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 June 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 July 31, 1996, the Registrant had 10,426,968 shares of common stock, par
value $.001 per share, outstanding.
<PAGE>
<PAGE>
MS FINANCIAL, INC.
FORM 10-Q FOR THREE MONTHS ENDED JUNE 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. . . . . . . . . . . . . . . . . . 14
Item 1. Legal Proceedings . . . . . . . . . . . . . 14
Item 2. Changes in Securities . . . . . . . . . . . 14
Item 3. Defaults upon Senior Securities . . . . . . 14
Item 4. Submission of Matters to a Vote of
Securityholders . . . . . . . . . . . . . . 15
Item 5. Other Information . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K. . . . . . 16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 17
<PAGE>
<PAGE>
<TABLE>
PART 1 - FINANCIAL INFORMATION
MS FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
December 31, 1995 and June 30, 1996
(in thousands, except share data)
<CAPTION>
ASSETS
December 31, June 30,
1995 1996
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 888 $ 375
Installment contracts 22,398 82,260
Amounts due under securitizations 21,385 20,436
Allowance for possible losses (1,602) (1,295)
Installment contracts and amounts due under
securitizations, net 42,181 101,401
Property and equipment, net 1,211 1,391
Repossessed automobiles 1,388 2,570
Installment contract origination program
acquisition cost, net of accumulated
amortization of $537 and $581 346 301
Income taxes receivable 223 574
Deferred income taxes 1,022 1,022
Other assets 4,124 4,022
Total assets $ 51,383 $ 111,656
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ ------ $ 60,000
Pending advances under notes payable ------ 1,002
Collections due investors 5 25
Dealer reserve and holdback accounts 290 287
Unearned commissions 1,695 1,566
Accounts payable and accrued expenses 2,744 2,548
Due to trustees under securitizations 1,665 2,669
Total liabilities 6,399 68,097
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 27,679
Retained earnings 18,373 18,154
46,044 45,844
Treasury stock, 174,000 and 374,000 shares
of common, at cost (1,060) (2,285)
Total stockholders' equity 44,984 43,559
Commitments and contingencies
$ 51,383 $ 111,656
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
Three and Six Month Periods Ended June 30, 1995 and 1996
(in thousands, except per share data)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1995 1996 1995 1996
(Unaudited)(Unaudited) (Unaudited)(Unaudited)
<S> <C> <C> <C> <C>
Interest and fee income on installment
contracts and securitizations $ 4,047 $ 3,476 $ 7,017 $ 5,122
Other interest income 2 24 7 41
Interest expense (1,298) (965) (2,249) (1,338)
Net interest income before
provision for possible losses
on installment contracts 2,751 2,535 4,775 3,825
Provision for possible losses on
installment contracts 357 331 515 581
Net interest income 2,394 2,204 4,260 3,244
Other income:
Insurance commissions 527 394 1,003 755
Service fee income 289 722 638 1,585
Other income 256 198 551 454
Total other income 1,072 1,314 2,192 2,794
Operating expenses:
Salaries and employee benefits 1,248 1,660 2,441 3,258
Other operating expenses 968 1,631 1,807 3,130
Total operating expenses 2,216 3,291 4,248 6,388
Income (loss) before income
taxes 1,250 227 2,204 (350)
Income tax expense (benefit) 469 85 827 (131)
Net income (loss) $ 781 $ 142 $ 1,377 $ (219)
Net income (loss) per share $ 0.08 $ 0.01 $ 0.15 $ (0.02)
Average shares and common
equivalent shares outstanding 9,332 10,856 9,332 10,439
</TABLE>
<PAGE>
<TABLE>
<PAGE>
MS FINANCIAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Month Periods Ended June 30, 1995 and 1996
(in thousands)
<CAPTION>
Six Months Ended
June 30, June 30,
1995 1996
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,377 $ (219)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Provision for possible losses on
installment contracts 515 581
Provision for deferred income taxes (56) -----
Depreciation and amortization 148 209
Changes in operating assets and liabilities, net (1,178) 231
Net cash provided by operating activities 806 802
Cash flows from investing activities:
Installment contracts originated (48,165) (66,377)
Installment contracts repaid, including
repossession proceeds 10,636 4,944
Repayment of amounts due under securitizations 2,587 685
Capital expenditures (220) (344)
Net cash used by investing activities (35,162) (61,092)
Cash flows from financing activities:
Proceeds from notes payable 34,500 60,000
Purchase of treasury stock ------ (1,225)
Net change in pending advances under notes payable 626 1,002
Net cash provided by financing activities 35,126 59,777
Net increase (decrease) in cash and
cash equivalents 770 (513)
Cash and cash equivalents, beginning of period 510 888
Cash and cash equivalents, end of period $ 1,280 $ 375
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,801 $ 833
Income taxes $ 841 $ 137
Noncash investing activity:
Repossession of automobiles $7,174 $ 14,396
</TABLE>
<PAGE>
MS FINANCIAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 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, June 30,
1995 1996
(Unaudited)
<S> <C> <C>
Gross automobile installment contracts $158,461 $202,136
Unearned finance charges (38,143) (52,112)
Net automobile installment contracts 120,318 150,024
Installment contracts sold in securitizations (99,382) (68,659)
20,936 81,365
Retained portion of installment contracts sold
in securitizations 1,328 770
Other consumer installment contracts, net 134 125
Installment contracts 22,398 82,260
Amounts due under securitizations 21,385 20,436
43,783 102,696
Allowance for possible losses (1,602) (1,295)
Installment contracts and amounts due under
securitizations, net $42,181 $101,401
</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.
Results of Operations (dollars in thousands)
Comparison of Three Months Ended June 30, 1995 to Three Months Ended
June 30, 1996, and Six Months Ended June 30, 1995 to Six Months Ended
June 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 decreased by
$571 or 14.1% from $4,047 for the three months ended June 30, 1995 to
$3,476 for the three months ended June 30, 1996 and by $1,895, or
27.0%, from $7,017 for the six months ended June 30, 1995 to $5,122
for the six months ended June 30, 1996. This decrease is primarily
due to the 13.8% decrease in average principal balance of owned loans
from $72,023 in the second quarter of 1995 compared to $62,071 in the
second quarter of 1996 and a 26.0% decrease from $62,845 for the six
months ended June 30, 1995 to $46,479 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 decreased by $333 or 25.7%,
from $1,298 for the three months ended June 30, 1995 to $965 in the
comparable quarter of 1996 and by $911 or 40.5% from $2,249 for the
six months ended June 30, 1995 to $1,338 for the six months ended June
30, 1996. This decrease is primarily due to a 27.3% decrease in
average borrowings from $62,515 for the quarter ended June 30,1995 to
$45,456 for the quarter ended June 30, 1996 and a 46.5% decrease in
average borrowings from $53,130 for the six months ended June 30, 1995
to $28,442 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. 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
decreased by $26, or 7.3% from $357 for the three months ended June
30, 1995 to $331 for the three months ended June 30, 1996, but
increased $66, or 12.8% from $515 for the six months ended June 30,
1995 to $581 for the six months ended June 30, 1996. The allowance
for possible losses decreased by $117, or 8.3%, from $1,412 at June
30, 1995 to $1,295 at June 30, 1996 and represented 1.4% and 1.0% of
the average net managed portfolio at June 30, 1995 and June 30, 1996,
respectively. 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 reference, see 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 decreased by $133,
or 25.2%, from $527 for the three months ended June 30, 1995 to $394
for the same period ending June 30, 1996 and by $248 or 24.7% from
$1,003 for the six months ending June 30, 1995 to $755 for the six
months ending June 30, 1996. This decrease is primarily due to the
Company's decision during 1995 to discontinue offering GAP insurance
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 $433, or 149.8%, from $289 for the quarter ended June 30, 1995 to
$722 for the quarter ended June 30, 1996 and by $947 or 148.4% from
$638 for the six months ended June 30, 1995 to $1,585 for the six
months ended June 30, 1996. This increase was primarily due to a
143.3% increase in the average balance of securitized installment
contracts being serviced by the Company (as a result of the 1995
securitization) comparing the averages for the quarter ending June 30,
1995 and June 30, 1996 and 138.1% for the comparison of the six months
ended June 30, 1995 and 1996.
Other income. Other income is primarily comprised of
miscellaneous fee income generated by the branch offices. Other
income decreased by $58, or 22.7%, from $256 for the quarter ended
June 30, 1995 to $198 for the quarter ended June 30, 1996 and by $97
or 17.6% from $551 for the six months ended June 30, 1995 to $454 for
the six months ended June 30, 1996. This decrease is due to a
reduction in title fee income and other miscellaneous income.
Operating expenses. Operating expenses increased by $1,075 or
48.5% from $2,216 for the quarter ended June 30, 1995 to $3,291 for
the quarter ended June 30, 1996 and by $2,140 or 50.4% from $4,248 for
the six months ended June 30, 1995 to $6,388 for the six months ended
June 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. 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 $639 or 81.8% from $781 for the quarter ended June
30, 1995 to $142 for the quarter ended June 30, 1996 and by $1,596 or
115.9% from $1,377 for the six months ended June 30, 1995 to a loss of
$219 for the comparable period in 1996.
<PAGE>
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 of the risks of loss on
installment contracts originated subsequent to July 1, 1996.
Management is seeking to commute the insurance policy with MS Casualty
late in 1996 and adjusting its allowance for possible losses
accordingly; however, no assurances can be made that such commutation
can be obtained. Through the first part of 1996, the Copmany has
experienced 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. Accordingly, if the negative trend of losses,
delinquencies and repossessions continues, substantial revisions to
the Company's allowance for possible losses on installment contracts
may be necessary.
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, 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)
Six Months Six Months
Ended Ended
06/30/95 06/30/96
(dollars in thousands)
<S> <C> <C>
Average Gross Managed Portfolio $ 130,450 $ 165,308
Average month-end number of
Installment Contracts 12,858 15,775
Repossessions as a percentage of
average month-end number of
Installment Contracts outstanding 10.5% 15.6%
Gross Charge-offs (2) $ 2,366 $ 7,246
Recoveries (3) 202 199
Claim Payments from MS Casualty (4) 1,715 6,159
Net Charge-offs (5) $ 449 $ 888
Annualized Net Charge-offs as a percentage
of average Gross Managed Portfolio
outstanding 0.7 % 1.1%
<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>
June 1995 June 1996
Number Number
of of
Contracts Amount Contracts Amounts
(dollars in thousands)
<S> <C> <C> <C> <C>
Managed Portfolio 13,588 $142,355 17,554 $196,589
Period of
delinquency
31-60 days. . . 494 5,251 809 9,131
61 days or more 391 4,539 623 7,256
Total
delinquencies. . 885 $ 9,790 1,432 $ 16,387
Total
delinquencies
as a percent of
the Managed
Portfolio. . . . 6.5% 6.9% 8.2% 8.3%
</TABLE>
<PAGE>
Liquidity and Capital Resources
The Company requires capital primarily for the purchase of
installment contracts and for working capital. The Company finances
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
July 31, 1996, the Company had $70.0 million principal amount
outstanding under the revolving credit facility at an average rate
of interest of 7.0%.
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.
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
provides funds to the Company to repay indebtedness under the
revolving credit facility. As of December 31, 1995, the Company
used a portion of the proceeds from its $90.0 million securitization
to repay the total outstanding amount of the warehouse facility. At
July 31, 1996, the Company had no principal amount outstanding under
the warehouse 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.
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 intends
to continue these periodic securitizations in the future; however,
if recent trends toward higher losses continue, no assurance can be
given that the Company will be able to obtain terms which it
considers favorable to allow it to securitize its portfolio in the
future.
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. 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.
The securitization transactions allow the Company to
repurchase loans when the balances have been reduced to a level not
greater than 10% of the original pool balance.
Pursuant to the warehouse facility, the SPC must repurchase
installment contracts from the warehouse facility and securitize
them before it securitizes any other installment contracts.
Gains from the sale of installment contracts in
securitizations provide a significant portion of the Company's
revenues. If the Company were unable or otherwise elected not to
securitize installment contracts in a financial reporting period,
the Company could incur a significant decline in total revenues, net
income and liquidity for such period.
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.
The Company believes that cash flow generated from
operations, the amounts available under the revolving credit
facility, the warehouse facility and the Company's securitization
programs will be sufficient to fund its operations and growth
strategy for the foreseeable future.
<PAGE>
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 thirteen 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 these 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 has finalized the settlement for the lawsuit
filed by Robin Pilart and others in the District Court of Harris
County, Texas. The Company does not anticipate the settlement will
exceed $100 thousand.
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.
<PAGE>
Item 2. Changes in Securities
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held
on June 14, 1996.
(b) Three directors were elected to Class I of
the Board of Directors at the Annual Meeting
of Shareholders held on June 14. They were:
Reed Bramlett
Carl Herrin
Philip J. Hubbuch, Jr.
The directors whose term is continued after
the June 14 meeting are:
Philip A. Canfield
Harold A. Hogue
Bruce Miller
Robert Plummer
James B. Stuart, Jr.
Carl D. Thoma
(c) At the Annual Meeting of Shareholders held on
June 14, the following two matters were voted
upon and passed. The tabulation of votes was:
(1) The election of three Directors to serve in Class I of the
Company's Board of Directors:
Votes in favor Votes against Abstentions
In Person As Proxy In Person As Proxy In Person As Proxy
Reed Bramlett 0 10,102,587 0 4,764 0 0
Carl Herrin 0 10,102,587 0 4,764 0 0
Philip J. Hubbuch, Jr.
0 10,102,587 0 4,764 0 0
(2) The ratification of the selection of KPMG Peat Marwick
LLP as Independent Auditors:
Votes in favor Votes against Abstentions
In Person As Proxy In Person As Proxy In Person As Proxy
0 10,102,951 0 1,000 0 3,400
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.
August 9, 1996 By: /s/Philip J. Hubbuch, Jr.
Philip J. Hubbuch, Jr.
Vice Chairman and Chief Executive
Officer
August 9, 1996 By: /s/Vann R. Martin
Vann R. Martin
President and Chief Operating
Officer
August 9, 1996 By: /s/R. Dale Miller
R. Dale Miller
Controller and Principal Accounting
Officer
<PAGE>
<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.
EXHIBIT 11
<TABLE>
MS FINANCIAL, INC.
COMPUTATION OF PER SHARE INCOME (LOSS)
(in thousands, except per share data)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1995 1996 1995 1996
<S> <C> <C> <C> <C>
Weighted average shares:
Common stock outstanding 8,800 10,426 8,800 10,439
Option shares outstanding 665 700 665 0(1)
Shares assumed repurchased
using treasury stock
method (133) (270) (133) 0(1)
Weighted average shares
outstanding 9,332 10,856 9,332 10,439
Net income (loss) $781 $142 $1,377 ($219)
Computation of net income
(loss) per share:
Net income (loss) divided
by weighted average
shares outstanding $0.08 $0.01 $0.15 ($0.02)
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 375
<SECURITIES> 0
<RECEIVABLES> 102696
<ALLOWANCES> 1295
<INVENTORY> 0
<CURRENT-ASSETS> 8489
<PP&E> 2161
<DEPRECIATION> 770
<TOTAL-ASSETS> 111656
<CURRENT-LIABILITIES> 68097
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 43548
<TOTAL-LIABILITY-AND-EQUITY> 111656
<SALES> 5122
<TOTAL-REVENUES> 2254
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6388
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1338
<INCOME-PRETAX> (350)
<INCOME-TAX> (131)
<INCOME-CONTINUING> (219)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (219)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
