SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number [ 0-26474 ]
MS FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 64-0835847
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
715 South Pear Orchard Road
Suite 300
Ridgeland, Mississippi 39157
(Address of principal executive offices) (Zip Code)
(601) 978-6737
(Registrant's telephone number
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding twelve months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past ninety days.
Yes X No
As of October 31, 1996, the Registrant had 10,428,390 shares of common stock,
par value $.001 per share, outstanding.
<PAGE>
MS FINANCIAL, INC.
FORM 10-Q FOR THREE MONTHS ENDED SEPTEMBER 30, 1996
INDEX
Page
PART I - FINANCIAL INFORMATION 1
Item 1. Condensed Consolidated Financial Statements . . 1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . 6
PART II - OTHER INFORMATION . . . . . . . . . . . . . . 16
Item 1. Legal Proceedings . . . . . . . . . . . . . . . 16
Item 2. Changes in Securities . . . . . . . . . . . . . 17
Item 3. Defaults upon Senior Securities . . . . . . . . 17
Item 4. Submission of Matters to a Vote of Securityholders 17
Item 5. Other Information . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K . . . . . . . 17
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . 18
<PAGE>
<TABLE>
PART 1 - FINANCIAL INFORMATION
MS FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
December 31, 1995 and September 30, 1996
(in thousands, except share data)
<CAPTION>
ASSETS
December 31, September 30,
1995 1996
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 888 $ 770
Installment contracts 22,398 107,608
Amounts due under securitizations 21,385 19,801
Allowance for possible losses (1,602) (8,171)
Installment contracts and amounts due under
securitizations, net 42,181 119,238
Property and equipment, net 1,211 1,478
Repossessed automobiles 1,388 3,411
Installment contract origination program
acquisition cost, net of accumulated
amortization of $537 and $603 346 280
Income taxes receivable 223 571
Deferred income taxes 1,022 3,551
Other assets 4,124 3,989
Total assets $ 51,383 $ 133,288
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ ----- $ 83,000
Pending advances under notes payable ----- 3,169
Collections due investors 5 26
Dealer reserve and holdback accounts 290 283
Unearned commissions 1,695 1,363
Accounts payable and accrued expenses 2,744 2,618
Due to trustees under securitizations 1,665 3,251
Total liabilities 6,399 93,710
Stockholders' equity:
Preferred stock, par value $.001 per
share, 5,000,000 shares authorized,
none outstanding ----- -----
Common stock, par value $.001 per share,
50,000,000 shares authorized, 10,800,000
shares issued and outstanding 11 11
Additional paid-in capital 27,660 27,684
Retained earnings 18,373 14,168
46,044 41,863
Treasury stock, 174,000 and 374,000
shares of common, at cost (1,060) (2,285)
Total stockholders' equity 44,984 39,578
Commitments and contingencies
$ 51,383 $ 133,288
</TABLE>
<PAGE>
<TABLE>
MS FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three and Nine Month Periods Ended September 30, 1995 and 1996
(in thousands, except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
1995 1996 1995 1996
(Unaudited)(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest and fee income on installment
contracts and securitization $ 4,268 $ 4,394 $ 11,285 $ 9,516
Other interest income 27 12 34 53
Interest expense (1,178) (1,585) (3,427) (2,923)
Net interest income before provision
for possible losses on installment
contracts 3,117 2,821 7,892 6,646
Provision for possible losses on
installment contracts 171 7,009 687 7,590
Net interest income (loss) 2,946 (4,188) 7,205 (944)
Other income:
Insurance commissions 416 438 1,420 1,193
Service fee income 462 595 1,100 2,180
Gains on securitizations 5,402 ----- 5,402 -----
Other income 186 162 737 617
Total other income 6,466 1,195 8,659 3,990
Operating expenses:
Salaries and employee benefits 1,286 1,767 3,727 5,025
Other operating expenses 1,237 1,618 3,044 4,749
Total operating expenses 2,523 3,385 6,771 9,774
Income (loss) before
income taxes 6,889 (6,378) 9,093 (6,728)
Income tax expense (benefit) 2,583 (2,392) 3,410 (2,523)
Net income (loss) $ 4,306 $ (3,986) $ 5,683 $ (4,205)
Net income (loss) per share $ 0.40 $ (0.38) $ 0.58 $ (0.40)
Average shares and common equivalent
shares outstanding 10,882 10,427 9,848 10,436
</TABLE>
<PAGE>
<TABLE>
MS FINANCIAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Month Periods Ended September 30, 1995 and 1996
(in thousands)
<CAPTION>
Nine Months Ended
September 30, September 30,
1995 1996
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 5,683 $ (4,205)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Provision for possible losses on
installment contracts 687 7,590
Provision for deferred income taxes (230) -----
Depreciation and amortization 232 325
Gains on securitizations (5,402) -----
Changes in operating assets and
liabilities, net 1,719 (1,782)
Net cash provided by operating activities 2,689 1,928
Cash flows from investing activities:
Installment contracts originated (63,150) (98,663)
Installment contracts repaid, including
repossession proceeds 14,794 10,867
Proceeds from securitizations 65,726 ------
Repayment of amounts due under
securitizations 1,843 1,332
Capital expenditures (323) (526)
Net cash provided (used) by investing
activities 18,890 (86,990)
Cash flows from financing activities:
Proceeds from issuance of common stock 21,500 ------
Proceeds from (repayments of)notes payable (36,043) 83,000
Purchase of treasury stock ----- (1,225)
Net change in pending advances under
notes payable (1,903) 3,169
Net cash provided (used) by financing
activities (16,446) 84,944
Net increase (decrease) in cash and cash
equivalents 5,133 (118)
Cash and cash equivalents, beginning of period 510 888
Cash and cash equivalents, end of period $ 5,643 $ 770
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,933 $ 1,935
Income taxes $ 1,733 $ 271
Noncash investing activity:
Repossession of automobiles $ 13,606 $ 19,797
</TABLE>
<PAGE>
MS FINANCIAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
Note 1: Basis of Presentation
The interim financial statements have been prepared by MS Financial, Inc.
and Subsidiary (the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission applicable to quarterly reports on
Form 10-Q. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. These financial statements should be read in conjunction
with the audited consolidated financial statements and related notes and
schedules included in the Company's 1995 Form 10-K.
The results for the interim periods are not necessarily indicative of the
results of operations that may be expected for the fiscal year. In the
opinion of management, the information furnished reflects all adjustments
(which are of a normal recurring nature) which are necessary for a fair
presentation of the Company's financial position, results of operations
and cash flows for the periods presented.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.
<PAGE>
<TABLE>
MS FINANCIAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2: Installment Contracts and Amounts Due Under Securitizations
The following table summarizes installment contracts and amounts due
under securitizations (in thousands)
<CAPTION>
December 31, September 30,
1995 1996
(Unaudited)
<S> <C> <C>
Gross automobile installment contracts $158,461 $224,308
Unearned finance charges (38,143) (60,471)
Net automobile installment contracts 120,318 163,837
Installment contracts sold in
securitizations (99,382) (56,980)
20,936 106,857
Retained portion of installment contracts
sold in securitizations 1,328 630
Other consumer installment contracts, net 134 121
Installment contracts 22,398 107,608
Amounts due under securitizations 21,385 19,801
43,783 127,409
Allowance for possible losses (1,602) (8,171)
Installment contracts and amounts due under
securitizations, net $42,181 $119,238
</TABLE>
Note 3: FASB Statement No. 125
FASB Statement No. 125 was issued in June 1996. This statement
impacts the accounting for transfers of and servicing of financial assets
which will include any securitization program the Company completes after
the statement's effective date of January 1, 1997. The impact on the
Company's financial statements has not been determined.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion of the results of operations and financial
condition should be read in conjunction with the Company's unaudited
condensed consolidated financial statements and notes thereto.
Overview
The Company is a specialized consumer finance company engaged in the
purchase, securitization and servicing of installment contracts originated
by automobile dealers. The Company acquires installment contracts
principally from franchise dealers in connection with their sale of used
and new automobiles and light duty trucks to approved non-prime consumers.
The Company also generates revenue from commissions which it receives from
the sale of insurance and other ancillary products sold in conjunction with
the installment contracts purchased by the Company through its branch offices.
Liquidity and Capital Resources
The Company requires capital primarily for the purchase of installment
contracts and for working capital. The Company has historically financed
these requirements with borrowings under the revolving credit facility
and warehouse facility and through the Company's securitization programs.
Revolving Credit Facility. The revolving credit facility, which was renewed
and extended on May 1, 1996 and provides funds to purchase installment
contracts and for working capital, currently consists of a three-year
revolving facility of up to $45.0 million and a 364-day revolving facility
of up to $45.0 million If not extended or renewed on May 1, 1997, the
364-day facility will be converted into a two-year term facility. The
maximum amount available under the revolving credit facility is limited to a
borrowing base principally consisting of 90% of the net adjusted amount of
eligible installment contracts. The revolving credit facility is secured by
substantially all of the Company's assets other than the accounts owned by
MS Auto Receivables Company. At October 31, 1996, the Company had $90.0
million principal amount outstanding under the revolving credit facility at
an average rate of interest of 7.3%. On November 8, 1996 after the reduction
of the revolving credit facility from the proceeds from the loan sale (see
Loan Sales), the Company had $76.5 million principal outstanding under the
revolving credit facility.
Pursuant to the terms of the revolving credit facility, funds borrowed
thereunder bear interest at a rate to be selected by the Company based on
either Fleet Bank's prime rate of interest or a designated London Interbank
Offering Rate ("LIBOR").
The revolving credit facility contains covenants that among other things,
limit the Company's ability to (i) incur additional indebtedness, (ii) grant
liens, (iii) enter into mergers, dispositions, sales and lease backs,
(iv) sell all or a substantial part of its assets or properties except for
permitted securitizations, (v) pay dividends or make certain other
distributions or pay subordinated indebtedness, (vi) make certain investments
and capital expenditures, and (vii) engage in certain transactions with
affiliates. These covenants also require the Company to maintain specified
financial ratios and to maintain its underwriting guidelines in all material
respects. The revolving credit facility also provides that a change of control
of the Company's outstanding voting securities will result in an event of
default under the revolving credit facility.
Currently, the Company is in violation of covenants relating to the Company's
interest coverage ratio and minimum tangible net worth requirement.
As a result of such defaults, the Company is currently unable to make any
additional borrowings under the revolving credit facility. The Company is
currently attempting to negotiate covenant waivers and an amendment to the
revolving credit facility which would permit the Company to borrow additional
funds under such facility. However, the terms of such additional borrowings,
if any, are likely to result in an increased cost of the facility and a
reduced advance rate. No assurance can be made that such additional borrowings
can be obtained or that the ultimate terms thereof will be favorable for the
Company.
Warehouse Facility. The Company, through a special purpose subsidiary,
MS Auto Receivables Company (the "SPC") has established the warehouse
facility, a $50.0 million structured "warehouse" revolving credit
securitization facility. The maximum amount available under the warehouse
facility is limited to a borrowing base consisting principally of a net 91%
of the face amount of the installment contracts to be sold to the SPC. The
warehouse facility was established to provide funds to the Company to repay
indebtedness under the revolving credit facility.
The warehouse facility is structured similarly to a securitization. However,
unlike a typical securitization, (i) the installment contracts transferred
are not intended to be held to maturity but are instead to be "warehoused" for
up to 12 months pending their later sale in a securitization, (ii) the
pass-through interest rate is floating and (iii) the Company's transfer of
the installment contracts is accounted for as a financing rather than a sale.
Through the warehouse facility, the SPC obtains loans from an unaffiliated
special purpose conduit enabling the SPC to purchase installment contracts
from the Company. The conduit, in turn, borrows its funds from an
unaffiliated institutional lender. These loans are insured by Financial
Security Assurance Inc. ("FSA"). The Company transfers the installment
contracts to the conduit as part of each transaction. The warehouse
facility's initial commitment was for one year and is automatically extended
monthly on an "evergreen" basis until May 5, 2000, unless the Company, the
conduit or FSA decide to not extend it. Payments on the installment contracts
are deposited in a secured collection account. Any excess in the collection
account over certain amounts required to (i) pay amounts due on the conduit's
loans, (ii) cover servicing fees and (iii) be retained for credit enhancement
purposes, is released to a spread account. The spread account is
cross-collateralized to the spread accounts established in connection with
certain of the Company's securitizations. If no default exists, all amounts
deposited into the spread account are released to the Company each month.
The warehouse facility is intended to permit the Company to accumulate pools
of installment contracts prior to a securitization. Accordingly, the SPC is
required to repurchase any eligible installment contracts that have been in
the warehouse facility for more than 12 months. The loans to the SPC bear
interest at the rate at which the conduit borrows funds under the facility;
that rate is based on a spread to the 30-day LIBOR.
Under the warehouse facility, the Company is required to have other
warehouse facilities (which may be the revolving credit facility) which
provide at least $25.0 million of credit to finance the purchase of
installment contracts. The Company is required to maintain its underwriting
guidelines in all material respects; otherwise, FSA in its discretion may
disapprove any future installment contract sales. The revolving credit
facility requires that the proceeds received by the Company through the
warehouse facility be used to pay down its borrowings under the revolving
credit facility before being used for any other purposes.
On November 12, 1996, the Company received notice from FSA that this
facility is no longer available due to the occurrence of an "Amortization
Event" as defined under the facility. This event was caused by high
delinquencies in the securitizations which are cross-collateralized with the
warehouse facility.
Securitization Programs. In 1992, the Company began selling interests in
pools of its installment contracts to investors through the issuance of
triple-A rated, asset-backed securities. The net proceeds from these
periodic securitizations were generally used to pay down outstanding loans
under the revolving credit facility and the warehouse facility, thereby
making such facilities available for the purchase of additional installment
contracts. During 1993, 1994 and 1995, the Company securitized $27.0 million,
$35.0 million and $90.0 million, respectively, of the Company's installment
contracts, for an aggregate of $152.0 million.
The Company has not completed a 1996 securitization to date because the terms
under which a securitization transaction have been available are unacceptable
to the Company. The terms offered to the Company have been less favorable
because of recent unfavorable trends in delinquencies and losses for owned
and serviced loans. The Company continues to evaluate the feasibility of
completing a securitization later this year or in early 1997. However, no
assurance can be made that any such securitization can be consummated by the
Company on terms acceptable to it.
In each of its securitizations, the Company sold its installment contracts to
the SPC, which then sold the installment contracts to a newly formed grantor
trust in exchange for senior and subordinated classes of certificates of
beneficial interests in the trust. The senior certificates were sold to
institutional investors and the holders of such certificates are entitled to
a proportionate amount of monthly principal reductions in the underlying
installment contracts and interest at a fixed pass-through rate each month.
The senior certificates represent a beneficial ownership interest in the trusts
and pay interest at a pass-through rate which is determined at the time each
securitization closes. As a credit enhancement for each securitization, FSA
issued an insurance policy for the benefit of the holders of the senior
certificates. On November 12, 1996, the Company was notified that the surety
premium for the 1995 securitization was increased due to the high delinquency
levels in that transaction. The senior certificates have been rated AAA and
Aaa by Standard & Poor's Ratings Group and Moody's Investors Service, Inc.,
respectively. Prior to 1995, the Company retained the subordinated certificates,
representing the remaining beneficial interest in the trusts of 5% to 15%. The
Company services the installment contracts sold to the trusts and receives a
monthly fee at a base rate of 3.75% per annum, plus certain late fees,
prepayment charges and similar fees received on the securitized installment
contracts.
All cash collected from obligors on the underlying installment contracts is
deposited into trust accounts as received and is used monthly to pay the
holders of senior certificates their proportionate share of principal
reductions and interest at the pass-through rate, the servicing fee and
certain other reimbursements to the Company, and the surety premium to FSA.
The remaining cash is then placed into a spread account until such time as it
reaches and maintains a predetermined balance. Funds on deposit in the spread
account provide a source of cash for shortfalls in collections and for
reimbursement to FSA for claims made in respect to the insurance policies issued
in connection with the securitizations. When the predetermined balance is
achieved, any excess cash flow is distributed to the Company.
The securitizations have certain threshholds for losses and delinquencies
which are used to determine the amount of the required balance of funds on
deposit in the spread account. During the third quarter of 1996, those
threshholds were exceeded for the 1993, 1994 and 1995 securitization
transactions. As a result, the required balance of funds on deposit in the
spread accounts for each of these securitizations increased and excess cash
flows that would normally have been distributed to the Company began to be used
to fund the required balance in the spread account. While not requested at
this time, the current level of loan delinquencies could result in a standby
servicer being substituted for the Company.
The securitization transactions allow the Company to repurchase loans when
the outstanding balances have been reduced to a level not greater than 10% of
the original pool balance.
Gains from the sale of installment contracts in securitizations have provided
a significant portion of the Company's revenues. If the Company is unable or
otherwise elects not to securitize installment contracts in 1996, the Company
could incur a significant decline in total revenues, net income and liquidity
for such period.
Loan Sales. During October 1996, the Company sold loans totaling
approximately $15 million to an unrelated party for approximately $14.4
million, and $13.5 million of the proceeds were used to reduce the balance
outstanding under the revolving credit facility. The Company also has an
executed letter of intent for the sale of an additional $10.0 million to be
sold later this year and the proceeds will also principally be used to reduce
the revolving credit facility. The Company has no continuing interest in these
loans or loan repurchase obligations.
Other Financing and Liquidity Alternatives. The Company's ability to
finance the purchase of installment contracts and its existing operations and
growth strategy are directly dependent on the continued availability of funds
from the Company's revolving credit facility, securitization programs and cash
flows from existing operations. The Company is currently facing a severe
liquidity problem as a result of (i) the Company's existing covenant defaults
and lack of capacity under its revolving credit facility and its inability
to finance the acquisition of additional installment contracts
through such facility or the now terminated warehouse facility; (ii) the
Company's inability to complete a securitization in 1996; and (iii) the
delay of payments to the Company under the Company's prior securitization
programs as a result of certain covenant violations thereunder. The adequacy
of the Company's current cash flows are insufficient to continue to maintain
the Company's current operations without curtailing the Company's retail
installment contract purchase program. No assurance can be made that the
continued lack of capital and cash flows will not have a material adverse
effect upon the Company.
The Company has retained Bear Stearns & Co., Inc. to provide
financial advice on financing and strategic alternatives.
Among other things, the Company intends to (i) attempt to negotiate an
amendment to the revolving credit facility to waive existing defaults and
permit additional borrowings thereunder; (ii) examine the possibility of
additional loan sales or a securitization of a portion of the Company's
installment contracts; (iii) assess the viability of the issuance of convertible
subordinated debentures; and (iv) explore a merger with or the possible sale
of the Company or its assets to another company. The Company is also examining
the possibility of scaling back its existing operations in an effort to achieve
greater liquidity by controlling costs.
Statements made in this report as to the future events or plans are uncertain
and subject to change. Many factors may effect the Company's expectations
and plans. Installment contract acquisitions and financing plans may change
in connection with the possible consumation of a 1996 securitization, as well
as other factors affecting the Company, such as delinquencies and losses on
existing installment contracts, interest rate fluctuations, regulatory
burdens and income from operations.
Results of Operations (dollars in thousands)
Comparison of Three Months Ended September 30, 1995 to Three Months Ended
September 30, 1996, and Nine Months Ended September 30, 1995 to Nine Months
Ended September 30, 1996
Interest and fee income on installment contracts and securitizations.
Interest and fee income on installment contracts and securitizations
represent interest and fee income on owned installment contracts, interest
income on the retained subordinated interest in securitized installment
contracts and the residual income attributable to excess cash flows on
securitizations. This income increased by $126 or 3.0% from $4,268 for the
three months ended September 30, 1995 to $4,394 for the three months ended
September 30, 1996, but decreased by $1,769, or 15.7%, from $11,285 for the
nine months ended September 30, 1995 to $9,516 for the nine months ended
September 30, 1996. This increase for the quarter to quarter comparison is
primarily due to the 5.9% increase in average principal balance of owned loans
from $86,843 in the third quarter of 1995 compared to $91,948 in the third
quarter of 1996 and this decrease for the year to year comparison is due to
a 13.0% decrease in average balance of owned loans from $70,844 for the nine
months ended September 30, 1995 to $61,635 for the same period in 1996 due to
the larger size of the securitization entered into during the third and fourth
quarters of 1995 (as compared to the 1994 securitization) creating a lower
earnings base.
Interest expense. Interest expense increased by $407 or 34.6%, from $1,178
for the three months ended September 30, 1995 to $1,585 in the comparable
quarter of 1996, but decreased by $504 or 14.7% from $3,427 for the nine
months ended September 30, 1995 to $2,923 for the nine months ended September
30, 1996. This increase for the quarter to quarter comparison is primarily
due to a 29.7% increase in average borrowings from $55,604 for the quarter
ended September 30, 1995 to $72,130 for the quarter ended September 30, 1996.
This decrease for the year to year comparison is attributable to a 20.1 %
decrease in average borrowings from $53,955 for the nine months ended September
30, 1995 to $43,111 for the comparable period in 1996. During the third and
fourth quarter of 1995, the Company completed a securitization which resulted
in $73.2 million in net proceeds and an initial public offering which resulted
in $21.4 million in net proceeds. These net proceeds were used to repay the
Company's revolving credit facility which in turn reduced the Company's average
borrowings and resultant interest expense. No securitization has been completed
in 1996. Reductions in interest expense were partially offset by an increase
in commitment fees due under the warehouse facility and the revolving credit
facility.
Provision for possible losses. The provision for possible losses increased
by $6,838 from $171 for the three months ended September 30, 1995 to $7,009
for the three months ended September 30, 1996, and by $6,903 from $687 for
the nine months ended September 30, 1995 to $7,590 for the nine months ended
September 30, 1996. The Company increased its allowance for possible losses
by $6,569, or 410.0%, from $1,602 at December 31, 1995 to $8,171 at September
30, 1996. The allowance for possible losses represented 1.8% and 5.8% of the
average net managed portfolio at September 30, 1995 and September 30, 1996,
respectively. This significant increase is substantially the result of the
Company's rising delinquency and loss rates on installment contracts. The
allowance is intended to cover losses on owned installment contracts as well as
securitized installment contracts after taking into account loss reserves and
other amounts available at MS Casualty. For further information, see the
discussion at "Installment Contract Loss Experience".
Insurance commissions. Insurance commissions represent commission and fee
income earned on insurance and other ancillary products sold by the branch
offices. This income increased by $22 or 5.3%, from $416 for the three
months ended September 30, 1995 to $438 for the same period ending September
30, 1996 and decreased by $227 or 16.0% from $1,420 for the nine months
ending September 30, 1995 to $1,193 for the nine months ending September 30,
1996. This increase in the quarter amounts is attributable to the 4.9% dollar
volume increase in installment contracts originated by the Company's branch
offices comparing the three months ended September 30, 1995 to the three months
ended September 30, 1996. This decrease in the year to date amounts is
primarily due to the Company's decision during mid-1995 to discontinue offering
GAP insurance which is a guaranteed asset protection product and the Company's
commencement of the regional marketing program in late 1995. Under the regional
marketing program, the dealer retains any commission from the sale of ancillary
products.
Service fee income. Service fee income represents amounts received by the
Company to collect and administer installment contracts previously sold into
securitizations. These fees increased by $133, or 28.8%, from $462 for the
quarter ended September 30, 1995 to $595 for the quarter ended September 30,
1996 and by $1,080 or 98.2% from $1,100 for the nine months ended September
30, 1995 to $2,180 for the nine months ended September 30, 1996. This
increase was primarily due to a 27.4% increase in the average balance of
securitized installment contracts being serviced by the Company comparing the
averages for the quarter ending September 30, 1995 and September 30, 1996 and
94.7% for the comparison of the averages for the nine months ended September
30, 1995 and 1996.
Gains on securitizations. During the quarter ended September 30, 1995, the
Company completed a securitization with total installment contracts sold of
$73,636. The gain on securitization for that period was $5,402. The Company
did not enter into a securitization for the quarter or for the nine months
ended September 30, 1996, resulting in no gain on securitization for that
period. For further information, see the discussion at "Liquidity and
Capital Resources-Securitization Programs".
Other income. Other income is primarily comprised of miscellaneous fee
income generated by the branch offices. Other income decreased by $24, or
12.9%, from $186 for the quarter ended September 30, 1995 to $162 for the
quarter ended September 30, 1996 and by $120 or 16.3% from $737 for the nine
months ended September 30, 1995 to $617 for the nine months ended September
30, 1996. This decrease is due to a reduction in title fee income and other
miscellaneous income.
Operating expenses. Operating expenses increased by $862 or 34.2% from
$2,523 for the quarter ended September 30, 1995 to $3,385 for the quarter
ended September 30, 1996 and by $3,003 or 44.4% from $6,771 for the nine
months ended September 30, 1995 to $9,774 for the nine months ended September
30, 1996 partially due to increased personnel and other expenses associated
with higher contract origination volume as well as increased customer service
efforts related to the increase in total accounts serviced. The Company is in
the process of expanding the customer service department with the opening of
another customer service center in Mobile, Alabama. This has added to the
yearly expenses with startup costs and personnel. In addition, during the year
the Company has incurred ongoing legal fees. For further reference see
discussion at "Legal Proceedings". Also, the Company has incurred additional
accounting fees and other costs associated with being a public company.
Net income. As a result of the factors discussed above, net income decreased
by $8,292 from $4,306 for the quarter ended September 30, 1995 to a loss of
$3,986 for the quarter ended September 30, 1996 and by $9,888 from $5,683 for
the nine months ended September 30, 1995 to a loss of $4,205 for the
comparable period in 1996.
Installment Contract Loss Experience
On all installment contracts with a purchase date on or prior to June 30,
1996, dealers purchased repossession loss insurance from MS Casualty, an
insurance company rated A- by A.M. Best & Co. MS Casualty retains such
premiums as reserves and is obligated to pay the Company up to $7,000 per
vehicle upon repossession of the financed vehicle for claims made under the
policies; provided, however, that MS Casualty's aggregate liability for all
repossession losses during any policy year may not exceed the product of $600
and the number of automobiles contracted during that policy year. Effective
July 1, 1996, the Company began purchasing contracts net of a discount.
Accordingly, the Company will be bearing all the risks of loss on installment
contracts originated subsequent to July 1, 1996. Through the third quarter of
1996 the Company has experienced increased delinquency, losses and
repossessions, as shown in the following credit loss/repossession experience and
delinquency tables. Also, as delinquency has increased the Company has extended
a larger number of contracts. As a result of higher losses and delinquencies,
the Company substantially increased its allowance for possible losses during
the third quarter.
The Company regularly reviews the adequacy of its allowance for possible
losses on installment contracts. This allowance is set at a level considered
to be adequate to cover the expected future losses on the existing
installment contract portfolio after taking into account reserves and
available loss limits of MS Casualty for outstanding contracts. Increases
in the allowance are primarily based on the level of installment contracts,
increases in delinquency trends, historical loss experience and, to a lesser
extent, current economic conditions, operating practices and other factors
which management deems relevant.
The Company's charge-off policy is based on a contract-by-contract review of
delinquent installment contracts. The Company generally charges off an
installment contract at the time the collateral is repossessed and sold at
auction, although certain installment contracts may be charged-off sooner if
management determines them to be uncollectible.
<PAGE>
<TABLE>
The following table summarizes the Company's installment contract and
repossession loss experience:
<CAPTION>
Credit Loss/Repossession Experience (1)
Nine Months Nine Months
Ended Ended
09/30/95 09/30/96
(dollars in thousands)
<S> <C> <C>
Average Gross Managed Portfolio $ 135,647 $ 181,785
Average month-end number of
Installment Contracts 13,315 16,965
Repossessions as a percentage of
average month-end number of
Installment Contracts outstanding 11.6% 14.5%
Gross Charge-offs (2) $ 4,346 $ 9,569
Recoveries (3) 313 275
Claim Payments from MS Casualty (4) 2,867 8,273
Net Charge-offs (5) $ 1,166 $ 1,021
Annualized Net Charge-offs as a percentage
of average Gross Managed Portfolio
outstanding 1.1 % 0.7 %
<FN>
(1) All amounts and percentages are based on the gross amount scheduled to be
paid on each installment contract, including unearned finance charges and
other charges. The information in the table includes installment contracts
previously sold through securitizations which the Company continues to
service.
(2) Gross charge-offs include principal, late charges, and repossession
expenses and are net of insurance (other than repossession loss
insurance) claims and rebates and proceeds from the sale of repossessed
financed vehicles.
(3) Recoveries are collections net of attorney fees and court costs.
(4) Refers to claims paid for repossession losses under the MS Casualty
repossession loss insurance policies maintained on the vehicles under
Installment Contracts, net of recoveries.
(5) Net charge-offs equal gross charge-offs minus recoveries and insurance
claim payments.
</FN>
</TABLE>
<PAGE>
Installment Contract Delinquency Experience
The Company considers an installment contract to be delinquent if the
borrower fails to make any payment in full on or before the due date as
specified by the terms of the installment contract. The Company typically
initiates contact with borrowers whose payments are not received by the due
date within eight days of the due date. The period-end delinquencies on the
Company's gross managed portfolio set forth in the table below are not
necessarily representative of average delinquencies during the periods
indicated.
<TABLE>
Delinquency Experience
<CAPTION>
September 1995 September 1996
Number Number
of of
Contracts Amount Contracts Amount
(dollars in thousands)
<S> <C> <C> <C> <C>
Managed Portfolio 13,774 $143,057 18,951 $218,524
Period of
delinquency
31-60 days 677 7,194 1,566 17,550
61 days or more 505 5,884 1,847 21,716
Total
delinquencies 1,182 $ 13,078 3,413 $ 39,266
Total
delinquencies
as a percent of the
Managed Portfolio 8.6% 9.1% 18.0% 18.0%
</TABLE>
Delinquent contracts and gross charge-offs have been increasing throughout
1996. While the Company has been working diligently to reduce those trends,
turnover in the customer service department management and staff personnel
have impeded the Company's ability to rehabilitate delinquent loans and thus
have resulted in higher delinquencies, repossessions and charge-offs. Also
Management believes there has been a general deterioration in the credit
quality for the "B" and "C" grade consumers as is evidenced by national trends
in delinquencies for non-prime consumers.
The Company has taken numerous steps to improve its delinquency ratios and
charge-offs. During 1996, the Company adopted a new, more stringent credit
scoring system and tightened its credit standards. During the third quarter
of 1996, Company management reorganized certain functional areas and
reassigned responsibilities to place more emphasis on collection efforts.
During October 1996, the Company opened a second customer service office in
Mobile, Alabama. Management believes this customer service office will allow
the Company to hire more experienced personnel. Further, as a result of the
loss per automobile increasing, the Company tightened its lending criteria
to reduce the acceptable mileage level on used cars.
Management believes that these steps will improve the long-term quality of
the managed loan portfolio; however, in the near term, additional substantial
increases to the allowance for possible losses may be necessary to reflect
further deterioration in the loan portfolio.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On June 23, 1995, the Company was named as a defendant in a lawsuit filed by
James Des Rochers and Rita Horsak in the District Court of Harris County,
Texas which proceedings the plaintiffs seek to have certified as a class
action. In their complaint, the plaintiffs allege, among other things, that
(i) the Company required each plaintiff to purchase one or more ancillary
products from or through the Company as a condition to purchasing such
plaintiff's installment contract in violation of the Texas Credit Code, which
they contend renders the Company's charges for the ancillary products illegal
finance and/or unauthorized charges, (ii) the GAP product offered by the Company
in Texas was not authorized under the Texas Credit Code, which they contend
renders the Company's charges for such GAP product illegal finance and/or
unauthorized charges and (iii) the Company's method of selling and financing the
ancillary products constitute unlawful acts or practices under the Texas
Deceptive Trade Practices-Consumer Protection Act. The plaintiffs seek
unspecified actual, statutory and exemplary damages, cancellation of finance
charges under their installment contracts, recovery of finance charges
previously paid, prejudgment and post judgment interest and attorney's fees.
In fourteen other lawsuits filed by persons represented by the same counsel on
or after such time, but who do not seek class action certification, the Company
denies any liability or fault with respect to the allegations, intends to
vigorously defend the actions, and has substantial defense to these claims.
There can be no assurance, however, that an adverse decision in such actions
would not have a material adverse effect on the Company's financial position
or results of operations.
The Company is involved from time to time in routine litigation incidental
to its business. However, the Company believes that it is not a party to any
other material pending litigation which, if decided adversely to the Company,
would have a significant negative impact on the business, income, assets or
operation of the Company. The Company is not aware of any other material
threatened litigation which might involve the Company.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults upon Senior Securities
The Company is currently a party to the Revolving Credit
Facility which was renewed and extended on May 1, 1996.
Currently, the Company is in violation of covenants relating
to the Company's interest coverage ratio and
minimum tangible net worth requirement.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
The Company has recently been notified by the Internal
Revenue Service that its 1994 tax return has been selected
for examination. Adjustments, if any, from this examination
cannot be determined at this time.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
11 Computation of Per Share Income (Loss)
(b) Reports on Form 8-K
Not applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MS FINANCIAL, INC.
November 14, 1996 By: /s/Philip J. Hubbuch, Jr.
Philip J. Hubbuch, Jr.
Vice Chairman and Chief Executive
Officer
November 14, 1996 By: /s/Vann R. Martin
Vann R. Martin
President and Chief Operating Officer
November 14, 1996 By: /s/R. Dale Miller
R. Dale Miller
Controller and Principal Accounting
Officer
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
3.1.1* --Amended and Restated Certificate of Incorporation of the
Company dated December 15, 1993.
3.1.2* --Form of Second Amended and Restated Certificate of Incorporation.
3.2.1* --Bylaws of the Company.
3.2.2* --Form of Amended and Restated Bylaws of the Company.
4.1**** --Form of Common Stock Certificate
10.1* --Third Amended and Restated Revolving Loan Agreement (the
"Revolving Credit Facility") dated as of April 1, 1995 among
National Westminster Bank, N.A. ("NatWest Bank"), as agent,
the banks signatories thereto and the Company.
10.1.1# --Fourth Amended and Restated Revolving Loan Agreement dated
as of May 1, 1996 among NatWest Bank, N.A., as agent, the
banks signatories thereto and the Company.
10.2* --Form of Consent dated April __, 1995 of NatWest, as agent,
and the banks signatories to the Revolving Credit Facility.
10.3** --Amended and Restated Security Agreement dated as of June 15,
1994 between the Company and NatWest Bank, as agent.
10.4** --Amended and Restated Pledge Agreement dated as of June 15,
1994 between NatWest Bank and the Company.
10.5* --Receivables Purchase Agreement and Assignment dated as of
April 1, 1995 among the Company, MS Auto Receivables Company
("MARCO") and MS Auto Credit, Inc. ("MS Auto").
10.6* --Repurchase Agreement dated as of April 1, 1995 among
Telluride Funding Corp. ("Telluride") and MARCO.
10.7* --Servicing Agreement dated as of April 1, 1995 among the
Company, Telluride, MARCO, MS Auto, Black Diamond Advisers, Inc.
and Norwest Bank Minnesota, National Association ("Norwest").
10.8* --Security Agreement dated as of April 1, 1995 among the
Company, MS Auto, MARCO, Telluride, Financial Security
Assurance Inc. ("FSA") and Norwest.
10.9* --Custodian Agreement dated as of April 1, 1995 among the
Company, MS Auto, Norwest, Telluride, MARCO and FSA.
10.10* --Registration Rights Agreement dated January 3, 1994 among
the Company, MSFS and GTCR IV.
10.11* --Stockholders Agreement dated January 3, 1994 among the
Company, MSFS and GTCR IV.
10.12** --Form of Employees' Stock Purchase Plan.
10.13** --Form of Directors' Stock Option Plan.
10.14.1* --Employees' Equity Incentive Plan dated December 15, 1993.
10.14.2** --Form of Amended and Restated Employee's Equity Incentive Plan.
10.15* --Form of Indemnification Agreement.
10.16* --Consultant Agreement dated as of January 1, 1994 between the
Company and Harold Hogue.
10.17* --Non-Qualified Stock Option Agreement with Harold Hogue dated
January 3, 1994.
10.18* --Experience Refund Agreement dated December 15, 1993 between
MS Life and the Company.
10.19* --Experience Refund Agreement dated December 15, 1993 between
MS Casualty and the Company.
10.20* --Experience Refund Agreement dated December 15, 1993 between
MS Casualty, NatWest Bank and the Company.
10.21* --Managing General Agency Agreement dated January 1, 1994
between MS Casualty and the Company.
10.22* --Office Building Sublease Agreement dated January 1, 1994
between MS Diversified, Inc.("MSD") and the Company.
10.23* --Tax Indemnification Agreement dated as of November 30, 1993
among MSD, MS Financial Services, Inc. ("MSFS") and the
Company.
10.24* --Agreement for Purchase and Sale of Assets and Assumption of
Liabilities dated November 15, 1993 between MSFS and the Company.
10.25** --Purchase Agreement dated as of September 1, 1994 between the
Company and MARCO.
10.26** --Pooling and Servicing Agreement dated as of September 1, 1994
among MARCO, the Company and Norwest.
10.27** --Servicing Assumption Agreement dated as of September 1, 1994
between the Company and Norwest.
10.28** --Letter Agreement dated September 14, 1994 among the Company,
MARCO, Norwest and FSA.
10.29** --Insurance and Indemnity Agreement dated as of September 14,
1994 among FSA, MARCO and the Company.
10.30** --Indemnification Agreement dated as of September 14, 1994
among FSA, MARCO, the Company and Kidder, Peabody & Co.
Incorporated.
10.31** --Financial Guaranty Insurance Policy No. 50316-N dated
September 14, 1994 from FSA.
10.32** --Letter Agreement dated September 14, 1994 among FSA, MARCO
and the Company.
10.33* --Second Amended and Restated Stock Pledge Agreement dated as
of April 1, 1995 between MSFS, FSA and Norwest.
10.34* --Spread Account Agreement dated as of April 11, 1995 among
MARCO, FSA and Norwest and related warehouse series supplement.
10.35** --Pooling and Servicing Agreement dated as of September 1, 1993
among MARCO, MSFS and Norwest.
10.36** --Purchase Agreement dated as of September 1, 1993 between MSFS,
and MARCO.
10.37** --Financial Guaranty Insurance Policy No. 50264-N dated September
28, 1993.
10.38** --Insurance and Indemnity Agreement dated as of September 28,
1993, among FSA, MARCO and MSFS.
10.39** --Indemnification Agreement dated as of September 28, 1993
among FSA, MARCO, MSFS and Bear Stearns & Co. Inc.
10.40** --Letter Agreement dated September 28, 1993 among MSFS, MARCO
and FSA.
10.41** --Amended and Restated Stock Pledge Agreement dated as of
September 28, 1993 among MSFS, MARCO, FSA and Norwest.
10.42** --Pledge and Security Agreement dated September 28, 1993 among
MARCO, FSA and Norwest.
10.43** --Letter Agreement dated September 28, 1993 among MARCO, MSFS,
Norwest and FSA.
10.44* --Insurance and Indemnity Agreement dated as of April 1, 1995,
among FSA, MARCO, the Company and Telluride.
10.45.1* --Management Agreement dated January 1, 1994 among the
Company, MSB and Philip J. Hubbuch, Jr. ("Hubbuch").
10.45.2** --Form of Amended and Restated Management Agreement dated July
21, 1995 among the Company, MSB and Hubbuch.
10.46.1* --Management Agreement dated February 15, 1994 among the
Company, MS Byrider, Inc. ("MSB") and E. Peter Healey ("Healey").
10.46.2** --Form of Amended and Restated Management Agreement dated July
21, 1995 among the Company, MSB and Healey.
10.47.1* --Management Agreement dated January 1, 1994 between the
Company and Vann R. Martin ("Martin").
10.47.2** --Form of Amended and Restated Management Agreement dated July
21, 1995 between the Company and Martin.
10.48* --Option Agreement with Hubbuch dated January 3, 1994.
10.49* --Option Agreement with Healey dated February 15, 1994.
10.50* --Option Agreement with Martin dated January 3, 1994.
10.51* --Equity Purchase Agreement dated January 3, 1994 among the
Company, MSFS and GTCR IV.
10.52** --Premium Letter dated April 20, 1995 among the Company, MARCO
and FSA.
10.53*** --Conversion Agreement among the Company, GTCR IV, MSD and MSFS.
10.54***** --Purchase Agreement dated as of September 1, 1995, among the
Company and MARCO.
10.55***** --Pooling and Servicing Agreement dated as of September 1, 1995
among MARCO, the Company, and LaSalle National Bank.
10.56***** --Servicing Assumption Agreement dated as of September 1, 1995
between the Company and LaSalle National Bank.
10.57***** --Insurance and Indemnity Agreement dated as of September 1,
1995 among FSA, MARCO and the Company.
10.58***** --Indemnification Agreement dated as of September 1, 1995 among
FSA, MARCO, the Company and Bear Stearns & Co., Inc.
10.59***** --Financial Guaranty Insurance Policy No.50395-N dated
September 21, 1995 from FSA.
10.60***** --Letter Agreement dated September 21, 1995 among FSA, MARCO
and the Company.
11^ --Computation of earnings per share.
_______________
* Incorporated herein by reference from the Registration Statement dated
May 30, 1995.
** Incorporated herein by reference from the Amendment No. 1 to the
Registration Statement dated June 16, 1995.
*** Incorporated herein by reference from the Amendment No. 2 to the
Registration Statement dated July 13, 1995.
**** Incorporated herein by reference from the Amendment No. 3 to the
Registration Statement dated July 21, 1995.
***** Incorporated herein by reference from the 1995 10-K dated April 1, 1996.
# Incorporated herein by reference from the 10Q dated May 3, 1996.
^ Filed herewith.
<PAGE>
EXHIBIT 11
<TABLE>
MS FINANCIAL, INC.
COMPUTATION OF PER SHARE INCOME (LOSS)
(in thousands, except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
1995 1996 1995 1996
<S> <C> <C> <C> <C>
Weighted average shares:
Common stock outstanding 10,344 10,427 9,320 10,436
Option shares outstanding 1,008 0(1) 1,008 0(1)
Shares assumed repurchased
using treasury stock
method (470) 0(1) (480) 0(1)
Weighted average shares
outstanding 10,882 10,427 9,848 10,436
Net income (loss) $4,306 ($3986) $5,683 ($4205)
Computation of net income
(loss) per share:
Net income (loss)
divided by weighted
average shares
outstanding $0.40 ($0.38) $0.58 ($0.40)
<FN>
(1) Excludes option shares as their inclusion would be antidilutive.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 770
<SECURITIES> 0
<RECEIVABLES> 127409
<ALLOWANCES> 8171
<INVENTORY> 0
<CURRENT-ASSETS> 11802
<PP&E> 2342
<DEPRECIATION> 864
<TOTAL-ASSETS> 133288
<CURRENT-LIABILITIES> 93710
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 39567
<TOTAL-LIABILITY-AND-EQUITY> 133288
<SALES> 9516
<TOTAL-REVENUES> (3547)
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9774
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2923
<INCOME-PRETAX> (6728)
<INCOME-TAX> (2523)
<INCOME-CONTINUING> (4205)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4205)
<EPS-PRIMARY> (.40)
<EPS-DILUTED> (.40)
</TABLE>
