we have grown from 7 offices located exclusively in Georgia
to the 43 offices that we operate today. As of the date of this prospectus, we
have 22 offices in Georgia, 16 offices in Louisiana, 4 offices in Missouri and
1 office in Illinois. We have achieved this expansion by acquiring 10 offices
and establishing 26 offices. We intend to continue to expand our presence in
the small loan consumer finance market by growing our existing offices and
opening and acquiring new offices in various locations throughout Georgia,
Louisiana, Missouri and Illinois. We have not yet established a definitive
timetable or minimum criteria for our expansion, preferring instead to leave
expansion decisions in the discretion of our management. One important factor
that will impact our expansion plans in the near term will be the results of
the rescission offer that currently is being conducted by Stewart Georgia. For
the most part, we have put our expansion plans on hold until that rescission
offer is complete, although our plans may change depending on whether
attractive opportunities arise.
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USE OF PROCEEDS.
We plan to use the proceeds of this offering to redeem the senior
demand notes and subordinated debentures of Stewart Georgia as they come due
over the next several years. We also plan to use the proceeds of this offering
to make additional loans, to expand our business operations, to repay bank
borrowings, and for general working capital purposes.
SUMMARY FINANCIAL DATA
The summary financial data presented below for the fiscal year ended
December 31, 1998 and the six month period ending June 30, 1999 have been
derived from Stewart Holdings' consolidated financial statements, which have
been audited by Pechter & Associates, P.C., independent public accounts. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Stewart
Holdings' financial statements and related notes included elsewhere in this
prospectus.
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YEAR ENDED SIX MONTH PERIOD ENDED
DECEMBER 31, 1998 JUNE 30, 1999
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(IN THOUSANDS)
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INCOME STATEMENT DATA:
Interest Fee Income and Maintenance
and Delinquent Charges $ 5,522 $ 4,317
Interest Expense.............................. 2,085 1,274
Net Interest Income................. 3,437 3,043
Provision for Credit Loss (Net of Recoveries). 315 848
Net Interest Income After Credit Loss 3,122 2,195
Insurance Premiums and Other Income........... 5,028 1,915
Salaries...................................... 2,976 2,060
Other......................................... 5,230 3,201
Net Income (Net Loss) Before Income Tax Effect (56) (1,151)
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YEAR ENDED SIX MONTH PERIOD ENDED
DECEMBER 31, 1998 JUNE 30, 1999
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(IN THOUSANDS)
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BALANCE SHEET DATA:
Total Assets.................................. $ 26,958 $ 23,203
Total Debentures and Senior Demand Notes...... 12,440 12,548
Total Other Liabilities....................... 10,596 10,393
Total Shareholder's Equity.................... 3,922 262
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4
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RISK FACTORS
BECAUSE THE LEGAL EFFECT OF THE RESCISSION OFFER BY STEWART GEORGIA IS
UNCERTAIN, IT MAY NOT ELIMINATE STEWART GEORGIA'S LIABILITY FOR POSSIBLE
VIOLATIONS OF FEDERAL AND STATE SECURITIES LAWS.
Eligible offerees who do not accept Stewart Georgia's rescission
offer, either because they affirmatively reject it or because they fail to
respond to it, may still attempt to assert claims against Stewart Georgia
relating to its possible non-compliance with the securities laws. We cannot
predict with certainty that such claims will be barred by the rescission offer
because the legal effect of the rescission offer is uncertain. To the extent
such claims are brought and result in judgments for damages, Stewart Georgia's,
and consequently Stewart Holdings', business, financial condition and results
of operation could all be adversely affected. Even if Stewart Georgia is
successful in defending such claims under applicable securities laws, their
mere assertion could result in costly litigation and significant diversions of
effort by our management. At this point, we cannot quantify the number of, or
the dollar amount of the securities held by, eligible offerees who will accept
or reject the rescission offer. Thus, we cannot quantify the potential
continuing liability upon completion of the rescission offer.
BECAUSE STEWART GEORGIA DOES NOT HAVE SUFFICIENT LIQUID ASSETS TO FUND THE
RESCISSION OFFER BY STEWART GEORGIA IF IT IS ACCEPTED BY ALL ELIGIBLE OFFEREES,
WE MAY BE REQUIRED TO INCUR ADDITIONAL DEBT OR SELL ASSETS TO FUND THE
RESCISSION OFFER.
We do not have liquid assets sufficient to pay the roughly $15,922,070
in cash that would need to be paid if one assumed 100% acceptance of Stewart
Georgia's rescission offer. We believe current assets of approximately
$11,575,000 (after repayment of a margin loan and the $6.35 million revolving
line of credit with Finova Capital Corporation) could potentially be used to
fund Stewart Georgia's rescission offer. If additional funds are required, we
would have to either increase our current credit lines, borrow from other
lenders or sell corporate assets to fund the rescission offer. We believe that
as much as $5,000,000 in additional funds could be borrowed if necessary,
however, we can make no assurance that we could borrow this amount or that we
could do so on sufficiently favorable terms. In addition, the interest expense
that we would incur in connection with such a loan would significantly
adversely affect our future cash flow, earnings, liquidity and growth. For a
more detailed discussion of our plans to fund Stewart Georgia's rescission
offer and the effect those plans may have on our business operations and
financial condition at various levels of acceptance, please see the discussion
under the caption "Plan for payment of security holders accepting Stewart
Georgia's rescission offer" contained within the section of this prospectus
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
BECAUSE THERE CURRENTLY IS NO PUBLIC MARKET FOR OUR SECURITIES AND ONE MAY NOT
DEVELOP, YOU MAY HAVE DIFFICULTY RESELLING YOUR SECURITIES.
Prior to this offering, there has been no public trading market for
our securities. We do not make a market in our securities and we are not aware
of anyone else who intends to do so in the future. Stewart Holdings is not
obligated, and does not intend, to apply for quotation or listing of any of
these securities on the Nasdaq Stock Market or a national securities exchange.
You should be aware that if you purchase subordinated debentures in this
offering, you may be required to hold your securities until maturity.
5
<PAGE> 7
OUR HISTORY OF OPERATING LOSSES MAY CONTINUE, WHICH MAY PREVENT US FROM
REPAYING YOUR SECURITIES AND PREVENT YOU FROM RECOVERING ALL OR ANY PART OF
YOUR INVESTMENT.
We have sustained operating losses since our inception in 1998, and we
can provide no assurance that we will be profitable in the future. If we are
ultimately unable to become profitable, our access to capital will diminish,
which will adversely impact our ability to make loans and continue our
operations. This, in turn, will make it more difficult for us to repay your
securities as they come due and ultimately will result in a decrease in their
value.
OUR ABILITY TO OBTAIN ADDITIONAL FUNDING WILL BE ADVERSELY AFFECTED IF STEWART
GEORGIA EXPERIENCE SIGNIFICANT DELAYS IN COMPLETING ITS RESCISSION OFFER.
Until Stewart Georgia completes its rescission offer, we may be unable
to obtain additional bank credit from our lenders until the outcome of the
rescission offer and Stewart Holdings' potential exposure to liability is more
definite. Because our operations, including making loans and repaying our
obligations as they become due, is dependant on our liquidity, significant
delays in completing the rescission offer will have an adverse impact on our
business and the value of your securities.
OUR ABILITY TO REPAY OUR MATURING DEBT SECURITIES AS THEY COME DUE WILL DEPEND
ON OUR ABILITY TO MAINTAIN SUFFICIENT LIQUIDITY.
A portion of our Stewart Georgia's debentures (approximately
$2,300,000) will become due within one year of this offering and all of Stewart
Georgia's senior notes are payable on demand. Depending on the level of
acceptance of Stewart Georgia's rescission offer, we can not ensure you that
the we will be successful in our efforts to maintain sufficient liquidity to
pay these debt securities as they become due. If we fail to repay these
securities in a timely manner, our ability to obtain additional capital in the
future through securities offerings will be severely limited, which, in turn,
will adversely impact our ability to support our current and future operations.
IF WE CANNOT MAINTAIN SUFFICIENT LIQUIDITY, WE MAY NOT BE ABLE TO REPAY OR
RENEW OUR OUTSTANDING CREDIT FACILITIES.
We obtain our working capital for ongoing operations in part from a
$6,600,000 line of credit with Finova Financial Corporation and a $1,500,000
line of credit with Community Bank & Trust, Cornelia, Georgia. The Cornelia
loan matures in May 2000, while the Finova loan matures on January 31, 2002.
Although we do not anticipate having difficulty obtaining future financing or
renewing our current lines on acceptable terms, we cannot be sure that these
lines of credit will continue to be available to us on terms and conditions
that exist as of the date of this rescission offer. Furthermore, the lines of
credit are subject to periodic review by the respective lenders. In conducting
these reviews our lenders consider our profitability, general economic
conditions, and other lending criteria in evaluating whether they will continue
to provide us with the lines of credit. If the outcome of Stewart Georgia's
rescission offer results in a significant decline in our liquidity, it could
adversely affect our lenders' decision to renew our credit facilities.
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CHANGES IN INTEREST RATES MAY DECREASE OUR NET INTEREST INCOME BECAUSE MANY OF
OUR LOANS ARE MADE AT FIXED RATES OF INTEREST AND MANY OF OUR OBLIGATIONS ARE
REPAYABLE AT VARIABLE RATES OF INTEREST.
Because we are engaged in the consumer loan business, we face the
on-going risk of decreases in our net interest margin or "spread", which is the
difference in the rate at which we borrow and the rate at which we lend. The
consumer loans that we extend in the ordinary course of our business are made
at fixed rates. In contrast, some of our sources of funds, such as our existing
lines of credit and some of Stewart Georgia's outstanding debentures, are made
at variable rates. Thus, from time to time we may find ourselves in a situation
in which we cannot pass on the increased cost of our borrowings to our loan
customers. A decline in our net interest margin may adversely affect our cash
flow, which in turn may adversely affect our ability to repay existing and
future borrowings and our maturing debt securities.
CHANGES IN INTEREST RATES ARE UNPREDICTABLE AND MAY MATERIALLY AFFECT THE LEVEL
OF CONSUMER LOAN ACTIVITY THAT WE GENERATE.
Interest rates are highly sensitive to many factors that are beyond
our control, including general economic conditions and the policies of various
federal and state government and regulatory authorities. Changes to the
discount rate by the Federal Reserve Board usually lead to corresponding
interest rate changes, which affect our interest income and interest expense.
Also, governmental policies, such as the creation of a tax deduction for
individual retirement accounts, can alter the rate of savings and affect the
costs of funds. The nature, timing and effect on Stewart Holdings and our
results of operations of any future changes in federal monetary and fiscal
policies and the lending laws prevailing in the states in which we operate are
not predictable.
UNPREDICTABLE ECONOMIC CONDITIONS MAY ADVERSELY AFFECT THE ABILITY OF OUR
BORROWERS TO REPAY THEIR LOANS AND OUR PROFITABILITY.
Because our business consists mainly of making loans to individuals
living in Georgia, Louisiana, Missouri and Illinois who depend on their
earnings to repay their loans, our profitability will materially depend on the
general economic conditions prevailing in those states. Accordingly, a
sustained recession in any of those states or any event which results in
unemployment or continued increases in the number of personal bankruptcies
among our customer base may have a materially adverse effect on our ability to
pay interest and repay the principal balance of our securities.
YOUR SECURITIES DO NOT PROVIDE YOU WITH ANY CONTROL OR VOTING RIGHTS WITH
RESPECT TO THE MANAGEMENT OF STEWART HOLDINGS AND YOU THEREFORE MUST DEPEND ON
THE POLICIES OF CURRENT MANAGEMENT TO MAKE STEWART HOLDINGS SUCCESSFUL.
John B. Stewart, Jr., is the president, sole director, and owner of
all of the outstanding common stock of Stewart Holdings. As such, Mr. Stewart
controls the election of all members of our board of directors and determines
all corporate actions. As a purchaser of subordinated debentures in this
offering, you will have no control over the management of Stewart Holdings and
you will not have any vote with respect to the election of executive officers
or directors of Stewart Holdings.
THE RECENT GROWTH OF STEWART HOLDINGS HAS PUT A STRAIN ON OUR FINANCIAL
RESOURCES, WHICH MAY CONTINUE FOR THE FORESEEABLE FUTURE.
Stewart Holdings' expansion has placed, and is expected to continue to
place, a strain on our personnel and financial resources. In the last eight
years, we have grown from 7 offices to the 43 that we operate today. In the
near term, we intend to slow the pace of our growth, particularly until Stewart
Georgia completes its rescission offering.
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Notwithstanding our present intentions, we will take advantage of
opportunities to open or acquire new branch offices if favorable opportunities
arise. If we elect to pursue such opportunities, our operating expenses will
increase in order to fund the costs of establishing a new branch or acquiring
an existing business. These costs may include, among other things, expenses
associated with purchasing equipment, making leasehold improvements, and
employing additional personnel. If we borrow funds to pay for the costs of
expansion, there is a risk of default in repayment of the borrowed funds, which
likely would be senior in right of payment to the interest payable on the
subordinated debentures that we are offering pursuant to this prospectus.
IN THE EVENT OUR KEY PERSONNEL WERE TO LEAVE STEWART HOLDINGS, OUR OPERATIONS
AND FINANCIAL PERFORMANCE WOULD BE ADVERSELY AFFECTED.
We believe our success depends largely on the efforts of John B.
Stewart, Jr., our founder, president and sole director, and Jeffery L. Smith,
our vice president. We have not entered into an employment agreement with
either of Mr. Stewart or Mr. Smith. Although Stewart Holdings is Mr. Stewart's
primary business endeavor, he is involved in other business ventures and does
not spend his entire business time and attention on the operations of Stewart
Holdings. We believe that the loss of Mr. Stewart's or Mr. Smith's services
would have a material adverse effect on our business, financial condition and
results of operations.
WE HAVE UNDERTAKEN TRANSACTIONS IN THE PAST WITH MR. STEWART THAT ARE FAVORABLE
TO HIM AND MAY LEAD TO CONFLICTS BETWEEN HIS PERSONAL INTEREST AND THE
INTERESTS OF STEWART HOLDINGS.
John B. Stewart, Jr., beneficially owns all of our common stock and
accordingly he controls the operations of Stewart Holdings, including Stewart
Georgia. As a result, we have conducted transactions with Mr. Stewart that are
less favorable to us than those we could obtain in arm's-length negotiations.
For example, Stewart Georgia has provided accounting and funding services to
the other subsidiaries of Stewart Holdings which are valued at approximately
$8.4 million and we have advanced Mr. Stewart approximately $1.3 million in
connection with the transfer of a portfolio of securities from our account to
his personal account. These services and advances were made without any
repayment obligation and do not generate interest. We have described these
transactions in more detail in the section of this prospectus entitled "Certain
Transactions." A conflict of interest exists between Stewart Georgia and Mr.
Stewart with respect to these transactions because repaying these obligations
may not be in Mr. Stewart's personal best interest. We cannot assure you that
such obligations will be repaid or, if so, on terms favorable to Stewart
Holdings. Additionally, our lenders under the Finova and Cornelia credit
facilities have obtained collateral or guaranties from Mr. Stewart that secure
such credit facilities. These arrangements may create potential conflicts of
interest if we decide to repay the indebtedness for which Mr. Stewart has
personal liability before other company indebtedness.
We may in the future transact business with Mr. Stewart, his family
and/or his other business ventures. These transactions may not be negotiated at
arm's-length and may involve potential conflicts of interest.
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WE ARE UNCERTAIN THAT OUR COMPUTER SYSTEMS ARE YEAR 2000 COMPLIANT.
We are not certain of the total exposure we may have as a result of
the "Year 2000" problem that is, the inability of existing data processing
computer hardware and software to appropriately recognize calendar dates
beginning in the year 2000. Year 2000 issues relate to our computer hardware
and software systems and other devices employing computer chips. We use
financial reporting computer software that is standard in the consumer finance
industry. We do not expect that we will incur significant operating expenses or
be required to invest heavily in computer system improvements to be year 2000
compliant. However, there can be no assurance that such computer systems will
operate properly once the year 2000 arrives, and significant uncertainty exists
concerning the potential costs and effects associated with any year 2000
compliance. Any year 2000 compliance problem of Stewart Holdings could have a
material adverse effect on our business, results of operations, financial
condition and prospects. Please refer to a more detailed discussion of our
efforts to address the year 2000 problem under the caption "Year 2000
Compliance" contained in the section of this prospectus entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
WE ARE UNCERTAIN THAT THE YEAR 2000 PROBLEM WILL NOT AFFECT OUR THIRD-PARTY
VENDORS AND PAYORS AND OUR CUSTOMERS.
Our software vendors have indicated that their software is year 2000
compliant. However, there can be no assurance that such software will operate
properly once the year 2000 arrives. Any year 2000 compliance problem of our
outside vendors, third-party payors or customers could have a material adverse
effect on our business, results of operations, financial condition and
prospects.
HOLDERS OF PROMISSORY NOTES ISSUED PERSONALLY BY JOHN B. STEWART, JR., MAY SEEK
TO ASSERT A CLAIM AGAINST STEWART GEORGIA FOR SATISFACTION OF SUCH NOTES.
Mr. Stewart has used the proceeds of approximately $1.6 million of
promissory notes that he personally issued to repay an obligation that he owed
to Stewart Georgia and to make a loan to Stewart Georgia. Because Mr. Stewart
indirectly controls Stewart Georgia as the sole shareholder of Stewart
Holdings, persons who hold Mr. Stewart's notes may attempt to claim that
Stewart Georgia is obligated to repay such notes if Mr. Stewart fails to
satisfy his obligations. Although we do not believe Stewart Georgia is
obligated to repay Mr. Stewart's personal obligations, it may be required to
expend resources defending such a claim if asserted, and ultimately repaying
the notes if a note holder successfully asserted such a claim.
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
Some of the statements in this prospectus under the captions
"Prospectus Summary," Risk Factors," "Rescission Offer," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Business" and elsewhere in this prospectus are "forward-looking statements."
Forward-looking statements include, among other things, statements about the
legal effects of the rescission offer, the level of acceptance of the
rescission offer, our ability to fund the rescission offer, the competitiveness
of the consumer finance industry, potential regulatory obligations, our
strategies and other statements that are not historical facts. When used in
this prospectus, the words "anticipate," "believe," "estimate," and other
similar expressions generally identify forward-looking statements. Because
forward-looking statements involve risks and uncertainties, there are important
factors that could cause actual results to differ materially from those
expressed or implied by the forward-looking statements.
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THE OFFERING
Stewart Holdings is offering up to $20,000,000 of its variable rate
subordinated debentures at 100% of full value, for an aggregate offering price
of $20,000,000.
PLAN OF DISTRIBUTION
The subordinated debentures will be offered by the executive officers
of Stewart Holdings on a best-efforts basis without any underwriting
commitment. Consequently, there is no minimum amount required to be sold in the
offering. Stewart Holdings intends to offer the subordinated debentures
continuously until the earlier of the issuance of all of the subordinated
debentures or December 31, 2001, at which time this offering will end.
No selling commission or other remuneration will be paid directly or
indirectly to the executive officers of Stewart Holdings in connection with the
sale of the subordinated debentures. There is no provision for escrow of any of
the proceeds and all proceeds from sales of the subordinated debentures,
regardless of the amount sold, will be placed in the general treasury of
Stewart Holdings. All offering expenses, including printing, postage and
professional fees, will be paid by Stewart Holdings.
Any person who desires to purchase subordinated debentures for cash
must: (i) receive a prospectus; (ii) tender a check for good funds to Stewart
Holdings for the amount of the subordinated debentures; (iii) complete a
purchase order; and (iv) accept a note for the subordinated debentures so
purchased.
The subordinated debentures will be offered and sold through the
executive officers of Stewart Holdings located at:
Stewart Finance Company Holdings, Inc.
610 Sibley Avenue
Union Point, GA 30669
(706) 486-4163
USE OF PROCEEDS
The amount of subordinated debentures actually sold pursuant to this
offering cannot be reasonably forecast because the offering is a best-efforts
undertaking. However, if all of the subordinated debentures offered pursuant to
this offering are sold, the maximum net proceeds to Stewart Holdings from such
sales are estimated to be approximately $19,750,000 after deducting estimated
offering expenses. However, no minimum amount of proceeds must be raised before
Stewart Holdings will be able to use the proceeds.
Stewart Holdings intends to offer to sell the subordinated debentures
for cash, out of which all costs and expenses of this offering will be paid.
Since no minimum amount of subordinated debentures is required to be issued in
this offering, no assurance can be given as to the amount, if any, of
subordinated debentures which will be sold for cash in this offering. Stewart
Holdings intends to use the cash proceeds, if any, to redeem the senior demand
notes and subordinated debentures of Stewart Georgia as such securities come
due and to repay its bank borrowings. Stewart Holdings also intends to use the
proceeds of the offering to make additional loans, to finance expansion of its
business operations, including the acquisition or opening of new branch
offices, and as general working capital.
Stewart Holdings currently anticipates that approximately $13 million
in existing indebtedness will mature over the next two years (including all of
the senior demand notes of Stewart Georgia, which are payable on demand) and
that approximately $2.5 million
10
<PAGE> 12
will be required to fund the currently anticipated planned growth of Stewart
Holdings through its subsidiaries. Consequently, management expects that, if the
offering is sold completely, approximately 66% of the net proceeds of the
offering would be used to retire existing indebtedness as it matures, and
approximately 12.6% would be used to fund Stewart Holdings' planned growth. If
the offering is not completely sold, Stewart Holdings would use the proceeds of
the offering primarily to retire existing indebtedness as it matures and
secondarily to fund the planned growth. Of the approximately $13 million in
maturing debt, approximately $8 million represents payments under the Finova
loan and the Cornelia loan and approximately $5 million represents maturing
subordinated debentures and senior demand notes of Stewart Georgia.
This description represents Stewart Holdings' best estimates of its
allocation of the net proceeds of this offering based upon its present plans
and business conditions. Unforeseen events or changed business conditions, of
which management has no present knowledge, could necessitate changes in the
application of proceeds. Pending expenditure of the proceeds from the offering,
Stewart Holdings may make temporary investments in interest-bearing accounts,
certificates of deposits, short-term United States government obligations or
other investment-grade securities.
CAPITALIZATION
The following table sets forth as of June 30, 1999, the capitalization
of Stewart Holdings (i) on an actual basis, and (ii) on a pro forma as adjusted
basis to reflect the offering and the application of the net proceeds to be
received by Stewart Holdings pursuant to the offering.
<TABLE>
<CAPTION>
JUNE 30, 1999
-------------
(IN THOUSANDS EXCEPT SHARE NOS.)
ACTUAL AS ADJUSTED
------ -----------
<S> <C> <C>
Subordinated debentures Stewart Holdings............................... $ 0 $ 20,000
Subordinated debentures Stewart Georgia................................ 11,626 0
Senior Demand Notes Stewart Georgia.................................... 922 0
Note Payable, Finova Capital........................................... 6,350 6,350
Note Payable, Community Bank & Trust, Cornelia, Georgia................ 1,500 1,500
Common Stock, 2,000,000 authorized, 42,000 issued and outstanding actual
and as adjusted........................................................ --- ---
Series A Preferred Stock of Stewart Georgia, 10,000,000 authorized and
33,475 issued ......................................................... 3,374 0
Additional Paid-in Capital............................................. 976 976
Accumulated Deficit.................................................... (4,089) (4,089)
Total Stockholders' Equity........................................ 262 (3,112)
Total Capitalization.............................................. 20,659 24,737
</TABLE>
DIVIDEND POLICY
Stewart Holdings currently anticipates that all of its earnings will
be retained for the future development, operation and expansion of Stewart
Holdings' business and does not anticipate paying any cash dividends on its
equity in the foreseeable future except with respect to the Series A preferred
stock of Stewart Georgia. Any determination to pay dividends in the future will
be at the discretion of Stewart Holdings' board of directors and will depend
upon Stewart Holdings' results of operations, financial condition and other
factors deemed relevant by the board of directors.
11
<PAGE> 13
SELECTED FINANCIAL AND OPERATIONS DATA
The following table sets forth summary financial and operating data of
Stewart Holdings for the periods indicated. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Stewart Holdings' financial statements and
related notes included elsewhere in this Prospectus:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTH PERIOD ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -------------
(IN THOUSANDS)
<S> <C> <C>
INCOME STATEMENT DATA:
Interest and Fee Income....................... $ 3,333 $ 3,145
Maintenance and Delinquent Charges............ 2,189 1,172
Insurance Premiums ........................... 1,916 1,284
Auto Club and Other Income ................... 3,112 631
Total Income ...................... 10,550 6,232
Interest Expense ............................. 2,085 1,274
Salaries...................................... 2,976 2,030
Other Expenses ............................... 5,545 4,049
Total Expenses ................... 10,606 7,383
Net Income (Loss) Before Income Tax Effect and (1,151)
Extraordinary Loss ........................... (56)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTH PERIOD ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Finance Receivables........................... $ 11,915 $ 13,447
Other Current Assets ......................... 7,645 4,758
Property and Equipment (net of accumulated
depreciation)................................. 4,181 4,711
Other Assets ................................. 3,217 287
Total Assets ....................... 26,958 23,203
Subordinated debentures ...................... 11,864 11,626
Senior Demand Notes .......................... 576 922
Note Payable FINOVA Capital .................. 6,500 6,350
Other Liabilities ............................ 4,096 4,043
Total Liabilities .................. 23,036 22,941
Stockholder's Equity.......................... 3,922 262
</TABLE>
12
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Stewart Finance Company Holdings, Inc. was established in 1998. On
February 26, 1999, John B. Stewart, Jr., the sole stockholder of each of
Stewart Georgia, Stewart Louisiana, Stewart Missouri and Stewart Illinois,
exchanged his stock in those companies for additional stock in the Stewart
Holdings. As of the date of the exchange, each of Stewart Georgia, Stewart
Louisiana, Stewart Missouri and Stewart Illinois became subsidiaries of the
Stewart Holdings.
Prior to this consolidation into a holding company structure, Stewart
Georgia had issued subordinated debentures, senior demand notes and preferred
stock as a partial means of financing its loan activities in Georgia and the
loan activities of its affiliates in Louisiana, Missouri and Illinois. Stewart
Georgia continues to provide funding and accounting services to its affiliates
in connection with their opening of new offices and the ongoing operations of
those affiliates. Such reimbursements amounted to $2,476,089 in 1998 and
$867,699 in 1997, an increase of 185.4%. The reimbursements for the six months
ended June 30, 1999 amounted to $1,452,004 as compared to $990,125 for the six
months ended June 30, 1998.
Stewart Holdings and its subsidiaries have expanded rapidly over the
past several years. At December 31, 1997, there were a total of 34 offices.
That number increased to 41 as of December 31, 1998 and has increased to 43 as
of June 30, 1999. Prior to the implementation of the holding company structure,
each of the subsidiaries of Stewart Holdings treated a portion of the costs
that it incurred in opening a new office as a start-up expense. Typically, the
amount of this expense equaled the aggregate expense of operating the new
office during its first three to six months of operation. These start-up
expenses were amortized over 60 months. As a result, the consolidated financial
statements of Stewart Holdings for 1998 reported unamortized amortization costs
related to opening new offices of $2,921,531.
The Financial Accounting Standards Board approved Statement of
Position 98-05 during 1998. This Statement became effective for the first
fiscal year beginning after December 15, 1998. According to this statement,
companies who had previously capitalized costs of start-up in prior periods had
to complete a change in accounting estimates of their accounting system. This
change disallowed future capitalization and recaptured all costs less
accumulated amortization as extraordinary losses during the current period.
Stewart Holdings adopted this Statement of Position as of January 1, 1998. This
resulted in an extraordinary loss by Stewart Holdings of $2,921,531.
The expansion of Stewart Holdings has resulted in significant
increases in assets, liabilities, revenue and operating expenses. Total assets
amounted to $23,202,819 at June 30, 1999, $19,005,205 at June 30, 1998,
$26,958,059 at December 31, 1998 and $20,193,637 at December 31, 1998. These
amounts reflect an increase at December 31, 1998 over December 31, 1997 of
33.5% and an increase as of June 30, 1999 as compared to June 30, 1998 of
12.2%. Liabilities at June 30, 1999 included $921,824 of senior demand notes,
$11,625,746 of subordinated debentures and $3,374,500 of preferred stock as
compared to June 30, 1998 balances of $361,193 of senior demand notes and
$13,154,869 of subordinated debentures. No preferred stock was issued as of
June 30, 1998.
These liabilities total $15,922,070 as of June 30, 1999. The same
liabilities totaled $13,516,062 at June 30, 1998 , reflecting an increase of
$2,406,008, or 17.8%, as of June 30, 1999.
Salaries expense also has increased significantly over this period as
a result of the increased personnel both at new offices and in the home office
personnel. Total salaries for the six months ended June 30, 1999 were
$2,059,997 as compared to salaries for the six months ended June 30, 1998 of
$1,419,569, an increase of $640,428 or 45.1%.
13
<PAGE> 15
General and administrative expenses also reflected increases as a
result of the additional offices and additional costs required to increase home
office operations. The total for the six months ended June 30, 1999 was
$2,837,500. The total general administrative expenses for the six months ended
June 30, 1998 were $2,152,640, an increase of $684,860 or 31.8%.
Interest expense increased to $1,274,322 for the six months ended June
30, 1999, an increase of $328,049 or 34.7% over the $946,273 reflected as of
the six months ended June 30, 1998. This increase was due primarily to
increases in interest bearing liabilities for funding new offices and
increasing loans receivable.
The following table provides information regarding expenses and revenues for
comparable periods of time:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31 ENDED JUNE 30
----------------------- -------------
1998 1997 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
General administrative $ 4,613,149 $3,220,680 $2,152,640 $2,837,500
Salaries and wages 2,976,028 2,199,396 1,419,569 2,059,997
Interest expense 2,085,492 1,564,030 946,273 1,274,322
Bad debts, net of recovery of
delinquent 0 390,516 47,042 848,346
accounts
Depreciation and amortization 616,560 361,565 326,389 363,968
Total expenses $10,291,229 $7,737,187 $4,891,913 $7,384,133
=========== ========== ========== ==========
Total revenue reflects the following
Total revenues $ 9,750,726 $7,504,512 $3,595,476 $6,172,739
=========== ========== ========== ==========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES.
As to liquidity, cash and certificates of deposit totaled $3,308,299
at June 30, 1999, $2,386,734 at June 30, 1998, $4,598,575 at December 31, 1998
and $2,435,866 at December 31, 1997. These amounts reflect a decrease as of
June 30,1999 as compared to June 30, 1998 of 13.9% and a decrease when the
balance at June 30, 1999 is compared to the balance at December 31, 1998 of
28.1%.
Stewart Holdings' primary sources of funds are a $6,600,000 revolving
line of credit with Finova Capital Corporation, a $1,500,000 revolving line of
credit with Community Bank & Trust, Cornelia, Georgia, and sales of securities
of Stewart Georgia. As of June 30, 1999, Stewart Holdings had borrowed
$6,350,000 and $1,500,000 under the Finova and Cornelia credit lines,
respectively. As of June 30, 1999, Stewart Georgia had issued $921,824 in
principal amount of senior demand notes, $11,625,746 in principal amount of
subordinated debentures and $3,347,500 in series A preferred stock.
Stewart Georgia stopped issuing new senior notes, subordinated
debentures, and preferred stock on February 28, 1999 in order to conduct a
rescission offering for all of its outstanding senior notes, subordinated
debentures, and preferred stock. With respect to its outstanding senior notes,
however, Stewart Georgia has continued its practice of allowing the holders of
its senior notes to redeem such notes in whole or in part, or to increase the
principal balance of such notes at any time. A senior note is redeemable in
full on demand by its holder for the outstanding balance of such senior note,
plus any accrued but unpaid interest at the time of redemption. A senior note
also is redeemable in part by its holder to the extent the holder of such note
requests a cash payment from Stewart Georgia that is less than the outstanding
principal balance of the holder's senior note. Likewise, the holder of a senior
note may increase the principal balance of an outstanding senior note by making
an additional payment to Stewart Georgia. When Stewart Georgia makes a
14
<PAGE> 16
payment to a senior note holder in partial redemption of a senior note or
accepts additional funds from a senior note holder to increases the amount of
an outstanding senior note, it records the change on its books and records, but
it does not issue a new senior note reflecting the reduced or increased
principal balance of such note. Accordingly, the balance of senior notes has
increased from the $809,931 outstanding as of February 28, 1999 to the $921,824
outstanding as of June 30, 1999.
The following table sets forth Stewart Holdings' average interest rate
on borrowings, computed by dividing the aggregate interest paid by the average
indebtedness outstanding for the fiscal years ended December 31, 1998, 1997,
1996, and 1995 and the six-month period ended June 30, 1999:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------ --------
ACTIVITY 1998 1997 1996 1995 1999
- -------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average Annual Yield ............ 9.00% 9.95% 9.90% 8.54% 9.80%
</TABLE>
PLAN FOR PAYMENT OF SECURITY HOLDERS ACCEPTING STEWART GEORGIA'S RESCISSION
OFFER.
Stewart Holding's plan to pay security holders who accept Stewart
Georgia's rescission offer would involve a series of steps beginning with the
use of cash, certificates of deposit and marketable securities (net of the
margin loan applicable to the marketable securities).
As of June 30, 1999, the value of these assets were:
<TABLE>
<S> <C>
Cash $ 2,352,491
Certificates of deposit 955,808
Marketable Securities, valued at market 590,969
Margin loan on marketable securities (279,917)
===========
Net cash available for rescission payments $ 3,619,351
===========
</TABLE>
These funds would liquidate approximately 22% of the total potential
rescission acceptances. At this level of acceptance, Stewart Holdings would
have to obtain additional cash resources in order to continue to pay its costs
of operations on a regular basis. During the six months ended June 30, 1999,
Stewart Holdings incurred average monthly expenses of approximately $230,000.
Additionally, Stewart Holdings expended approximately $100,000 per month in
connection with new loan receivables from customers during that period.
Consequently, Stewart Holdings would need to obtain sufficient cash to fund
approximately $330,000 per month if 22% of rescission offerees accept the
rescission offer. Stewart holdings anticipates that it could borrow sufficient
cash to enable Stewart Holdings to continue to pay these operating expenses and
to make such loans until the cash flow from these loans provided adequate funds
for Stewart Holdings to sustain its operating expenses from internally
generated funds.
The next step in Stewart Holdings' plan would be to borrow up to
$5,000,000 to liquidate additional rescission acceptances. Stewart Holdings
believes that it can borrow 5,000,0000 either from John B. Stewart, Jr. or
lending institutions. These funds would enable Stewart Holdings to liquidate an
additional 30% of the aggregate amount of potential rescission acceptances.
If 50% of the offerees accepted the rescission offer, Stewart Holdings
would continue to require approximately $330,000 on a monthly basis to satisfy
its operating expenses. If Stewart Holdings could not obtain funds to satisfy
these operating expenses after the additional $5,000,000 had been borrowed, it
would be required to take steps to significantly reduce its monthly expenses
through employee reductions and the sale of offices. Stewart Holdings
anticipates that it would prioritize the sale of offices by first selling those
which are marginally profitable and retaining those offices that provide a
greater return on
15
<PAGE> 17
investment. The funds obtained through the reduction of expenses and the sale
of offices would be utilized to reduce debt and fund ongoing operations.
If more than 50% of the security holders elected to accept the
rescission offer, Stewart Holdings would have to liquidate finance receivables
and sell additional office locations (including the licenses granted to such
office locations by the applicable regulatory authority).
Stewart Holdings would be required to pay off the Finova loan before
any of the finance receivables could be sold to unrelated third parties. As a
result, it would be necessary for Stewart Holdings to raise $6,350,000 from the
sale of existing finance receivables or offices before any funds could be
applied to liquidate additional rescission acceptances. Therefore, to complete
the payoff of the remaining 50% of the rescission elections (approximately
$7.275 million), Stewart Holdings would have to sell, on a wholesale basis,
finance receivables or offices with an inventory of finance receivables in a
total amount of approximately $13.625 million. These steps would provide the
funds to pay the Finova liability and to liquidate the balance of the
rescission offering.
The specific method of liquidating any finance receivables or selling
any office locations with the finance receivables would be determined at the
time the need for such sales arose. There are accepted formulas for the sale,
on a wholesale basis, of finance receivables or office locations with finance
receivables.
If more than 50% of the offerees accept the rescission offer, Stewart
Holdings would face an ongoing requirement to reduce payroll and other
operating expenses. Its ability to make new loans would be based on its
collection of outstanding loans and its ability to obtain additional funding
either from borrowing or other sources. Stewart Holdings has no specific plan
to obtain sufficient funding to satisfy this rescission offering if more than
50% of the offerees accept the rescission offer.
YEAR 2000 COMPLIANCE.
The state of Stewart Holdings' readiness.
The Year 2000 issue results from computer programs being written using
two digits rather than four to define the applicable year. Any of Stewart
Holdings' computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could cause a system failure or miscalculations resulting in
disruptions of operations, including, among other things, a temporary inability
to process transactions, send statements or engage in similar normal business
activities.
Stewart Holdings has a four-phase plan to resolve the Year 2000 issue
with respect to its internal and external systems:
- Identifying significant systems and assessing potential Year
2000 issues relating to those systems;
- Renovating, repairing and replacing noncompliant systems;
- Testing and validating solutions; and
- Implementing those solutions.
The first and second phase of the plan have been completed and Stewart
Holdings has substantially completed the third phase. The first phase involved
assessing all computer controlled systems, including the computer systems of
Stewart Holdings' vendors, telecommunications, security and
16
<PAGE> 18
alarm, elevator, telephone, HVAC, and environmental systems with embedded
microchips. Stewart Holdings' local area network has been evaluated and is Year
2000 compliant.
The second phase involves upgrading, as applicable, hardware,
software, networks and other processing platforms. The noncompliant individual
personal computers throughout the organization have been replaced. Stewart
Holdings also has upgraded the versions of the spreadsheet and word processing
programs it uses for internal purposes to the Year 2000 compliant versions.
The testing, validation and implementation phases are substantially
complete. During the remainder of 1999 additional testing and re-testing will
be performed, and every effort will be made to ensure the conversion from 1999
to the Year 2000 is uneventful.
The costs to address Stewart Holdings' Year 2000 issues.
The costs associated with Stewart Holdings' Year 2000 issues are not
expected to have a material impact on the long term results of the operations
or financial condition of Stewart Holdings. The total expense to upgrade the
individual personal computers throughout the organization was approximately
$35,000. The software upgrade cost approximately $5,000. Stewart Holdings also
has incurred consulting expenses of approximately $15,000 in connection with
its Year 2000 plan. Expenses incurred in the upgrade and testing of the new
hardware and software for the vendors' data processing systems are the outside
vendors' responsibility.
The risks of Stewart Holdings' Year 2000 issues.
Stewart Holdings believes that the failure of third parties to address
their Year 2000 problems in a timely fashion presents the greatest likelihood
of Stewart Holdings not being fully Year 2000 compliant. Such a failure could
materially adversely impact Stewart Holdings' operations and the estimated
costs of the Year 2000 plan. The effect of non-compliance by third parties is
not determinable at this time. Stewart Holdings could be subject to litigation
for computer systems product failure including equipment shutdown or failure to
properly date business records or process transactions. The amount of potential
liability, if any, and lost revenue cannot be reasonably estimated at this
time.
Stewart Holdings' contingency plans.
Stewart Holdings has contingency plans in place for mission critical
systems in the event of unforeseen difficulties to minimize any disruptions.
Personnel of Stewart Holdings have been trained and advised to operate on a
manual basis, with all items going to Stewart Holdings' corporate headquarters
for processing. The corporate headquarters will operate on a power generator
that should allow continued processing and service to Stewart Holdings'
customers in the event of interruption of electric utility service.
17
<PAGE> 19
BUSINESS
OUR BUSINESS.
Our business primarily consists of making small balance consumer
finance loans to individuals in relatively small original principal amounts for
relatively short periods of time. In Georgia, our small balance consumer loans
do not exceed $3,000 in original principal amount and are originated under the
Georgia Industrial Loan Act, ("GILA"). As of June 30, 1999, approximately 46.9%
of the aggregate amount of our outstanding loans were small balance consumer
loans originated under GILA. In Louisiana, Missouri and Illinois, our small
balance consumer loans do not exceed $500 in original principal amount. We
originate these loans under the small loan consumer finance laws and
regulations applicable in the state where the loans are made. For the most
part, these laws and regulations are similar to GILA. As of June 30, 1999,
approximately 33.3% of the aggregate amount of our outstanding loans were small
balance consumer loans originated by our Louisiana, Missouri and Illinois
subsidiaries.
In Louisiana, Missouri and Illinois, our business consists almost
exclusively of making and servicing small balance consumer loans. In Georgia,
however, we undertake various other lending and non-lending activities. For
example, our lending activities in Georgia include originating:
- larger balance consumer loans to individuals in original
principal amounts in excess of $3,000 that are not regulated
under GILA;
- insurance premium loans, which we offer to finance a
borrower's purchase of property and casualty insurance; and
- tax refund loans, which are loans we make to individuals who
anticipate receiving a federal income tax refund.
We also sell certain credit related insurance products in connection with our
Georgia and Louisiana loans, such as life, accident and health, and property
and automobile insurance. Finally, we sell memberships in an automobile club
through our Georgia branch offices, which provides payment or reimbursement of
automobile emergency related expenses such as towing charges and roadside
repair.
As of June 30, 1999, we had approximately 47,050 loan accounts and
approximately $13,447,292 in total amount of loans outstanding. Of this amount,
our small balance consumer loans and our larger balance consumer loans
comprised in excess of 98% of the total amount of our outstanding loans. Our
resources as of June 30, 1999 were invested primarily in small and larger
balance consumer loans, which together comprised approximately 57% of our total
assets on that date. For the six month period since Stewart Holdings'
inception, approximately 68% of our revenue was derived from interest, fees and
related charges earned on these loans. We also earned an additional 30% of our
revenue for the six month period from commissions on sales of credit related
insurance products and automobile club memberships, while 2% of our revenue for
such period was derived from interest, fees and related charges earned on
insurance premium loans and tax refund loans.
DESCRIPTION OF LOANS.
The following table sets forth certain information regarding Stewart
Holdings' loans for the fiscal years ended December 31, 1998, 1997, 1996 and
1995 and for the six-month period ended June 30, 1999:
18
<PAGE> 20
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------ --------
1998 1997 1996 1995 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Number of Loans
Outstanding...................... 41,798 32,585 22,214 15,831 47,050
Total Amount of Loans Outstanding
(Gross) (in thousands)...........
$13,416 $10,940 $ 4,468 $ 7,104 $13,447
Average Balance on Outstanding
Loans (in thousands).............
$ 321 $ 336 $ 381 $ 449 $ 286
Average Amount of Loans Outstanding
Per Branch....................... $ 327 $ 322 $ 565 $ 374 $ 313
Average Number of Loans Outstanding
Per Branch....................... 1,019 958 966 833 1,120
</TABLE>
SMALL BALANCE LOANS. Stewart Holdings originates its small balance
loans to individual consumers who use the proceeds of these loans primarily for
payment of unusual or unforeseen expenses, discharging accumulations of small
debts, or purchasing furniture or appliances. As of June 30, 1999, the
aggregate amount of small balance loans Stewart Holdings had outstanding was
approximately $10,887,000, which represented approximately 81% of Stewart
Holdings' total amount of loans outstanding as of that date. As of June 30,
1999, approximately 46.9% of Stewart Holdings small balance loans were
originated by Stewart Georgia. The average maturity of Stewart Holdings' small
balance loans as of June 30, 1999 was 5.9 months. Stewart Holdings generally
secures small balance loans by obtaining a security agreement from the borrower
which grants Stewart Holdings a security interest in specified collateral. In
connection with its small balance loans in Georgia, however, Stewart Holdings
does not perfect its security interest by filing any financing statements or
deeds to secure debt or taking possession of any title certificates. Instead,
Stewart Holdings relies on the borrower's payment of "non-recording" insurance.
There are no non-accruing loans in Stewart Holdings' loan portfolio.
The table below provides information with respect to the small balance
loans made by Stewart Holdings, including the average annual yield on such
loans for the fiscal years ended December 31, 1998, 1997, 1996 and, 1995 and
for the six-month period ended June 30, 1999. The average annual yield on
Stewart Holdings' loans is calculated by taking the ratio of finance charges,
including late charges, earned the loans to the average net outstanding balance
of a loans.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------ JUNE 30,
--------
1998 1997 1996 1995 1999
---- ---- ---- ---- ----
(IN THOUSANDS EXCEPT FOR PERCENT DATA)
<S> <C> <C> <C> <C> <C>
Average Amount Outstanding......... $ 9,352 $ 8,752 $ 6,974 $ 6,009 $ 10,645
Average Interest Earned............ $ 4,766 $ 3,209 $ 2,757 $ 1,917 $ 2,700
Average Annual Yield............... 32% 31% 37% 33% 32%
</TABLE>
19
<PAGE> 21
LARGER BALANCE LOANS. In Georgia, Stewart Holdings also originates
loans to individuals in original principal amounts in excess of $3,000, which
loans are used for various purposes but most typically to finance the
borrower's purchase of personal property. As of June 30, 1999, the approximate
aggregate amount of larger balance loans Stewart Holdings had outstanding was
$2,563,000 which represented approximately 19% of Stewart Holdings' total loans
outstanding as of that date. The average maturity of Stewart Holdings' larger
balance loans as of June 30, 1999 was 22 months. Larger balance loans are
secured by a security interest in the property that is the subject of the loan
and Stewart Holdings attempts to perfect its security interest by filing
financing statements in the case of personal property which does not have a
certificate of title, and holding certificates of title on automobiles and
other similar certificated property. There are no non-accruing loans in Stewart
Holdings' loan portfolio.
The table below provides information with respect to the larger
balance loans made by Stewart Holdings, including the average annual yield on
such loans, for the fiscal years ended December 31, 1998, 1997, 1996 and 1995
and the six-month period ended June 30, 1999:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------ --------
1998 1997 1996 1995 1999
---- ---- ---- ---- ----
(IN THOUSANDS EXCEPT PERCENT DATA)
<S> <C> <C> <C> <C> <C>
Average Amount Outstanding..... $ 2,563 $ 2,188 $ 1,494 $ 1,095 $ 2,560
Average Interest Earned........ $ 756 $ 618 $ 538 $ 369 $ 445
Average Annual Yield........... 30% 36% 31% 31% 30%
</TABLE>
OTHER TYPES OF LOANS. Stewart Holdings also offers a variety of other
types of loans and services in its Georgia branch offices that it doesn't offer
in Louisiana, Missouri or Illinois. For example, Stewart Holdings provides
insurance premium loans to finance the purchase of automobile, property and
casualty insurance exclusively for Ben Stewart Insurance and Realty, Inc.,
which is wholly owned by John B. Stewart, Jr. Stewart Holdings obtains an
assignment of insurance policies which it finances so that in the event of a
cancellation of the policy as a result of a loan default, or otherwise, Stewart
Holdings receives any rebate of unearned premiums which it can apply against
the loan balance. Otherwise, insurance premium loans are unsecured. Stewart
Holdings also provides loans to individuals based on their anticipated federal
income tax refund. As of June 30, 1999, the aggregate amount of insurance
premium loans and tax refund loans Stewart Holdings had outstanding was
$242,000, which represented less than 1% of Stewart Holdings' total loans
outstanding as of that date. There are no non-accruing loans in Stewart
Holdings' loan portfolio.
UNDERWRITING.
Prior to making any loan to a potential borrower, it is Stewart
Holdings' policy to conduct a credit investigation to determine the income,
existing indebtedness, length and stability of employment, and other relevant
information concerning the potential borrower. The account is credit scored,
and this score is used in making the loan decision. In making small balance
loans and insurance premium loans, Stewart Holdings places emphasis upon the
potential borrower's ability to repay the loan rather than upon the potential
resale value of any underlying collateral. In making larger balance loans,
however, Stewart Holdings places more emphasis upon the marketability and value
of the underlying collateral than on the potential borrower's ability to repay
the loan.
20
<PAGE> 22
DELINQUENCIES.
Delinquent accounts are classified at the end of each month according
to the number of installments past due at that time based on the original or
extended terms of the contract. When 75% of an installment has been paid, it is
not considered delinquent for the purpose of this classification. When three
installments are past due, the account is classified as being 60-89 days past
due; when four or more installments are past due, the account is classified as
being 90 days or more past due. Stewart Holdings has an immediate response
policy for delinquencies and attempts to collect loans that are one day past
due. Stewart Holdings' loan officers are encouraged to contact the customer
each day and to continue collection efforts for 90 days. Stewart Holdings may
renew or modify past due loans; however, if the loan continues in a delinquent
status for 90 days, Stewart Holdings generally attempts to exercise its
remedies, including legal action, primarily through actions filed in small
claims court. Stewart Holdings considers renewals of past due loans to be in
the ordinary course of business and does not maintain records of the number of
past due loans which are renewed. Based on recent collection experience,
Stewart Holdings now writes off past due balances at 240 days.
The table below shows the amount of classifications of delinquencies
and the ratio that such delinquencies bear to related outstanding loans for the
years ended December 31, 1998, 1997, 1996, 1995 and the six months ended June
30, 1999. Stewart Holdings changed its accounting methods in 1996 to include in
the category of loans that are 90 or more days past due balanced of loans that
are subject to bankruptcy or legal proceedings. For the years ended 1998, 1997
and 1996, the aggregate loan balances for customers who had filed bankruptcy
were $430,000, $630,000 and $180,000, respectively. Prior to 1996, the balance
of a bankrupt customer was charged off to bad debts and removed from loan
receivables. Stewart Holdings has no non-accruing loans in its loan portfolio
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------ --------
1998 1997 1996 1995 1999
---- ---- ---- ---- ----
(IN THOUSANDS EXCEPT PERCENT AND AVERAGE DATA)
<S> <C> <C> <C> <C> <C>
Loans 60-89 Days $ 197 $ 294 $ 162 $ 113 $ 297
Percentage of Outstanding
Loans 1.47% 0.90% 1.91% 1.59% 2.21%
Loans 90 Days or More Past
Due $ 1,493 $ 1,643 $ 741 $ 246 $ 1,466
Percentage of Outstanding
Loans 11.13% 15.02% 8.75% 3.46% 10.90%
Average Number of Loans
Outstanding Per Branch
1,019 958 966 833 1,120
</TABLE>
21
<PAGE> 23
LOSS EXPERIENCE.
The table below provides net losses (charge-offs less recoveries) for
the years ended December 31, 1998, 1997, 1996 and 1995 and the six-month period
ended June 30, 1999:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------ --------
1998 1997 1996 1995 1999
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Charge-offs.................... $794 $ 862 $604 $203 $917
Recoveries..................... 478 1,049 662 61 69
---- ------ ---- ---- ----
Net Loss....................... 316 (187) (58) 142 848
</TABLE>
ALLOWANCE FOR LOAN LOSSES.
Stewart Holdings determines its allowance for loan losses based on
previous loss experience, a review of specifically identified potentially
uncollectible loans and management's evaluation of the inherent risks in, as
well as the change in the composition of, Stewart Holdings' loan portfolio.
Such allowance is, in the opinion of management, sufficient to provide adequate
protection against future loan losses.
CREDIT-RELATED INSURANCE.
NON-RECORDING INSURANCE. Generally, Stewart Holdings' small balance
loans are secured by specific personal property owned by the borrower and
listed on a security agreement. In Georgia, however, Stewart Holdings charges
the borrower who chooses not to pay the costs associated with, and incur the
other detriments of, a secured loan the cost of purchasing "insurance" rather
than providing a perfected security interest. The insurance purchased under
this arrangement is commonly known as "non-recording" insurance because no
financing statement is filed. Despite its characterization as "insurance," the
payment made by the borrower is not actually a form of insurance, but is rather
a payment for Stewart Holdings' self-retention risk. Stewart Holdings' practice
is not to waive "non-recording" insurance for unsecured small balance loans
under GILA. Georgia regulations governing "non-recording" insurance provide
that such insurance can be written on loans with a face amount of greater than
$100 in lieu of recording a security instrument with the proper public official
or agency of the state. The rates for such "non-recording" insurance must meet
standards and requirements of the Georgia Insurance Code and Stewart Holdings
is not allowed to select "non-recording" insurance instead of recording a
security instrument if the former choice will cost the borrower more money than
the latter choice. Stewart Holdings' current charges for "non-recording"
insurance are $10 if personal property is listed as security and $25 if both
personal property and an automobile are listed as security. Stewart Holdings
does not charge borrowers "non-recording" insurance in any state other than
Georgia.
OTHER INSURANCE SALES. Stewart Georgia and Stewart Louisiana are
authorized to sell credit-related insurance to their loan customers and to
charge and collect from such customers premiums actually paid for the insurance
that they obtain on behalf of their customer. Under applicable regulations,
such insurance must be reasonably related to the type and value of the property
at issue and the amount and term of the loan. Additionally, such insurance may
be obtained only through an insurance company authorized to do business in the
state in which the loan is originated.
When authorized to do so by its customers, Stewart Georgia and Stewart
Louisiana act as a subagent for Voyager Insurance Company, an un-affiliated
insurance company based in Jacksonville, Florida, through which it places life,
accident and health, property and automobile insurance in
22
<PAGE> 24
connection with its loans. At a minimum, the manager of each Stewart Georgia
and Stewart Louisiana branch locations is licensed as a subagent of Voyager to
sell credit-related insurance. Commissions are determined on the basis of 40%
of the premiums collected on insurance other than the so called "non-recording"
insurance. Under applicable regulations, Stewart Georgia and Stewart Louisiana
are authorized to sell level term life insurance and reducing term life
insurance, which can be written as security on all loans. The insurance
coverage is not allowed to exceed the face amount of the loan contract. Stewart
Georgia and Stewart Louisiana also are authorized to write credit accident and
sickness insurance, household goods fire insurance (provided that the face
amount of the contract is $200 or more), and automobile insurance against loss
or damage caused by fire, theft or collision. Stewart Holdings does not write
any type of insurance anywhere other than in Georgia and Louisiana.
The following table sets forth information regarding Stewart Holdings'
commissions on insurance activities for the fiscal years ended December 31,
1998, 1997, 1996, and 1995 and the six-month period ended June 30, 1999:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ --------------
1998 1997 1996 1995 1999
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commissions on Sales of
Insurance.................... $1,916 $1,364 $1,283 $964 $1,284
</TABLE>
AUTO CLUB MEMBERSHIPS.
Stewart Holdings is affiliated through common ownership with Preferred
Choice Auto Club, Inc. ("Auto Club"), which is owned by John B. Stewart, Jr.,
the sole shareholder of Stewart Holdings. The Auto Club provides payment or
reimbursement of certain automobile emergency related expenses such as towing
charges and roadside repair. Stewart Holdings offers memberships in the Auto
Club to its Georgia customers through its branch offices as a service to its
customers and receives a commission for membership sales.
The following table sets forth information regarding Stewart Holdings'
commissions on Auto Club activities for the fiscal years ended December 31,
1998, 1997, 1996, and 1995 and the six-month period ended June 30, 1999:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------ --------
ACTIVITY 1998 1997 1996 1995 1999
- -------- ---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commissions on Sales of Auto Club
Memberships...................... $ 1,095 $ 1,003 $ 687 $ 582 $ 571
</TABLE>
GOVERNMENT REGULATION.
The business of Stewart Holdings is subject to regulation through
statutes and through supervision by administrative agencies. Because in excess
of 46.9% of the aggregate amount of he Company's outstanding loans are
originated under GILA, the following discussion of the regulatory environment
in which Stewart Holdings operates will focus on GILA. The small balance loans
Stewart Holdings originates in Louisiana, Missouri and Illinois are governed by
small loan consumer finance laws substantially similar to GILA.
23
<PAGE> 25
The small balance loans made by Stewart Holdings in Georgia are
governed by GILA, which governs loans of $3,000 or less and requires that
lenders subject to GILA not lend funds for a term of more than 36 months and 15
days. GILA provides for a maximum rate of interest and specifies permitted
additional fees which can be charged for a loan, including loan fees,
maintenance fees and late fees. Stewart Holdings is also authorized to collect
the actual and reasonable expense of repossessing, storing, and selling any
collateral pledged as security. In general, charges, interest and fees cannot
exceed the 5% per month limit established by the criminal usury provisions of
Georgia law.
GILA requires that each office in which a small loan business is
conducted be licensed by the State of Georgia. The granting of a license
depends on a finding of public convenience and advantage for the proposed
office, and a finding of the financial responsibility, character and fitness of
the applicant. Pursuant to regulations under GILA, Stewart Holdings is required
to demonstrate that it has a minimum net worth of $25,000 to begin business. As
a condition to obtaining such license, the applicant must consent to state
regulation and examination and to the making of periodic reports to the Georgia
Industrial Loan Department. Licenses are revocable for cause, and their
continuance depends upon compliance with the law and regulations under which
they are issued. As of the date of this prospectus, Stewart Holdings has never
had any of its GILA licenses revoked. A breach of any applicable rules or
regulations may result in a fine of up to $l,000 (or $5,000 if Stewart Holdings
knew or should have reasonably known that it was in violation of the applicable
rules and regulations) or Stewart Holdings' being placed on probation by the
Commissioner of the Georgia Industrial Loan Department. GILA regulations also
prescribe debt collection practices which govern the conduct of Stewart
Holdings' employees and agents in collecting debts. The Georgia Insurance
Department, which regulates and enforces GILA, periodically conducts audits of
Stewart Holdings and its individual branches. Stewart Holdings follows its own
internal audit procedures in an effort to insure that its operations are
conducted in accordance with the rules and regulations of the Georgia Insurance
Department and the requirements of GILA.
All of Stewart Holdings' lending operations are carried on under the
provisions of the Federal Consumer Credit Protection Act and the Fair Credit
Reporting Act. On all loans made by Stewart Holdings, the finance charge, the
annual percentage rate, the total of payments and other disclosures required by
the Truth-in-Lending Act are disclosed to the borrower.
A Federal Trade Commission ruling prevents Stewart Holdings and other
consumer lenders from using household goods as collateral on small balance
loans. Stewart Holdings believes the inability to use household goods as
collateral has not had any adverse impact on the quality of Stewart Holdings'
receivables, since the primary credit consideration in making small balance
loans is the customer's ability to repay the loan, and not the collateral
available in the event of default. Stewart Holdings secures its larger balance
loans with non-household collateral such as automobiles, boats and other items
which are exempt under Federal Trade Commission rulings.
Stewart Holdings is also licensed as an insurance premium finance
company in Georgia under the Georgia Insurance Premium Finance Company Act.
Pursuant to the Insurance Premium Finance Act, Stewart Holdings is required to
maintain a minimum balance of at least $5,000 (or such higher amount required
by the Georgia Insurance Commissioner) in its capital account as shown on its
annual report to the Commissioner and a $25,000 bond. The transaction of
Stewart Holdings' insurance premium finance business is subject to the
statutory limitations, proscriptions, licensing requirements and the
supervision and regulation of the Georgia Insurance Department.
COMPETITION.
Stewart Holdings competes with national, regional and local finance
companies in the communities in which it serves and, to a lesser extent, with
commercial banks. Stewart Holdings believes that customer service is the
primary factor that differentiates finance companies, since most competing
finance companies, including Stewart Holdings, charge the same rate of interest
and fees as permitted by the applicable state regulatory authorities. Stewart
Holdings believes it has been able to compete
24
<PAGE> 26
effectively with other lenders in its market area through superior customer
service. Many of Stewart Holdings' competitors, however, have substantially
greater resources and larger branch networks than Stewart Holdings and are able
to offer a broader range of products and services.
LEGAL PROCEEDINGS.
There are no pending legal proceedings to which Stewart Holdings is a
party or to which the property of Stewart Holdings is subject which management
believes would have a material effect upon the operations or financial
condition of Stewart Holdings. No information has been received with respect to
any claim that might constitute a basis for any such material litigation.
EMPLOYEES.
Stewart Finance Company Holdings, Inc. does not have any employees.
Instead, all of the employees of Stewart Holdings are employed by its
subsidiaries. As of June 30, 1999, the subsidiaries of Stewart Holdings
employed 245 full-time persons, including 46 in managerial functions, 14 in
corporate headquarters functions and 185 in branch operations. The employees
include 3 executive officers, 1 senior supervisor, 12 supervisors, a corporate
headquarters manager, the corporate headquarters administrative staff, along
with office managers, assistant managers and cashiers at each branch location.
FACILITIES.
Stewart Holdings' corporate headquarters are located in four office
buildings in Union Point, Georgia, which are owned by Stewart Georgia and
contain approximately 50,000 aggregate square feet of capacity. Stewart
Holdings leases office space for all of the other branches. Stewart Holdings
believes that its facilities are adequate for its current operations.
EFFECT OF RESCISSION OFFER BY STEWART GEORGIA.
The effect of Stewart Georgia's rescission offer on the business
operations of Stewart Holdings will depend upon the level of acceptance by
rescission offerees. Please refer to a more detailed discussion of the effect
the rescission offer may have on our business operations and financial
condition at various levels of acceptance under the caption "Plan for payment
of security holders accepting Stewart Georgia's rescission offer" contained
within the section of this prospectus entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
25
<PAGE> 27
RESCISSION OFFER BY STEWART GEORGIA
BACKGROUND INFORMATION.
Stewart Georgia is offering to eligible purchasers of its senior
demand notes, subordinated debentures and series A preferred stock the
opportunity to rescind or void their purchase of those securities. The
rescission offer is being made only to persons who purchased those securities
from Stewart Georgia by payment or exchange (in the case of the preferred
stock) and will not be extended to persons who purchased any of those
securities from any other person. Eligible offerees who elect to participate in
the rescission offer will exchange their securities for cash. The amount of
cash they will receive will equal the original purchase price of the
securities, plus accrued and unpaid interest (if the securities surrendered are
senior notes or debentures) or accrued and unpaid dividends (if the securities
surrendered are shares of preferred stock). As of June 30, 1999, Stewart
Georgia had outstanding senior demand notes in the aggregate principal amount
of $921,824, subordinated debentures in the aggregate principal amount of
$11,625,746 and 33,475 shares of series A preferred stock. Stewart Georgia's
rescission offer covers all of those securities.
WHY IS STEWART FINANCE COMPANY OFFERING TO RESCIND ITS SALE OF THESE
SECURITIES?
Stewart Georgia offered and sold these securities in a continuous
series of offerings beginning in 1989 in reliance on what is referred to as the
"intrastate offering" exemption under Section 3(a)(11) of the Securities Act of
1933. In order to satisfy that exemption's requirements, Stewart Georgia had to
offer and sell these securities only to residents of the State of Georgia and
had to confine the vast majority of its business operations to the State of
Georgia. While Stewart Georgia did limit its offer and sale of these securities
to Georgia residents, over time it may have used a larger and larger percentage
of the proceeds from the sale of these securities to fund the operations of its
affiliated companies located outside Georgia. As a result, the intrastate
offering exemption may not have been available, which means that holders of
Stewart Georgia's securities may have the right under applicable federal and
state law to recover the price that they paid for their securities, plus
interest, reduced by any income received on or from their securities. Stewart
Georgia is making the rescission offer voluntarily to limit, as far as may be
permissible under applicable securities laws, its potential liability stemming
from its possible non-compliance with applicable state and federal securities
laws. You should note, however, that the Securities and Exchange Commission
takes the position that liabilities under the federal securities laws are not
terminated by making a rescission offer.
LEGAL EFFECT OF THE RESCISSION OFFER.
- Federal securities laws. We believe that Stewart Georgia's potential
liability under applicable federal securities laws resulting from its offer and
sale of the securities subject to the rescission offer will be eliminated with
respect to those eligible security holders who accept the rescission offer and
exchange their securities for cash. The Securities and Exchange Commission,
however, takes the position that liabilities under the federal securities laws
are not terminated by making a rescission offer. We believe, however, that
acceptance of the rescission offer and receipt by the eligible security holder
of the cash consideration to be paid for such person's securities, should have
the effect of terminating liability to that security holder because the damages
element of any claim by the security holder will be eliminated.
If an eligible security holder affirmatively rejects or fails to
respond to the rescission offer, Stewart Georgia's potential liability under
the Securities Act of 1933 may not be completely extinguished. Under those
circumstances, Stewart Georgia may assert that these security holders released
any claims to recover the purchase price of their securities because of their
rejection or inaction. If the affirmative rejection or failure to respond to
the rescission offer does not act as a release of claims, eligible security
holders who have rejected or failed to respond to the rescission offer would
retain any rights or claims
26
<PAGE> 28
they may have under the federal securities laws. Such claims would be subject
to any defenses Stewart Georgia may have, including the running of the statute
of limitations.
In general, to sustain a claim based on violations of the registration
provisions of the federal securities laws, the claim must be brought within one
year after discovery of the violation upon which the claim is based, but in no
event more than three years after the occurrence of the violation. The statute
of limitations may have already run with respect to some eligible holders of
securities.
- Georgia securities laws. Under Georgia securities laws, a person may
sue an issuer that offers or sells a security in violation of the Georgia
registration requirements to recover the consideration paid for the security,
together with interest at the stated rate per annum appearing on the face of
such security (or 6% per annum for a non-interest bearing security) from the
date of payment, less the amount of any income received on the security, until
the person's return of the security. Under Georgia law, no person may sue based
on a violation of the registration provisions of Georgia law more than two
years after the contract of sale. In any event, a buyer of securities in
Georgia may not sue if he has received a bona fide offer in writing to refund
the consideration paid for such security, together with interest at the
applicable rate, from the date of payment, less the amount of any income
received on the security, and such buyer has failed to accept the offer within
30 days of its receipt.
FUNDING THE RESCISSION OFFER.
Stewart Holdings does not have liquid assets sufficient to pay the
roughly $15,922,070 in cash that it would need to pay if the rescission offer
were accepted by all of the eligible security holders. Because we have no way
of predicting the number of eligible security holders who will accept the
rescission offer or how many securities they own, we cannot provide you with a
realistic description of the effect that the rescission offer will have on the
financial condition of Stewart Georgia individually, or Stewart Holdings
collectively. We have tried, however, to analyze the potential effect at
various levels of acceptance under the caption "Plan for payment of security
holders accepting Stewart Georgia's rescission offer," which can be found in
the section of this prospectus entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
27
<PAGE> 29
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES.
The individuals described below are the directors, executive officers and
other key personnel of Stewart Holdings. As previously discussed, none of these
individuals are employed by Stewart Finance Company Holdings, Inc., but each is
employed instead by Stewart Georgia.
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<S> <C> <C>
John B. Stewart, Jr. 49 Director, President and Treasurer
Jeffery L. Smith 44 Vice President
Janice M. Wallace 34 Secretary
Frederick Boutwell 34 Director of Operations
</TABLE>
John B. Stewart, Jr. Mr. Stewart is the founder of Stewart Holdings and
has been Stewart Holdings' President, Treasurer and a director since Stewart
Holdings' inception in 1998. Mr. Stewart is also the sole shareholder of
Stewart Holdings. In addition to his duties with Stewart Holdings, Mr. Stewart
is currently serving a fourth term as the Mayor of the City of Union Point,
Georgia. Mr. Stewart received his bachelor's degree in Finance from the
University of Georgia.
Jeffery L. Smith. Mr. Smith has served as the Vice President of Stewart
Georgia since April 1993. As Vice President, Mr. Smith is responsible for
general operations of Stewart Holdings' business, with particular emphasis on
the Union Point corporate headquarters office. Mr. Smith is responsible for
general supervision of Stewart Holdings' programs. Prior to being employed by
Stewart Georgia, Mr. Smith was, from 1977 to 1993, employed by the Central and
Southern Bank of Greensboro, where he served as a Senior Vice President from
1988 to 1993. Mr. Smith received his Bachelor of Business Administration in
accounting from the University of Georgia in 1977.
Janice M. Wallace. Ms. Wallace has served as the Secretary of Stewart
Georgia since 1992 and has been employed by Stewart Georgia since 1988. Ms.
Wallace graduated from Greene-Taliaferro High School.
Frederick Boutwell. Mr. Boutwell has served as the Director of Operations
for Stewart Georgia since June 1996. In this capacity, Mr. Boutwell is
responsible for the overall office operations of Stewart Holdings. Prior to
being employed by Stewart Georgia, Mr. Boutwell was, from 1991 to 1996,
employed by The Money Tree as a regional supervisor. Mr. Boutwell graduated
from Central of Thomas County High School.
The directors of Stewart Holdings are elected annually and serve a term
of one year which expires at the annual meeting of shareholders following their
election, or at the earlier of their resignation, removal from office or death.
Officers of Stewart Holdings are appointed annually by the board of directors
and serve one year terms, or until their earlier resignation, removal from
office or death.
28
<PAGE> 30
EXECUTIVE COMPENSATION.
The following table sets forth the aggregate compensation for services
rendered to Stewart Georgia in all capacities paid or accrued for the fiscal
years ended December 31, 1998, 1997 and 1996. No executive officer of Stewart
Georgia received aggregate cash and cash equivalent forms of compensation in
excess of $100,000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
ALL OTHER
---------
NAME CAPACITY SALARY YEAR BONUS COMPENSATION
- ---- -------- ------ ---- ----- ------------
<S> <C> <C> <C> <C> <C>
John B. Stewart, Jr. President, Director $60,000 1998 N/A $27,000
$60,000 1997 N/A 27,000
$60,000 1996 N/A 27,000
</TABLE>
INDEMNIFICATION.
Stewart Holdings has, pursuant to the authority granted under Georgia
law, agreed to indemnify any officer or director of Stewart Holdings against
any expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually or reasonably incurred by him in any action, suit or
proceeding brought or threatened to be brought against him by reason of the
fact that he is or was an officer or director of Stewart Holdings if he acted
in a manner he reasonably believed to be in or not opposed to the best
interests of Stewart Holdings, and with respect to any criminal proceeding, had
no reasonable cause to believe his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Stewart Holdings pursuant to the foregoing provisions, or otherwise, Stewart
Holdings has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable.
PROFIT SHARING 401(K) PLAN.
Stewart Georgia has established a Profit Sharing 401(k) Plan, which is
qualified under Sections 401(a) and 401(k) of the Internal Revenue Code
("Code"), pursuant to which all employees of Stewart Georgia may elect to have
Stewart Georgia make certain salary reduction contributions on their behalf.
Subject to certain annual limitations imposed by the Code ($10,000 per
participant in 1999), an employee may elect to contribute up to 15% of his or
her total compensation to the plan on a pre-tax basis. Each participant in the
401(k) Plan is fully vested in his or her salary reduction contributions
account. In addition, at the end of each "plan year", Stewart Georgia may make
a discretionary matching contribution with respect to the first 4% of each
participant's salary reduction contribution for the relevant plan year in an
amount that is equal to a specified percentage of the participant's
contributions as determined by the board of directors. Each participant becomes
vested ratably in Stewart Georgia's contributions on behalf of the participant
at the rate of 20% after two years of service with Stewart Georgia and an
additional 20% for each subsequent year of service, becoming fully vested after
six years of service.
29
<PAGE> 31
PRINCIPAL SHAREHOLDERS
The table below presents information regarding the beneficial ownership
of all shares of common stock of Stewart Holdings as of June 30, 1999 by:
(i) each person who owns beneficially more than five percent of the
outstanding shares of common stock;
(ii) each director of Stewart Holdings;
(iii) each named executive officer; and
(iv) all directors and officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
- ------------------------ ------ -------
<S> <C> <C>
John B. Stewart, Jr. (director, executive officer)..................... 42,000 100%
All directors and officers as a group.................................. 42,000 100%
</TABLE>
The business address of Mr. Stewart is the same as the address of Stewart
Holdings' principal executive offices.
30
<PAGE> 32
CERTAIN TRANSACTIONS
As of June 30, 1999, Stewart Holdings (through its subsidiary Stewart
Georgia) had the following loan transactions with parties that are related to
Stewart Holdings.
- During 1996 and 1997, Stewart Georgia acquired a portfolio of
marketable securities at the direction of John B. Stewart, Jr. At the request
of Stewart Georgia's lenders, the portfolio was transferred from Stewart
Georgia into Mr. Stewart's individual name. Stewart Georgia accounted for this
transfer as an advance to Mr. Stewart in the amount of $1,363,087, which was
the market value of the securities in the portfolio when they were transferred
to Mr. Stewart. The advance was unsecured, non-interest bearing, had no stated
maturity and was not represented by a written instrument. On or about June 15,
1999, Mr. Stewart repaid the advance in full and loaned Stewart Georgia an
additional $246,866. The loan is unsecured, non-interest bearing, has no stated
maturity and is not represented by a written instrument. Mr. Stewart obtained
the proceeds to repay the advance and to make the loan to Stewart Georgia by
personally borrowing money from individuals pursuant to written promissory
notes. Mr. Stewart is obligated to repay the principal balance of such notes,
together with interest at 9% per annum, on demand at the request of the holders
of such notes.
- On December 15, 1989, Stewart Georgia issued to John B. Stewart, Jr., a
senior demand note in the aggregate principal amount of $26,887.00. As of
December 31, 1998, the outstanding principal balance of this note was
$72,297.48. Interest on this senior note is payable monthly at a rate of 9% per
annum and the outstanding principal balance of the note is repayable on demand
at the request of Mr. Stewart. As of June 30, 1999, the outstanding principal
balance of this note was $502.27.
- On July 18, 1995, Stewart Georgia issued to Stewart Insurance, Ltd., an
insurance company which is owned entirely by John B. Stewart, Jr., and
domiciled in the Turks and Caicos Islands, a senior demand note in the
aggregate principal amount of $50,667.04. As of June 30, 1999, the outstanding
principal balance of this note was $106,438.88. Interest on this senior note is
payable monthly at a rate of 7% per annum and the outstanding principal balance
of the note is repayable on demand at the request of Stewart Insurance, Ltd.
- On February 26, 1999, Stewart Georgia issued to J&J Reinsurance, Ltd.,
an insurance company which is owned entirely by John B. Stewart, Jr., and
domiciled in the Turks and Caicos Islands, a senior demand note in the
aggregate principal amount of $23,126.24. As of June 30, 1999, the outstanding
principal balance of this note was $79,550.12. Interest on this senior note is
payable monthly at a rate of 8% per annum and the outstanding principal balance
of the note is repayable on demand at the request of J&J Reinsurance, Ltd.
- Stewart Georgia has a loan outstanding in the aggregate principal
amount of $137,573.82 that was made on July 12, 1999 to Richard Stewart, who is
the brother of John B. Stewart, Jr. The loan is amortized in equal monthly
installments of principal and interest over its term, which matures on July 1,
2004. The loan bears interest at an annual percentage rate of 12%.
Stewart Georgia is subject to various conflicts of interest in its
relationship with Mr. Stewart and his other business enterprises. The following
relationships between Stewart Georgia and related parties may involve actual or
potential conflicts of interest.
- Stewart Georgia provides cash advances and accounting services to
Stewart Louisiana, Stewart Missouri, and Stewart Illinois. As of June 30, 1999,
Stewart Georgia was owed $8,385,137 for advances and services provided to these
affiliates. Stewart Georgia earns no return on funds advanced or services
rendered to these affiliates, the advances and services are not made pursuant
to written instruments and there is no schedule established for repayment of
the advances or payment for the services. At December
31
<PAGE> 33
31, 1998, Stewart Georgia and each of the affiliates identified above was
wholly owned by John B. Stewart, Jr.
- Voyager Insurance Company has a risk sharing agreement with Stewart
Insurance, Ltd. Under this agreement, Stewart Insurance, Ltd. bears a
portion of the risk of loss associated with insurance placed by Stewart
Georgia with Voyager Insurance Company on a retrospective plan under which
Stewart Insurance, Ltd. receives as profit a portion of the insurance
commissions paid to Voyager Insurance Company determined on the basis of
its loss experience. Stewart Georgia has no interest in the earnings,
profits or losses of Stewart Insurance, Ltd. In 1998, Stewart Insurance,
Ltd. earned $160,188 in net income from its arrangement with Voyager
Insurance Company, Inc.
- John B. Stewart, Jr. is the sole shareholder of Preferred Choice Auto
Club, Inc., which provides payment or reimbursement of certain automobile
emergency related expenses such as towing charges and roadside repair.
Stewart Georgia offers memberships in the Auto Club as a service to its
customers and receives a commission for membership sales. In 1998, Stewart
Georgia earned $1,110,173 in commissions on sales of memberships in the
Auto Club.
32
<PAGE> 34
DESCRIPTION OF CAPITAL STOCK
GENERAL.
Stewart Holdings' authorized capital stock consists of (i) 2,000,000
shares of common stock, $0.01 par value, and (ii) 10,000,000 shares of
preferred stock, 0.001 par value. As of the date of this prospectus, Stewart
Holdings has 42,000 shares of common stock outstanding and no shares of
preferred stock outstanding. The following summary description of Stewart
Holdings' capital stock does not purport to be complete and is qualified in its
entirety by reference to Stewart Holdings' articles of incorporation, which are
filed as an exhibit to the registration statement of which this prospectus
forms a part, and Georgia law. Reference is made to such exhibit and Georgia
law for a detailed description of the provisions thereof summarized below.
COMMON STOCK.
As of the date of this prospectus, there are 42,000 shares of Stewart
Holdings' common stock issued and outstanding, all of which are owned by John
B. Stewart, Jr. Holders of common stock have one vote per share on all matters
submitted to a vote of the shareholders of Stewart Holdings, including with
respect to the election of directors. Stewart Holdings' common stock is not
traded in an established public trading market.
Subject to the preferences that may be applicable to outstanding
preferred stock, holders of common stock are entitled to receive ratably such
dividends as may be declared by the board of directors of Stewart Holdings out
of funds legally available therefor. In the event of a liquidation, dissolution
or winding up of Stewart Holdings, holders of the common stock are entitled to
share ratably in all assets remaining after payment of liabilities and the
liquidation preferences of any then outstanding preferred stock. The common
stock has no preemptive or conversion rights or other subscription rights.
All outstanding shares of common stock are fully paid and nonassessable.
PREFERRED STOCK.
Stewart Holdings' articles of incorporation authorize its board of
directors to issue up to 10,000 shares of preferred stock in one or more series
and to establish such designations and relative voting, dividend, liquidation,
conversion, redemption, liquidation and other rights, preferences and
limitations as the board of directors may determine without any further
approval of the shareholders of Stewart Holdings. As of the date of this
prospectus, Stewart Holdings has issued no shares of preferred stock.
33
<PAGE> 35
VARIABLE RATE SUBORDINATED DEBENTURES
GENERAL.
The following statements with respect to the debentures are subject to
the detailed provisions of the variable rate indenture. Whenever any particular
article or section of the variable rate indenture is referred to, the statement
made in connection with such reference is qualified in its entirety by such
reference.
The debentures are registered and issued without coupons in series
form. Any amount of any series may be issued. There is no limit on the
principal variable rate indenture. Stewart Holdings and the trustee may amend
the variable rate indenture to limit the principal amount of a particular
series or to allow additional series of debentures with no limitations as to
the maximum amount of any increase or as to the number of increases which may
be made. Stewart Holdings may change the interest rates and the maturities of
the debentures offered pursuant to this prospectus and of any subsequent series
which may be offered, provided that no such change shall affect any debenture
of any series issued prior to the date of change.
The debentures are direct obligations of Stewart Holdings, but are not
secured. Principal and interest are payable at the executive office of Stewart
Holdings in Union Point, Georgia. The debentures are executed by Stewart
Holdings and authenticated and delivered to the purchaser by the trustee upon
written order of Stewart Holdings.
ESTABLISHED FEATURES OF SERIES 1 DEBENTURES
The variable rate subordinated debentures series 1 ("series 1
debentures") offered herein are issued and dated as of the date when purchased.
The interest rate for a series 1 debenture is compounded daily and is payable
at any time at the holder's request. This request may be made to Stewart
Holdings by phone, mail or in person at Stewart Holdings' executive offices.
The series 1 debentures mature four years from date of issue, and may be
extended for one additional four-year term as described below.
Each Thursday, on a weekly basis, Stewart Holdings establishes various
minimum purchase amounts with varying interest rates and interest adjustment
periods ("established features") for each respective minimum purchase amount.
The purchase amount and the interest adjustment period as established are
maintained for the term of the series 1 debenture. The interest rate at which
the series 1 debenture is sold is set only for the initial interest adjustment
period. Stewart Holdings anticipates that it will offer the series 1 debentures
with interest rate adjustment periods ranging from one month to four years.
At the end of each interest adjustment period, Stewart Holdings will
notify the holder by mail of the new interest rate, which will be the same
interest rate that is applicable to all new series 1 debentures being offered
during the same week and on the same terms. The new interest rate will be
determined by Stewart Holdings, in its discretion, based on general market
rates of interest. If the holder elects to retain the series 1 debenture at the
new rate, no action is required of the holder as the new rate will become
effective as of the first day of the interest adjustment period. If the holder
elects not to accept the new rate, the holder can redeem the series 1 debenture
without penalty at the end of the interest adjustment period. Debentures with
the current established features are available for the period from Thursday
through the following Wednesday. The current established features are
applicable to all series 1 debentures sold by Stewart Holdings during that
period. Stewart Holdings publishes this information in a newspaper of general
circulation and, in addition, such information may be obtained directly from
Stewart Holdings's executive offices in Union Point, Georgia. To the extent the
established features of the series 1 debentures are changed, they are also set
forth in Rule 424(b) prospectus supplements that are filed with the Securities
and Exchange Commission.
34
<PAGE> 36
SUBORDINATION.
The payment of the principal of and interest on the debentures is
subordinate in right of payment, as set forth in Article 10 of the variable
rate indenture, to all senior debt of Stewart Holdings.
The term "senior debt" means all indebtedness of Stewart Holdings
outstanding at any time except debt of Stewart Holdings that by its terms is
not senior in right of payment to the debentures, and indebtedness represented
by Stewart Holdings' outstanding debentures, all of which are equal in terms of
priority.
If the debentures are declared due and payable before their expressed
maturity due to a default under the variable rate indenture, the indebtedness
evidenced by the debentures will be entitled to payment only after there shall
have been paid in full all principal and interest on the senior debt. Likewise,
in the event of any
- insolvency or bankruptcy proceeding, or of any receivership,
liquidation, reorganization or other similar proceeding, relative to
Stewart Holdings or to its creditors, as such, or to its property; or
- in the event of any proceeding for voluntary liquidation, dissolution
or other winding up of Stewart Holdings, whether or not involving
insolvency or bankruptcy;
then the holders of senior debt will be entitled to receive payment in full of
all principal and interest on all senior debt before the holders of the
debentures are entitled to receive any payments.
The amount of Stewart Holdings' senior debt outstanding as of June 30,
1999 is set $8,771,824..
REDEMPTION BY STEWART HOLDINGS PRIOR TO MATURITY.
Stewart Holdings may redeem any debenture of any series at any time
prior to maturity for a redemption price equal to the principal amount plus any
unpaid interest on such debenture to the date of redemption. Stewart Holdings
will notify debenture holders whose debentures are to be redeemed not less than
30 nor more than 60 days prior to the date fixed for redemption. In the event
the entire series is not called for redemption, the redemption call shall be
made pro rata.
REDEMPTION AT REQUEST OF HOLDER PRIOR TO MATURITY.
At the request of the holder, Stewart Holdings will redeem any series
1 debenture at the end of any interest adjustment period for a redemption price
equal to the principal amount plus any unpaid interest thereon to date of
redemption.
At the request of the holder, Stewart Holdings may, at its option,
redeem any series 1 debenture during any interest adjustment period for a price
equal to the principal amount plus interest at one-half the stated rate on the
series 1 debenture.
If the holder dies before maturity, Stewart Holdings may, at its
option, redeem any series 1 debenture for a redemption price equal to the
principal amount plus any unpaid interest thereon to date of redemption.
Historically, Stewart Holdings has honored all such requests for early
redemption.
All redemptions will be made at Stewart Holdings' executive offices in
Union Point, Georgia, either in person or by mail.
35
<PAGE> 37
EXTENSION AFTER MATURITY.
The maturity of a series 1 debenture will be automatically extended
from the original maturity date for a period equal to the original term of such
series 1 debenture unless the holder submits the series 1 debenture for
redemption within 15 days after its maturity or Stewart Holdings tenders the
amount due the holder within 15 days after maturity. In the event of such an
extension, all provisions of the series 1 debenture will remain unchanged with
the exception of the interest rate which will be changed in accordance with the
interest adjustment provision. If Stewart Holdings does not elect to tender
payment, it will notify the holder of this extension provision at least 30 days
prior to the maturity date.
RESTRICTIONS UPON STEWART HOLDINGS.
There are no restrictions in the variable rate indenture against the
issuance of additional securities or the incurring of additional debt including
senior debt and secured obligations.
MODIFICATION OF THE VARIABLE RATE INDENTURE.
The variable rate indenture contains provisions permitting Stewart
Holdings and the trustee, with the consent of the holders of not less than
two-thirds of the outstanding principal amount of the debentures, to execute
supplemental indentures adding any provisions to or changing in any manner or
eliminating any of the provisions of the variable rate indenture or of any
supplemental indenture or modifying in any manner the rights of the holders of
such debentures. However, no such supplemental indenture shall change the fixed
maturity of any debenture, reduce the principal amount of any indenture, reduce
the rate or change the time of payment of interest on any indenture, reduce the
amount of debentures whose holders must consent to an amendment, or make any
changes regarding the variable rate indenture that relate to waiver of default,
the rights of holders to receive payments, and the requirements of consent of
the debenture holders, without the consent of the holder of each debenture so
affected.
Stewart Holdings and the trustee may amend the variable rate indenture
to allow the issuance of additional amounts of a particular series or
additional series of debentures without the consent of the debenture holders.
There are no limitations as to the maximum amount of any increase or to the
number of increases which may be made. Stewart Holdings may change the interest
rates and the maturities of the debentures offered pursuant to this prospectus
and of any subsequent series which may be offered without entering into a
supplemental indenture, provided that no such change will affect any debenture
of any series issued prior to the date of change.
EVENTS OF DEFAULT AND NOTICE.
An event of default is defined by the variable rate indenture to mean
any of the following:
- failure to pay principal upon any debenture when the same becomes due;
- failure to pay interest upon any debenture when the same becomes due
and the default continues for 30 days;
- failure, after notice from the trustee or from the holders of at least
25% in principal amount of the debentures of the affected series, to
observe or perform within 30 days any of the covenants contained in
the variable rate indenture or debentures; or
- the occurrence of certain events of bankruptcy, insolvency or
reorganization.
36
<PAGE> 38
The variable rate indenture provides that the trustee will, within 90
days after the occurrence of an event of default, give the registered holders
of the debentures notice of any existing default known to the trustee, but,
except in case of a default in the payment of principal or interest, the
trustee may withhold such notice if and for so long as the trustee in good
faith determines that the withholding of such notice is in the interest of such
holders.
RIGHTS ON DEFAULT.
The trustee, by notice to Stewart Holdings or the holders of at least
25% in principal amount of the debentures of the affected series, may declare
the principal of and accrued interest on all debentures due upon the happening
of any of the events of default specified in the variable rate indenture, but
the holders of a majority of the outstanding principal amount of such
debentures may waive any default and rescind such declaration if the default is
cured within the 30 day period, except a default in the payment of the
principal of or interest on any debenture or a default on senior debt. The
holders of a majority of the outstanding principal amount of the debentures of
the affected series may direct the time, method and place of conducting any
proceeding for any remedy available to, or exercising any power or trust
conferred upon, the trustee, but the trustee may decline to follow any
direction that conflicts with law, provisions of the variable rate indenture,
or is unduly prejudicial to the rights of the other debenture holders or would
involve the trustee in personal liability. Holders may not institute any
proceeding to enforce the variable rate indenture unless the trustee refuses to
act for 60 days after request from the holders of at least 25% in principal
amount of the debentures of the affected series and during such 60 day period
the holders of a majority in principal amount do not give the trustee a
direction inconsistent with the request, and tender to the trustee of
satisfactory indemnity against any loss, liability or expense. Nevertheless,
any holder may enforce the payment of the principal and interest on the
holder's debenture when due.
EVIDENCE TO BE FURNISHED TRUSTEE.
The variable rate indenture provides that, as evidence of compliance
with the conditions precedent provided for in the variable rate indenture
relating to any action to be taken by the trustee upon the application or
demand of Stewart Holdings, Stewart Holdings shall furnish to the trustee an
officer's certificate and an opinion of counsel stating that all such
conditions precedent have been met. Within 120 days after the end of each
fiscal year, Stewart Holdings shall file with the trustee an officer's
certificate stating whether or not, to the best knowledge of the signers,
Stewart Holdings is in default in the performance of any covenant, agreement or
condition contained in the variable rate indenture and, if so, specifying each
such default, and, with respect to each, the action taken or proposed to be
taken by Stewart Holdings to remedy such default.
37
<PAGE> 39
DESCRIPTION OF FINOVA CREDIT FACILITY
On December 21, 1994, Stewart Georgia entered into a $6.5 million
revolving credit facility with Finova Capital Corporation. Since then, the
credit facility has been amended and restated several times, most recently on
January 29, 1999 to add Stewart Holdings and each of Stewart Louisiana, Stewart
Missouri and Stewart Illinois subsidiaries as parties. When we refer in this
section of the prospectus to Stewart Georgia, Stewart Holdings and the
Louisiana, Missouri and Illinois subsidiaries collectively, we refer them as the
"Borrowers." The following summary description of the credit facility is
qualified in its entirety by reference to the original agreement, as amended, a
copy of which is filed as an exhibit to the registration statement of which this
prospectus forms a part.
SECURITY.
Indebtedness of Stewart Georgia under the credit facility is secured by a
first priority security interest in substantially all of the personal property
(including, but not limited to, accounts receivable, chattel paper,
instruments, contract rights, general intangibles and proceeds of such assets)
of the Borrowers, whether now owned or subsequently acquired. Additionally, all
of the obligations of Stewart Georgia under the credit facility are personally
guaranteed by John B. Stewart, Jr.
INTEREST.
Indebtedness under the credit facility bears interest at a floating rate
equal to the "prime" rate publicly announced by Citibank, N.A., New York, New
York, plus 3.0% per annum. Stewart Georgia pays interest on a monthly basis
under the terms of the credit facility.
BORROWING BASE AND ELIGIBLE RECEIVABLES.
Advances under the credit facility are limited to 65% of eligible
receivables (as defined in the credit facility), including loans, extensions of
credit, and rights to payment of Borrower. In order to qualify as an eligible
receivable, a loan must satisfy, among other conditions, certain maximum amount
limitations ($5,000), term limitation (24 months), and delinquency limitations
(90 days).
MATURITY.
Advances made under the credit facility may be borrowed, repaid and
reborrowed from time to time until January 31, 2002, subject to the
satisfaction of conditions on the date of any such borrowing.
CONDITIONS TO EXTENSIONS OF CREDIT.
The obligation of Finova to make advances under the credit facility is
subject to the satisfaction of customary conditions, including, but not limited
to:
- the absence of a default or event of default under the credit
facility;
- all representations and warranties under the credit facility being
true and correct in all material respects; and
- the absence of any material adverse change.
38
<PAGE> 40
COVENANTS.
Stewart Georgia has agreed to customary negative covenants in connection
with the credit facility, including, without limitation, restrictions on:
- the incurrence of debt;
- the sale of assets;
- mergers, acquisitions and other business combinations;
- distributions;
- repurchase or redemption of securities; and
- amendments of Stewart Georgia's articles of incorporation and
bylaws.
The credit facility also contains various financial covenants, including
requirements to maintain certain minimum levels of net worth and net income and
a maximum limitation on Stewart Georgia's leverage ratio. This rescission
offering, to the extent that it is accepted, is technically a breach of the
covenant against redemptions of Stewart Georgia's securities. Stewart Georgia
has discussed its intent to undertake this rescission offer with Finova,
however, and has received its verbal approval to proceed with the offering.
Notwithstanding Finova's verbal approval, Stewart Georgia has assumed full
repayment of the credit facility in planning for the funding of the rescission
offering.
EVENTS OF DEFAULT.
The credit facility contains certain customary events of default,
including, without limitation:
- the non-payment of principal or interest when due, subject to the
applicable grace periods in certain circumstances;
- non-fulfillment of the covenants described above;
- any impairment of the validity, enforceability or priority of
Finova's security interest;
- events of bankruptcy or insolvency; and
- material judgments.
If any event of default occurs, Finova will be entitled to take all
actions permitted to be taken by a secured creditor under the Uniform
Commercial Code and to accelerate all amounts due under the credit facility.
39
<PAGE> 41
DESCRIPTION OF COMMUNITY BANK AND TRUST CREDIT FACILITY
On May 19, 1999, Stewart Georgia entered into a $1.5 million revolving
credit facility with Community Bank & Trust, Cornelia, Georgia. The following
summary description of the credit facility is qualified in its entirety by
reference to the original agreement, as amended, a copy of which is filed as an
exhibit to the registration statement of which this prospectus forms a part.
SECURITY.
Indebtedness of Stewart Georgia under the credit facility is secured by a
pledge of 100% of the outstanding common stock of Stewart Georgia and a
$1,500,000 insurance policy on the life of John B. Stewart, Jr. Additionally,
all of the obligations of Stewart Georgia under the credit facility are
personally guaranteed by John B. Stewart, Jr.
INTEREST.
Indebtedness under the credit facility bears interest at a floating rate
equal to the "prime" rate published daily in the Wall Street Journal plus 2.0%
per annum. Although the credit facility requires Stewart Georgia to pay the
accrued interest only upon maturity of the credit facility, Stewart Georgia
consistently has paid such interest monthly.
BORROWING BASE.
Advances under the credit facility are made at the request of Stewart
Georgia upon approval of Community Bank & Trust.
MATURITY.
All advances made pursuant to the credit facility mature on May 18, 2000.
CONDITIONS TO EXTENSIONS OF CREDIT.
The obligation of Community Bank & Trust to make advances under the
credit facility are subject to the satisfaction of customary conditions,
including, but not limited to:
- the absence of a default under the credit facility;
- all representations and warranties under the credit facility
remaining true and correct in all material respects; and
- the absence of any material adverse change.
EVENTS OF DEFAULT
The credit facility contains customary events of default, including,
without limitation:
- the non-payment of principal or interest when due, subject to any
applicable grace periods;
- the non-fulfillment of the covenants described above;
- any impairment of the validity, enforceability or priority of
Community Bank & Trust's security interest;
40
<PAGE> 42
- events of bankruptcy or insolvency; and
- material judgments.
If any event of default occurs, Community Bank & Trust will be entitled to take
all actions permitted to be taken by a secured creditor under the Uniform
Commercial Code and to accelerate the amounts due under the credit facility.
Community Bank & Trust also will be entitled to reasonable attorneys' fees and
costs incurred in enforcing such rights.
41
<PAGE> 43
LEGAL MATTERS
Certain legal matters in connection with this offering will be passed
upon for Stewart Holdings by Holland & Knight LLP, Atlanta, Georgia.
EXPERTS
The financial statements of Stewart Holdings as of June 30, 1999,
appearing in this prospectus and in the registration statement, have been
audited by Pechter & Associates, P.C., independent certified public
accountants, as stated in their report appearing elsewhere in this prospectus,
and are included in reliance upon such report of such firm given upon their
authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
Stewart Holdings has filed with the Securities and Exchange Commission
(the "Commission"), a registration statement on Form SB-2 under the Securities
Act of 1933 with respect to the debentures offered hereby. This prospectus,
which constitutes a part of the registration statement, does not contain all
the information set forth in the registration statement and the exhibits and
schedules thereto, certain parts of which have been omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to Stewart Holdings and the debentures, reference is made to the
registration statement and to the exhibits and schedules filed as part of the
registration statement. Statements contained in this prospectus concerning the
contents of any contract or any other document referred to are not necessarily
complete; reference is made in each instance to the copy of such contract or
document filed as an exhibit to the registration statement. Each such statement
is qualified in all respects by such reference to such exhibit. Copies of the
registration statement and the exhibits and schedules thereto may be inspected
without charge at the public reference facilities maintained by the Commission
in Room 1024 Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the regional offices of the Commission located at Seven World Trade
Center, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and copies of all or any part thereto may be obtained
from such office upon payment of prescribed fees. The registration statement,
including the exhibits and schedules thereto, is also available on the
Commission's Web site at http://www.sec.gov.
Stewart Holdings intends to make available to the holders of its
securities annual reports containing audited financial statements examined by
its independent auditors and quarterly reports for the first three quarters of
each year containing interim unaudited financial information.
42
<PAGE> 44
STEWART FINANCE COMPANY HOLDINGS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants ...............................F-2
Balance Sheet as of June 30, 1999 ................................................F-3
Statements of Income for the six months ended June 30, 1999 ......................F-4
Statements of Stockholders' Deficit for the six months ended June 30, 1999 .......F-5
Statements of Cash Flows for the six months ended June 30, 1999 ..................F-6
Notes to Financial Statements.....................................................F-8
</TABLE>
F-1
<PAGE> 45
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Stewart Finance Company Holdings, Inc. and Subsidiaries
Union Point, Georgia
We have audited the accompanying consolidated balance sheet of Stewart Finance
Company Holdings, Inc. and Subsidiaries as of June 30, 1999 and the related
consolidated statements of income, stockholder's deficit and cash flows for the
six months ended June 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Stewart Finance
Company Holdings, Inc. and Subsidiaries as of June 30, 1999, and the results of
operations and its cash flows for the period then ended in conformity with
generally accepted accounting principles.
/s/ Pechter & Associates, P.C.
August 11, 1999
F-2
<PAGE> 46
STEWART FINANCE COMPANY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash 2,352,491
Certificates of deposit 955,808
Marketable securities 590,969
Finance receivables, net 13,447,292
Prepaid expenses 135,507
Note receivable 46,800
Refundable income taxes 538,110
Other current assets 137,574
------------
TOTAL CURRENT ASSETS 18,204,551
------------
PROPERTY AND EQUIPMENT
Buildings 747,028
Furniture, fixtures and equipment 3,643,323
Leasehold improvements 1,427,423
Vehicles 493,645
------------
6,311,419
Accumulated depreciation (1,600,161)
------------
4,711,258
------------
OTHER ASSETS
Goodwill, net of accumulated
amortization of $60,876 246,930
Deposits and other assets 40,085
------------
287,015
------------
$ 23,202,824
============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 47
STEWART FINANCE COMPANY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
<TABLE>
<CAPTION>
<S> <C>
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES
Accounts payable $ 292,604
Accrued liabilities 956,844
Credit line payable 1,500,000
Current portion of long-term debt 750,000
Subordinated debentures 11,625,746
Senior demand notes 921,824
Margin loan on marketable securities 279,917
Loans from related parties 246,866
Note payable, related party 17,111
-----------
TOTAL CURRENT LIABILITIES 16,590,912
-----------
LONG-TERM DEBT
Credit line payable 6,350,000
Note payable 750,000
-----------
7,100,000
Less: current portion (750,000)
-----------
(6,350,000)
-----------
PREFERRED STOCK OF SUBSIDIARIES 3,374,500
-----------
STOCKHOLDER'S DEFICIT
Common stock, $.01 par value, 2,000,000
shares authorized, 42,000 shares
issued and outstanding 420
Additional paid-in capital 492,296
Accumulated deficit (3,605,304)
-----------
(3,112,588)
-----------
$23,202,824
===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 48
STEWART FINANCE COMPANY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
<S> <C>
REVENUES:
Interest and fee income $ 3,145,030
Maintenance and delinquent charges 1,172,191
Insurance commissions 1,284,027
Auto club and other operating revenue 571,491
-----------
6,172,739
-----------
OPERATING EXPENSES:
General and administrative 2,837,874
Salaries and wages 2,059,997
Interest expense 1,274,322
Bad debts, net of recovery of delinquent accounts 848,346
Depreciation and amortization 363,594
-----------
7,384,133
-----------
Operating loss (1,211,394)
-----------
NONOPERATING INCOME (EXPENSE):
Realized gains on marketable securities 73,711
Dividend income 4,700
Unrealized (loss) on marketable securities (18,062)
-----------
60,349
-----------
Net (loss) before provision for income
taxes and extraordinary (loss) (1,151,045)
PROVISION FOR INCOME TAXES
Benefit from net operating loss carryforward 360,984
-----------
Net (loss) before extraordinary (loss) (790,061)
EXTRAORDINARY (LOSS)
(Loss) from change in accounting estimates (2,921,531)
-----------
Net (loss) $(3,711,592)
===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 49
STEWART FINANCE COMPANY HOLDINGS, INC. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Additional
Common Paid-In Accumulated
Stock Capital Deficit Total
<S> <C> <C> <C> <C>
Balance, December 31, 1998 $100 976,315 $ (377,731) 598,684
Issuance of common stock 320 0 0 320
Reclassification of
S-Corporation Retained
Earnings 0 (484,019) 484,019 0
Net (loss) 0 0 (3,711,592) (3,711,592)
---- --------- ----------- -----------
Balance, June 30, 1999 $420 $ 492,296 $(3,605,304) $(3,112,588)
==== ========= =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 50
STEWART FINANCE COMPANY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash received on customers loans $ 4,640,432
Cash paid to suppliers and employees (5,873,561)
Dividends received 4,700
Realized gains 73,711
Interest paid (1,274,322)
-----------
Net cash (used in) operating activities (2,429,040)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of certificates of deposit 240,159
Purchases of marketable securities (5,710,270)
Proceeds from sales of marketable securities 5,547,312
Purchases of property and equipment (521,711)
-----------
Net cash (used in) investing activities (444,510)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net receipts from related parties 1,609,953
Proceeds from senior demand notes 1,709,833
Reductions of senior demand notes (1,364,134)
Proceeds from subordinated debentures 1,145,740
Reductions of subordinated debentures (1,383,624)
Net increase of margin loans 38,054
Proceeds from issuance of long-term debt 6,650,000
Payments on long-term debt (6,803,113)
Issuance of preferred stock 27,000
-----------
Net cash provided by financing activities 1,629,709
-----------
Net (decrease) in cash
(1,243,841)
Cash, beginning of year 3,596,332
-----------
Cash, end of year $ 2,352,491
===========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 51
STEWART FINANCE COMPANY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
<S> <C>
RECONCILIATION OF NET LOSS TO NET CASH
(USED IN) OPERATING ACTIVITIES
Net loss $(3,711,592)
-----------
Non-cash items included in net income:
Unrealized loss on marketable securities 18,062
Depreciation and amortization 311,159
Extraordinary loss 2,921,531
Refundable income taxes (360,984)
Changes in assets; (increase) decrease in:
Finance receivables, net (1,532,307)
Prepaid expenses (25,905)
Other current assets 13,165
Deposits (2,000)
Changes in liabilities; increase (decrease) in:
Accounts payable (105,542)
Accrued expenses 239,097
Outstanding checks in excess of bank balance (193,724)
-----------
Total adjustments 1,282,552
-----------
Net cash (used in) operating activities $(2,429,040)
===========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE> 52
STEWART FINANCE COMPANY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Note 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business:
Stewart Finance Company Holdings, Inc. ("the Company") is a holding
company which owns all of the outstanding common stock of Stewart
Finance Company (Georgia), Stewart Finance Company of Louisiana, Inc.,
Stewart Finance Company of Missouri, Inc., Stewart Finance Company of
Illinois, Inc., and Stewart Finance Company of Texas, Inc. (the
"Finance Companies"). Stewart Finance Company (Georgia) provides
funding and accounting services to other subsidiaries. The Finance
Companies provide short-term lending services to the general public and
sell insurance coverages related to these loans. These loans are
generally collateralized by personal property of the borrower.
The Finance Companies operate twenty-three offices located in twenty
Georgia cities, sixteen offices in thirteen Louisiana cities, four
offices in two Missouri cities and one location in an Illinois city.
Significant accounting policies:
Finance Receivables:
Finance receivables that management has the intent and ability to hold
until payoff or maturity are reported at their outstanding unpaid
balances reduced by any chargeoff or specific valuation accounts and
net of any deferred fees or costs on originated loans, or unamortized
premiums or discounts on purchased loans.
Allowance for loan losses is increased by charges to income and
decreased by chargeoffs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Company's
past loan experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any
F-9
<PAGE> 53
STEWART FINANCE COMPANY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Note 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - Continued
underlying collateral and current economic conditions. Consumer loans
are charged off when they are 240 days past due.
The Company calculates its provision for credit losses based on changes
in the present value of expected future cash flows of its loans
discounted at the loan's effective interest rate in accordance with
Financial Accounting Standards Board Statement of Accounting Standard
No. 114.
Income recognition:
The Company uses the rule of 78's method to recognize interest and the
straight-line method to recognize insurance commissions on loans that
have precomputed charges included in the loan balance. The use of the
effective interest method would not have a material effect on the
income recognized by the Company due to the majority of loans being
short term. The use of the straight line method for insurance
commissions is not materially different from recognizing the revenue in
proportion to the insurance protection provided due to the short term
nature of the loans. The unearned portions of these charges are
combined on the Balance Sheet in Finance Receivables, net.
The commission income from the sale of auto club memberships is
recognized using the straight line method. The unearned portion of
these charges are combined on the Balance Sheet in Finance Receivables,
net.
Trading securities:
The Company's marketable securities that are bought and held
principally for the purpose of selling them in the near future are
classified as trading securities. Trading securities are recorded at
fair value on the balance sheet in current assets, with the change in
fair value during the
F-10
<PAGE> 54
STEWART FINANCE COMPANY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Note 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - Continued
period included in earnings. Realized gains are computed using the
specific identification method.
Credit losses:
Provisions for credit losses are charged to expense in amounts
sufficient to maintain the allowance at a level considered adequate to
cover potential losses as estimated by management.
Loans are written off directly to the provision for credit losses when
deemed uncollectible by management.
Loan origination fees and costs:
Loan origination fees and costs are recognized at the inception of the
loan. Because loan fees are not significant and the majority of loans
have maturities of one year or less, the results on operations are not
materially different than the results which would be obtained by
amortizing these costs over the life of the loan as required by
generally accepted accounting principles.
Goodwill:
Branch office location purchase price allocations in excess of net
assets acquired are recorded as goodwill and amortized on a
straight-line basis over 15 years.
Property and equipment:
Property and equipment is stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
assets.
F-11
<PAGE> 55
STEWART FINANCE COMPANY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Note 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - Continued
Income taxes:
A subsidiary of the Company, with the consent of its stockholder,
elected to issue a secondary class of capital stock. In accordance with
Internal Revenue Service regulations, the subsidiary of the Company
will be treated as a C- Corporation beginning with the year ended
December 31, 1998. For the period ended December 31, 1998, a subsidiary
of the Company had a net operating loss. The tax benefit from the loss
has been included in these financial statements.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions regarding reported amounts of assets and liabilities
and disclosure of contingent liabilities at the date of the financial
statements. The estimate for loan losses are a significant estimate
included in these financial statements. Actual results may differ from
those estimates. Changes to estimates are recognized in the period in
which the revisions are determined.
Note 2. TRADING SECURITIES
Trading securities consisted exclusively of common stock at June 30,
1999. The market value of these securities was $590,969 as compared to
the cost basis of $593,156.
At June 30, 1999, the Company had borrowed $279,917 on a margin account
related to purchasing marketable securities.
F-12
<PAGE> 56
STEWART FINANCE COMPANY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Note 3. FINANCE RECEIVABLES
Finance receivables consisted of the following at June 30, 1999:
Gross finance receivables $ 15,371,695
Allowance for credit losses (613,350)
Unearned interest and
insurance premiums (1,311,053)
------------
Finance receivables, net $ 13,447,292
============
Note 4. RELATED PARTY TRANSACTIONS
Loans from related parties of $246,866 consist of noninterest bearing,
unsecured advances made from the sole shareholder and other related
parties. These amounts are payable on demand.
Finance receivables included amounts due from related parties of
$182,835.
Subordinated debentures included amounts due to related parties of
$48,564.
Senior demand notes included amounts due to related parties of
$126,647.
The Company owed a related party $17,431. This loan is unsecured and
due on demand.
The Company pays rent to its sole shareholder on a month-to-month basis
for its home office location. Total rent paid relating to this
arrangement for the six months ended June 30, 1999 was $3,719.
F-13
<PAGE> 57
STEWART FINANCE COMPANY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Note 4. RELATED PARTY TRANSACTIONS, continued
Within the subsidiaries of the Company, Stewart Finance Company
(Georgia) provides funding and accounting services for Stewart Finance
Company of Louisiana, Inc., Stewart Finance Company of Missouri, Inc.
and Stewart Finance Company of Illinois, Inc.
Note 5. SENIOR DEMAND NOTES
Senior demand notes are unsecured obligations which are payable on
demand. The interest rate is a variable rate, adjusted periodically by
the Company. The range of interest rates as of June 30, 1999 from 7.0%
to 10.5%.
Note 6. SUBORDINATED DEBENTURES
Debentures reflect subordinated debt of the Company and consist of
variable rate debentures which mature at three, six, twelve, eighteen,
twenty-four or forty-eight months after the date of issue. The Company
has the option of redeeming debentures prior to maturity for 100% of
the principal plus any unpaid interest to date of the redemption. The
Company has followed a policy of allowing debenture holders to redeem
their notes at any time. The range of interest rates as of June 30,
1999 was from 7% to 11%.
Aggregate maturities of long-term debt at June 30, 1999, were as
follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 1,819,720
2001 3,116,883
2002 4,246,193
2003 2,442,950
-----------
$11,625,746
===========
</TABLE>
F-14
<PAGE> 58
STEWART FINANCE COMPANY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Note 7. LONG-TERM DEBT
Credit line, funding company represents a revolving credit line with a
lender which provides for collateralized working capital borrowings.
Borrowings are based upon an asset formula involving finance
receivables, with maximum borrowings limited to $6,500,000. The
revolving credit line is collateralized by substantially all of the
Company's and its subsidiaries' assets and a personal guarantee of the
Company's sole shareholder.
Interest on this credit line is at the prime rate plus 3% through
maturity on January 31, 2001. The credit line is subject to compliance
with certain restrictive covenants related to the Company, including a
leverage ratio and a net income requirement for the calendar year.
Total outstanding borrowings related to this arrangement were
$6,350,000 at June 30, 1999.
Additional long term debt consisted of the following:
Note payable of $750,000 to an insurance company, principal due
October, 1999, interest paid quarterly at prime, collateralized by
a security interest in borrower's insurance commissions and other
amounts owed to the Company by the lender.
Aggregate maturities of long-term debt at June 30, 1999, were as
follows:
<TABLE>
<CAPTION>
<S> <C>
2000 750,000
2001 6,600,000
----------
$7,350,000
==========
</TABLE>
For the period ended June 30, 1999, all interest incurred was expensed.
F-15
<PAGE> 59
STEWART FINANCE COMPANY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Note 8. LEASE COMMITMENTS
The Finance Companies leases office space at nineteen Georgia
locations, fifteen Louisiana locations, four Missouri locations, and
one Illinois location. Three of the locations are leased on a month to
month basis totalling $2,713 per month. Rent expense for the period
ended June 30, was $351,270.
Future minimum lease payments for the remaining locations are as
follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 549,176
2001 412,707
2002 205,985
2003 101,513
2004 4,900
----------
$1,274,281
==========
</TABLE>
Note 9. CONCENTRATION OF CREDIT RISK
The Company's deposits with financial institutions were $1,185,002 in
excess of federally insured limits.
Note 10. PROFIT SHARING PLAN
The Company sponsors a defined contribution profit sharing plan
covering substantially all full time employees. Contributions are
decided by the board of directors each year. The Company has not
contributed to the plan during the period ended June 30, 1999.
Note 11. LINE OF CREDIT
At June 30, 1999, the Company had a line of credit with a local bank
that accrues interest at the prime rate. The line of credit had a
balance of $1,500,000 at June 30, 1999.
F-16
<PAGE> 60
STEWART FINANCE COMPANY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Note 12. REFUNDABLE INCOME TAXES
For the six months ended June 30, 1999, the Company had refundable
income taxes from taxable losses of $360,984. The net operating loss
carryforward of $1,136,566, from the period ended June 30, 1999,
expires in the period ended December 31, 2013. The refundable income
taxes are comprised of a Federal income tax benefit of $292,790 and a
state income tax benefit of $68,194.
Note 13. EXCHANGE OF STOCK
On February 26, 1999, the Company, with the consent of its sole
stockholder, issued one share of common stock of Stewart Finance
Company Holdings, Inc. to its sole stockholder in exchange for each
share of Stewart Finance Company (Georgia), Stewart Finance Company of
Louisiana, Inc., Stewart Finance Company of Missouri, Inc. Stewart
Finance Company of Illinois, Inc. and Stewart Finance Company of Texas,
Inc.
Note 14. ORGANIZATION COSTS
The Financial Accounting Standards Board approved Statement of Position
98-05 during 1998. This Statement became effective with fiscal years
beginning after December 15, 1998. According to this statement
companies who had previously capitalized costs of start-up in prior
periods had to complete a change in accounting estimates on their
accounting system. This change disallowed future capitalization and
recaptured all costs less accumulated amortization as extraordinary
losses during the current period. The Company adopted this Statement of
Position as of January 1, 1999. This resulted in an extraordinary loss
by the Company of $2,921,531.
F-17
<PAGE> 61
STEWART FINANCE COMPANY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Note 15. PREFERRED STOCK
A subsidiary of the Company, Stewart Finance Company (Georgia) has
authorized 10,000,000 shares of .001 par value preferred stock. At June
30, 1999, Stewart Finance Company (Georgia) had issued 33,745 shares of
preferred stock with a redemption price of $100 per share and a
redemption value of $3,374,500. Holders of the preferred stock have
rights to annual dividends per share of $11.
The redemption value of the preferred stock at June 30, 1999 was
$3,374,500.
Note 16. SUBSEQUENT EVENTS
The Company filed a Rescission Registration Statement with respect to
outstanding debentures and preferred stock in 1999 with the Securities
and Exchange Commission. The Rescission Registration Statement was
pending with the Securities and Exchange Commission at the date of
these financial statements.
The Company plans to file a Registration Statement for its issuance of
debentures and preferred stock in 1999. The expected result is to allow
Stewart Finance Company Holdings, Inc. to issue debentures and
preferred stock on an interstate basis rather than the subsidiary of
the Company issuing debentures and preferred stock on an intrastate
basis.
F-18
<PAGE> 62
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL INFORMATION
To the Board of Directors
Stewart Finance Company Holdings, Inc. and Subsidiaries
Union Point, Georgia
Our audit was performed for the purpose of forming an opinion on the financial
statements as of June 30, 1999 taken as a whole. The supplemental information on
page 19 is presented for purposes of additional analysis and is not a required
part of the basic financial statements. Such information has been subjected to
the auditing procedures applied in the audit of the financial statements as of
June 30, 1999 and for the period then ended, and, in our opinion, is fairly
stated in all material respects in relation to the financial statements taken as
a whole.
August 11, 1999
F-19
<PAGE> 63
STEWART FINANCE COMPANY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF GENERAL AND ADMINISTRATIVE EXPENSES
FOR THE SIX MONTHS ENDED JUNE 30, 1999
See Independent Auditor's Report on Supplemental Information
<TABLE>
<CAPTION>
<S> <C>
Auto expenses $ 54,383
Advertising 115,269
Bank charges 117,358
Cash (over) and short (4,882)
Charitable contributions 1,837
Consulting 5,835
Contract labor 157,020
Credit reports 78,061
Dues and subscriptions 17,225
Employee benefits 12,821
Equipment rental 42,102
Insurance - health 150,817
Legal and professional 342,717
Meals and entertainment 50,153
Miscellaneous 3,660
Office supplies 172,076
Other expenses 64,352
Postage and delivery 222,219
Referral fees 46,723
Rent 351,270
Repairs and maintenance 82,327
Taxes - payroll 188,775
Taxes - state loan 11,644
Taxes and licenses 151,985
Telephone 219,789
Travel and convention 72,683
Utilities 109,655
----------
$2,837,874
==========
</TABLE>
F-20
<PAGE> 64
===============================================================================
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR OTHER
INFORMATION TO WHICH THIS DOCUMENT REFERS. WE HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
-----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary...................................................... 3
Summary Financial Data.................................................. 4
Risk Factors............................................................ 5
Stewart Holdings........................................................ 9
The Offering............................................................ 10
Plan of Distribution.................................................... 10
Use of Proceeds......................................................... 10
Capitalization.......................................................... 11
Dividend Policy......................................................... 11
Selected Financial and Operations Data.................................. 12
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 13
Business................................................................ 18
Rescission Offer by Stewart Georgia..................................... 26
Management.............................................................. 28
Principal Shareholders.................................................. 30
Certain Transactions.................................................... 31
Description of Capital Stock............................................ 33
Description of Variable Rate Subordinated Debentures.................... 34
Description of FINOVA Credit Facility................................... 38
Description of Community Bank & Trust Credit Facility................... 40
Legal Matters........................................................... 42
Experts................................................................. 42
Additional Information.................................................. 42
Index to Financial Statements........................................... F-1
</TABLE>
-------------
===============================================================================
STEWART FINANCE COMPANY
HOLDINGS, INC.
$20,000,000
Variable Rate Subordinated Debentures
--------------------
PROSPECTUS
--------------------
______________________, 1999
===============================================================================
<PAGE> 65
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant has, pursuant to the authority granted in Section
14-2-851 of the Official Code of Georgia Annotated, agreed to indemnify any
officer or director of the Registrant against any expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually or
reasonably incurred by him in any action, suit or proceeding brought or
threatened to be brought against him by reason of the fact that he is or was an
officer or director of the Registrant if he acted in a manner he reasonably
believed to be in or not opposed to the best interests of the Registrant, and
with respect to any criminal proceeding, had no reasonable cause to believe his
conduct was unlawful.
ITEM 24. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the fees and expenses in connection
with the issuance and distribution of the securities being registered
hereunder.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.... $5,560
Printing and Engraving Costs........................... *
Accounting Fees and Expenses........................... *
Legal Fees and Expenses (excluding Blue Sky)........... *
Blue Sky Fees and Expenses............................. *
Miscellaneous.......................................... *
------
Total............................................. $ *
======
</TABLE>
- --------------
* To be supplied by amendment. All amounts are estimated except for the SEC
registration fee.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Pursuant to its organization in July of 1998, the Registrant issued to
Mr. John B. Stewart, Jr., in a private placement, 10,000 shares of the
Registrant's common stock for nominal consideration. In February of 1999, the
Registrant issued an additional 32,000 shares of common stock in exchange for
all of the common stock of Stewart Georgia, Stewart Missouri and Stewart
Illinois owned by Mr. Stewart The sales were exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) of the Act as transactions by
an issuer not involving a public offering.
<PAGE> 66
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
The following exhibits are filed herewith and made a part hereof:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C> <C>
3.1 * Articles of Incorporation of the Registrant, as amended
3.2 * Bylaws of the Registrant
4.1 * Variable Rate Indenture dated __________, 1999 between the
Registrant and the Trustee
4.2 * Form of Variable Rate Subordinated Debenture
5.1 * Opinion of Holland & Knight LLP
10.1 * Finova Capital Corporation Credit Agreement
10.2 * Community Bank and Trust Credit Agreement
10.3 * Profit Sharing-- 401(k) Plan
23.1 * Consent of Holland & Knight LLP (included in Exhibit 5.1 of this
registration statement)
23.2 Consent of Pechter & Associates, P.C.
24.1 Power of Attorney (included on the signature page of this
registration statement)
25.1 * Form T-1 as to the eligibility and qualification of Trustee under
the Variable Rate Indenture dated as of ___________, between
the Registrant and the Trustee.
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
- ----------------------------
** To be filed by Amendment
(b) Financial Statement Schedules
All financial statement schedules are omitted because they are
inapplicable or the requested information is either immaterial or shown in the
Registrant's financial statements or notes thereto.
II-2
<PAGE> 67
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement: (i) to include any
prospectus required by ss.10(a)(3) of the Securities Act of 1933; (ii) to
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental
change in the information set forth in the registration statement; (iii) to
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement; and (iv) to file weekly with
the Securities and Exchange Commission a Rule 424(b)(2) prospectus supplement
setting forth the established features (as defined in the prospectus).
(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of this offering.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-3
<PAGE> 68
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Union Point, State of
Georgia, on the 11th day of November, 1999.
STEWART FINANCE COMPANY HOLDINGS, INC.
By: /s/ John B. Stewart, Jr.
------------------------------------
John B. Stewart, Jr., President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that John B. Stewart, Jr., being a
director and officer, of Stewart Georgia (the "Company"), a Georgia
corporation, by his signature below, hereby constitutes and appoints Jeffery L.
Smith, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this registration
statement, including post-effective amendments and registration statements
filed pursuant to Rule 462 under the Securities Act of 1933, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite, necessary and advisable to be done, as fully to
all intents and purposes as the undersigned might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John B. Stewart, Jr.
- ---------------------------------
John B. Stewart, Jr. President and Sole Director November 11, 1999
(Principal Executive Officer)
Jeffery L. Smith
- ---------------------------------
Jeffery L. Smith Vice President November 11, 1999
(Principal Financial and
Accounting Officer)
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Stewart Finance Company Holdings, Inc.
We consent to the use of our report in the Form SB-2 Registration
Statement and related Prospectus of Stewart Finance Company and to the
reference to our firm under the headings "Selected Financial Data" and
"Experts" in the Prospectus.
/s/ PECHTER & ASSOCIATES, P.C.
------------------------------
PECHTER & ASSOCIATES, P.C.
Atlanta, Georgia
November 11, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF STEWART FINANCE COMPANY HOLDINGS, INC. FOR THE SIX
MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,308,299
<SECURITIES> 590,969
<RECEIVABLES> 14,107,442
<ALLOWANCES> 613,350
<INVENTORY> 0
<CURRENT-ASSETS> 18,204,551
<PP&E> 6,311,419
<DEPRECIATION> 1,600,161
<TOTAL-ASSETS> 23,202,824
<CURRENT-LIABILITIES> 16,590,912
<BONDS> 7,100,000
3,374,500
0
<COMMON> 420
<OTHER-SE> (3,113,008)
<TOTAL-LIABILITY-AND-EQUITY> 23,202,824
<SALES> 0
<TOTAL-REVENUES> 6,172,739
<CGS> 0
<TOTAL-COSTS> 5,261,465
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 848,346
<INTEREST-EXPENSE> 1,274,322
<INCOME-PRETAX> (1,151,045)
<INCOME-TAX> (360,984)
<INCOME-CONTINUING> (790,061)
<DISCONTINUED> 0
<EXTRAORDINARY> (2,921,531)
<CHANGES> 0
<NET-INCOME> (3,711,592)
<EPS-BASIC> (88.37)
<EPS-DILUTED> (88.37)
</TABLE>
