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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-K/A
AMENDMENT NO. 2
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required) For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
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 Identification No.)
Incorporation or Organization)
715 S. Pear Orchard Road, Suite 300, Ridgeland, Mississippi 39157
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number Including Area Code: (601) 978-6737
------------------------------
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock,
$.001 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 12 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 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 90 days.
X Yes No
-------- --------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registration's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K[ ]
The aggregate market value of the Registrant's voting Common Stock (based
on the closing price of such shares on the Nasdaq National Market on February
28, 1997) held by non-affiliates was approximately $ 3,824,771. Common Stock
held by each officer and director and each person who owns 5% or more of the
outstanding Common Stock has been excluded in that such persons may be deemed
affiliates. This determination of affiliates status is not necessarily a
conclusive determination for other purposes.
On February 28, 1997, the following number of shares of the Company's
capital stock were outstanding:
Common Stock 10,429,926
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<TABLE>
<S> <C> <C>
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders . . . . 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . 12
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . 15
Item 8. Financial Statements and Supplementary Data . . . . . . . . 36
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . 36
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . 37
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . 42
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . 51
Item 13. Certain Relationships and Related Transactions . . . . . . 52
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 54
</TABLE>
2
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PART I
ITEM 1. BUSINESS
GENERAL
MS Financial, Inc. (the "Company") is a specialized consumer finance
company engaged in the purchase and servicing of retail installment contracts
("Installment Contracts") originated principally by manufacturer-franchised
dealerships ("Franchise Dealer") which sell new and used automobiles and light
duty trucks to borrowers with limited credit history, low income or past credit
problems ("Non-prime Consumer"). The Company also generates revenues from
commissions on the sale of credit life insurance, credit accident and health
insurance, and extended service or warranty contracts ("Ancillary Products").
The Company commenced operations in 1984 and achieved significant growth
until the third quarter of 1996, reaching a maximum of 23 branch offices in 11
states and 10 regional marketing programs in 8 states. At September 30, 1996,
the Company's dealer network consisted of 1,071 dealers in 14 states, and the
Company's net portfolio of managed Installment Contracts was $163.8 million.
During 1996, the percentage of the Company's delinquent receivables
increased dramatically to 18.0% at September 30, 1996. This resulted in the
Company's inability to maintain acceptable sources of credit necessary for
normal business operations. Since October 1, 1996, the Company's sources of
liquidity have not been adequate to allow the Company to purchase any
significant number of Installment Contracts. (See the Company's "Management's
Discussion and Analysis of Financial Condition and Results of Operations") At
December 31, 1996, delinquent receivables as a percentage of total receivables
were 19.3%.
On February 7, 1997, the Company entered into an Agreement and Plan of
Merger ("Merger Agreement") with Search Capital Group, Inc. ("Search"). If the
merger (the "Merger") contemplated by the Merger Agreement is consummated, the
Company will become a wholly-owned subsidiary of Search and the Company's
shareholders will become shareholders of Search. Consummation of the Merger is
subject to a number of conditions and contingencies, many of which are outside
the Company's control. More detailed information about Search and the proposed
Merger will be contained in Search's registration statement on Form S-4 to be
filed with the Securities and Exchange Commission.
BACKGROUND
MSDiversified Corporation ("MSD") was founded in 1973 by eight
automotive dealers to
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provide administrative and financial services to automobile dealerships and to
provide such dealers with Ancillary Products through its wholly owned
subsidiaries, principally MS Life Insurance Company ("MS Life"), a Mississippi
life insurance company, and MS Casualty Insurance Company ("MS Casualty"), a
Mississippi casualty insurance company that is rated "A-" by A.M. Best & Co.
In 1984, First Jackson Savings Bank, F.S.B., a savings and loan association
then owned by MSD, established an automotive financing program focusing on Non-
prime Consumers, which was transferred in 1989 to MS Financial Services, Inc.
("MSFS"), a Mississippi corporation wholly owned by MSD. In September 1993,
the Company was created as a wholly-owned subsidiary of MSFS. As part of a
corporate reorganization, all of the assets of MSFS were transferred to the
Company in November 1993. In January 1994, MSFS sold 50% of the capital stock
of the Company to Golder, Thoma, Cressey, Rauner Fund IV, L.P. ("GTCR IV"), a
Chicago-based private equity fund. On July 21, 1995, the Company issued
2,000,000 new shares in an initial public offering. At that time, together
with the exercise of an over allotment option granted to the underwriters, GTCR
IV sold a combined 760,000 shares to the public. As of December 31, 1996, the
Company was owned 41.4% by MSD and 35.7% by GTCR IV. The remaining 22.9% was
held by public investors.
THE AUTOMOTIVE FINANCE INDUSTRY
The automobile finance industry is the second largest consumer finance
market in the United States. The overall industry is generally segmented
according to type of car sold (new vs. used) and the credit characteristics of
the borrower. The vast majority of the automobile financing that is being
provided by large captive finance companies and banks tends to be for new cars
purchased by prime consumers. Independent finance companies tend primarily to
finance the purchase of used cars by Non-prime Consumers.
The Non-prime Consumer credit segment of the automotive finance market
is comprised of individuals who are relatively high credit risks and who have
limited access to traditional financing sources, generally due to such factors
as unfavorable past credit experience, low income or limited financial
resources and/or the absence or limited extent of credit history.
BUSINESS STRATEGY
Prior to 1996, the Company believed it had implemented a successful
business strategy based on its (i) understanding of the automotive finance
business, (ii) substantial experience with Franchise Dealers' Non-prime
Consumer financing requirements, (iii) ability to evaluate credit risks
associated with the Non-prime Consumer market, and (iv) methods of receivables
servicing and collection. The principal components of this business strategy
included (i) developing and retaining experienced management personnel, (ii)
developing and expanding its branch office network around a cluster of urban
centers, (iii) utilizing centralized credit functions and advanced management
information systems, (iv) developing strong dealer relationships, and (v)
providing economical and flexible financing structures.
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The Company believes it can identify some of the reasons for the
increase in delinquencies and losses that occurred beginning in late 1995 and
continued throughout 1996. Some portion of the increase appears to be
attributable to macroeconomic factors which affected the sub-prime market
generally. The Company also believes that the decline in the quality of its
owned and managed portfolio was, in part, attributable to increased competition
in the non-prime market which resulted in the Company being pressed into the
lower end of the range of acceptable credit criteria. Finally, the Company
experienced management and turnover problems in its collection/customer service
department during 1996 which caused the Company's collection efforts to be less
effective than in past years.
The Company intends to operate within the current confines of available
liquidity until the date and time of the consummation of the Merger
("Effective Time") with Search. The completion of the Merger is projected to
occur in July, 1997. After the Effective Time of the Merger, Search, as the
controlling party of the Company, would then assume the role of determining the
Company's business strategy on an ongoing basis.
INSTALLMENT CONTRACTS ACQUISITION PROGRAM
Along with a number of other finance companies purchasing Installment
Contracts owned by Non-prime Consumers, the Company experienced a dramatic
increase in delinquencies on Installment Contracts in 1996 which ultimately
resulted in a devaluation of its owned and managed portfolio and a loss of
customary financing sources. Since early October, 1996, the Company's
financing sources have not been adequate to continue normal business
operations.
Historically, the Company has marketed its services through three
programs: a branch office network; a central marketing program; and a
regional marketing program.
BRANCH NETWORK. The branch office network reached a high of 23 offices
during 1996. After closing 12 offices during 1996, the Company currently
maintains 11 branch offices divided into two regional divisions (East and West)
located in five states.
The following table sets forth the locations of the Company's branch
offices as of December 31, 1996:
<TABLE>
<CAPTION>
BRANCH OFFICE LOCATIONS (BY REGIONAL DIVISION)
----------------------------------------------
EAST WEST
---- ----
<S> <C>
Atlanta, GA Houston, TX (North)
Nashville, TN Houston, TX (South)
Memphis, TN Dallas, TX
Charlotte, NC Tulsa, OK
Winston-Salem, NC Oklahoma City, OK
Duncanville, TX
</TABLE>
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The Company's branch office personnel directly assist the dealership in
completing the paper work necessary to complete the sale of the vehicle and the
Installment Contract. In connection with that service, the Company's personnel
have direct contact with the consumer and market Ancillary Products to the
consumer. The Company publishes a schedule of acceptable interest rates and
purchases Installment Contracts meeting its criteria at a fixed discount
(typically a net discount to the dealer of 7.6% for branch office purchases).
Prior to July 1, 1996, after payment of the cost of repossession loss insurance
which the Company remitted to the insurance carrier, the amount of the discount
retained by the Company was one percent. Since July 1, 1996, the Company has
retained the amount previously paid for repossession loan insurance which
increased the average net discount to the Company to 7.6% on purchases by
branch offices.
CENTRAL MARKETING PROGRAM. The Company also purchases Installment
Contracts from its Ridgeland, Mississippi office on an indirect basis from
dealers. These are typically dealers who have done business with other MSD
affiliates. In the central marketing program, the dealers fax a loan
application to the Company's headquarters. Any required negotiations to
improve credit terms prior to funding an Installment Contract takes place
directly between the Company's underwriting personnel and personnel at the
dealership. If acceptable terms can be reached, the contract is closed at the
dealership by the dealer's personnel. To the extent any Ancillary Products are
sold, the dealer retains any commission income. Installment contracts meeting
the Company's published interest rate and credit criteria purchased through the
Central Marketing Program are purchased at a fluctuating discount based on the
term of the Installment Contract. The discount ranges from 3.75% to 7.5%,
subject to a minimum discount of $450. The Company has established
arrangements with some dealers that allow the dealer to participate in a
portion of the interest paid by the consumer. Otherwise, these transactions
are nonrecourse to the dealer. The discount was used by the dealer or the
Company on behalf of the dealer to purchase repossession loss insurance prior
to July 1, 1996. After the Company discontinued repossession loss insurance
(see below) the Company retained the discount, which has averaged approximately
6.75%.
REGIONAL MARKETING PROGRAM. Beginning in November 1995, the Company
converted four of its branches into regional marketing programs. These
programs were chosen in areas where the Company believed it was not economical
to operate a branch office either because of the competitive environment or due
to geographic limitations or both. The program consists of a sales
representative establishing relationships with dealers located in their market
areas and soliciting Installment Contracts on an indirect basis. Dealers close
the contract, sell any Ancillary Products to the customers and retain the
commissions. The Company's personnel do not negotiate the contracts or have
any contact with the customer. This program allows the regional marketing
representative to cover a larger geographic area since the customer does not
come into the branch office to close the contract. Branch office personnel
also establish relationships with dealers beyond their normal range of
operations and offer the regional marketing program to these dealers.
Installment Contracts meeting the Company's published interest rate and credit
criteria purchased through the Regional Marketing Program are purchased at a
fixed $750 discount, which averages 6.91% of the amount financed. These
transactions
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are nonrecourse to the dealers, and the dealer does not participate in any
interest paid on these
contracts. After the Company discontinued repossession loss insurance, the
$750 discount used to pay the repossession loss insurance premium was retained
by the Company.
During 1996, the Company closed 9 regional offices, and at December 31,
1996, had its only regional office in Raleigh, NC.
DEALER RELATIONSHIPS. The Company primarily markets its financing
program to Franchise Dealers because it believes that the quality and value of
used cars sold by Franchise Dealers are generally higher than those sold by
independent dealers. Except for one dealer partially owned by a director of
the Company that generated approximately 5.8 % of the Company's Installment
Contracts outstanding as of December 31, 1996, no dealer accounted for more
than 2.7 % of the Company's total number of Installment Contracts. For the
years ended December 31, 1994, 1995 and 1996, the Company had 632, 781 and
1,059 active dealers, respectively.
Each dealer with which the Company establishes a financing relationship
enters into a non-exclusive written dealer agreement with the Company (a
"Dealer Agreement") governing the purchase of Installment Contracts from such
dealer. The Dealer Agreement sets forth the general terms upon which
Installment Contracts will be purchased by the Company, but does not obligate
the dealer to sell, or the Company to purchase, any particular Installment
Contract. The Company monitors the number and tracks the performance of
Installment Contracts purchased from each dealer to identify problem dealers at
an early stage and take corrective actions against possible adverse trends in
loss ratios with respect to such dealers.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------
NUMBER OF ACTIVE DEALERS BY STATE 1994 1995 1996 (1)
- ---------------------------------------- ---- ---- --------
<S> <C> <C> <C>
Alabama ................................ 8 11 12
Georgia ................................ 96 93 113
Indiana ................................ 2 22 39
Kentucky ............................... 14 21
29
Mississippi ............................ 82 74
93
North Carolina ......................... 59 90
140
Ohio ................................... 18 45 70
Oklahoma ............................... 51 75 115
Tennessee .............................. 86 96
119
Texas .................................. 193 228 284
Virginia ............................... 9 22
25
Other .................................. 14 4 20
----- ----- -----
Total ........................... 632 781 1,059
===== ===== =====
</TABLE>
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(1) The Company has been unable to purchase any significant number of
Installment Contracts since October 1, 1996.
REPOSSESSION LOSS INSURANCE. Prior to July 1, 1996, the Company insured
against a portion of the losses on its Installment Contracts with a
repossession loss policy underwritten by MS Casualty. Under that program, at
the time of financing, the dealer paid MS Casualty a premium for an insurance
policy covering default losses. When an insured vehicle is repossessed, any
credit loss of up to $7,000 per vehicle is covered by MS Casualty and, subject
to any loss deductibles applied by the Company, paid with respect to the
Installment Contract. The total liability of MS Casualty for all repossession
losses with respect to each policy year could not, however, exceed the product
of $600 times the number of repossession loss policies purchased through the
Company during such policy year. In addition, the Company was eligible for an
experience refund that allowed the Company to recapture any profits from
positive underwriting experience after paying an administrative fee on the
repossession policies. The Company earned no experience refund in 1995 or
1996. As of July 1, 1996, the Company discontinued the repossession loan
program and, instead, reduced the purchase price paid dealers for Installment
Contracts or retained a portion of the discount previously used to pay the
insurance premium.
CREDIT EVALUATION AND PURCHASING PROCEDURES. The Company applies
uniform underwriting standards in purchasing Installment Contracts. These
standards have been developed and refined over several Installment Contract
cycles (i.e., where the Company has experienced the full maturities of several
generations of 48-month Installment Contracts) during the Company's 12 year
history. The two most important criteria used in evaluating an Installment
Contract are the degree of the applicant's creditworthiness and the collateral
value of the vehicle.
After the Company completes its credit analysis, it advises the dealer
of its decision to reject or conditionally approve the Installment Contract.
Turnaround time in the automotive finance business is a significant competitive
factor, and the Company typically completes its initial credit decision in an
average of 1 1/2 hours. Substantially all approved credit applications are
approved "conditionally," pursuant to which the Company's acceptance is subject
to the consumer and the dealer agreeing on certain provisions.
Once the terms of the financing are agreed upon, the financing documents
are approved by the Company's home office. The dealer then delivers all
documentation required under the Dealer Agreement to the Company, including
proof of title indicating the Company's lien, an odometer statement confirming
the vehicle's mileage and proof that the automobile is insured, with the
Company designated as loss payee. When the Company has received the final
credit and other documents from the dealer, the Company remits funds to the
dealer.
The Company believes that the decline in the quality of its owned and
managed portfolio was, in part, attributable to increased competition in the
subprime market which resulted in the Company being pressed into the lower end
of the range of acceptable credit criteria. In October 1996, the Company
tightened its credit standards. At this point, the Company does not have
adequate data to
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determine whether Installment Contracts purchased since October 1996 will
perform significantly better than the Installment Contracts purchased prior to
that date. Pursuant to the Merger Agreement, the Company agreed to begin
purchasing Installment Contracts which satisfy Search's underwriting criteria
or are otherwise approved by Search.
ANCILLARY PRODUCTS. Prior to the Company's acquisition of an
Installment Contract, the dealer and/or the Company's branch office personnel
may also offer Ancillary Products to the consumer. The Company acts as an
agent for MS Life and MS Casualty in connection with the sale of many of the
Ancillary Products and receives a commission on the sale of all such products
sold through its branch offices. The Company does not receive commissions on
the sale of any Ancillary Products in either the central or regional marketing
programs. During 1996, the Company's total earned revenues from the sale of
Ancillary Products were $1.3 million, or 6.4% of total revenues as compared to
1995 amounts of $1.8 million, or 7.5% of total revenues.
CONTRACT PROFILE During the years ended 1994, 1995 and 1996, the
Company purchased 6,463, 8,768, and 10,352 Installment Contracts, respectively,
with principal balances of $65.4 million, $87.0 million, and $110.8 million,
respectively. Of the $110.8 million purchased in 1996, $99.9 million were
purchased during the first nine months of the year. As of December 31, 1996,
the average unpaid principal balance per contract was $7,870 and the average
initial principal balance was $10,539. The initial contract term ranged from
12 to 60 months, and the average initial term was 49 months for all loans
outstanding at December 31, 1996. The annual percentage rate ("APR") paid by
consumers for contracts originated in 1996 ranged from 16.0% to 36.0%. The
Company's weighted average APR of Installment Contracts purchased in 1996 was
20.7%.
<TABLE>
<CAPTION>
INSTALLMENT CONTRACTS PURCHASED
--------------------------------
1994 1995 1996
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
New Car Portfolio
Installment Contracts 1,129 690 904
Principal amount financed $ 15,244 $ 9,208 $ 13,102
Weighted average initial APR 17.7% 18.2% 18.2%
Used Car Portfolio
Installment Contracts 5,334 8,078 9,448
Principal amount financed $ 50,184 $ 77,765 $ 97,726
Weighted average initial APR 21.4% 21.0% 21.0%
Total Portfolio
Installment Contracts 6,463 8,768 10,352
Principal amount financed $ 65,428 $ 86,973 $110,828
Weighted average initial APR 20.4% 20.7% 20.7%
</TABLE>
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CONTRACT SERVICING AND ADMINISTRATION
The Company's centralized Installment Contract servicing and
administration activities have been specifically tailored to servicing loans to
Non-prime Consumers. The Company's servicing and administration departments,
which are located at its corporate headquarters near Jackson, Mississippi, (i)
monitor the Installment Contracts and the related collateral, (ii) account for
and post all payments received, (iii) respond to customer inquiries, (iv) take
all necessary action to maintain the security interest granted in the financed
automobile, (v) investigate delinquencies and communicate with the borrowers to
obtain timely payments, (vi) pursue deficiencies on Installment Contracts, and
(vii) when necessary, contract with third parties to repossess and dispose of
the financed automobile. During 1996, the Company experienced unusually high
turnover in its customer service department which contributed to the higher
delinquencies and losses experienced during the year. Also, as a result of the
shortage of experienced sub-prime customer service representatives, in November
1996, the Company opened a customer service center in Mobile, Alabama to
support the main office collection efforts.
COMPETITION
The non-prime credit market is highly fragmented, consisting of many
national, regional and local competitors, and is characterized by relative ease
of entry. Existing and potential competitors include well-established
financial institutions, such as banks, savings and loans, small loan companies,
leasing companies and captive finance companies owned by automobile
manufacturers and others. The Company believes that increased regulatory
oversight and capital requirements imposed by market conditions and
governmental agencies have limited the activities of many banks and savings and
loans in the Non-prime Consumer credit market. The Company also believes that
captive finance companies generally focus on new car financing. As a result,
the Non-prime Consumer credit market is primarily serviced by smaller finance
organizations that solicit business when and as their capital resources permit.
The Company estimates, based on available information, that its managed
portfolio represents less than 1% of the Non-prime Consumer automobile finance
market in the United States and believes that no competitor controls more than
2% to 3% of this market.
REGULATION
The Company's business is subject to regulation and licensing under
various federal, state and local statutes and regulations. Numerous federal
and state consumer protection laws and related
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regulations impose substantive disclosure requirements upon lenders and
servicers involved in automobile financing. The Company is also subject to
various states' insurance regulations in connection with the sale of insurance
policies.
The Company believes that it is in substantial compliance with all
applicable material laws and regulations. Adverse changes in the laws or
regulations to which the Company's business is subject, or in the
interpretation thereof, could have a material adverse effect on the Company's
business. Because the Company generally charges the highest finance charges
permitted by state law, reductions in statutory maximum rates could directly
impair the operating results.
EMPLOYEES
At December 31, 1996 the Company had 132 full-time employees, none of
whom was covered by collective bargaining agreements. Of such employees, 76
were located in the Company's headquarters near Jackson, Mississippi, 21 were
located in the Mobile, Alabama customer service center and 35 were located in
the Company's branch offices or regional marketing programs. The Company
considers its employee relations to be good.
ITEM 2. PROPERTIES
The Company's executive offices are located in Ridgeland, Mississippi,
immediately north of Jackson, Mississippi, where it leases 13,176 square feet
pursuant to a sublease expiring in December 1997. The Company also leases
3,106 square feet in the adjacent building.
As of December 31, 1996, the Company maintained 11 branch offices and 1
regional office. Generally, these offices range from 200 to 1,300 square feet,
and monthly rental rates for such offices range from $445 to $1,878 per month.
The average initial term of such leases is 12-24 months. The Company does not
consider the rental cost of its branch and regional marketing offices to be a
material component of its overall cost structure.
In October 1996, the Company opened a customer service office in Mobile,
Alabama, consisting of 4,670 square feet leased for $1,100 per month for the
first six months of the lease and for $2,200 per month thereafter through
September, 1997.
ITEM 3. LEGAL PROCEEDINGS
Beginning in June 1995, the Company was named as a defendant in a number
of lawsuits filed in the District Court of Harris County, Texas. In certain of
these cases, plaintiffs sought class action certification. In January 1997, the
Company entered into a settlement agreement covering the pending cases which
requires the Company to pay $375,000 prior to July 1, 1997. The terms of the
settlement require the Company to release certain deficiency claims against the
plaintiffs.
On January 15, 1997, the Company was named as a defendant in a lawsuit
filed by Telluride
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Funding Corp. ("Telluride") in the U.S. District Court for the Southern
District of New York. In its complaint, Telluride asserts claims for unpaid
fees due it in connection with the Company's warehouse line of credit entered
into in April 1995. Plaintiff seeks damages in the amount of $437,500, plus
interest, costs and attorney's fees. At this time, the Company is unable to
predict the outcome of this litigation, but intends to vigorously defend this
proceeding. The Company has filed a declaratory judgment action against
Telluride in Mississippi State Court requesting a determination of the parties'
rights and obligations under the letter agreement relating to the warehouse
line of credit. At this time, the Company is unable to predict the outcome of
this litigation.
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 its business, income,
assets or operations. The Company is not aware of any other material
threatened litigation which might involve the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock has been trading on the Nasdaq National
Market since July 21, 1995, under the symbol "MSFI". As of February 28, 1997,
based upon information provided by record holders, there were approximately
1,200 shareholders of the Company.
The Company has not paid dividends on its common stock and has no
present intention of paying any dividends in the foreseeable future. The
current policy of the Company is to retain earnings to provide funds for
operations and growth.
The following table presents the high and low sales prices of the
Company's common stock for each quarter of 1996 and 1995 subsequent to the
Company's initial public offering.
<TABLE>
<CAPTION>
Price of Common Stock
---------------------
1995 1996
----- ----
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $ 7 1/8 $ 4 3/8
Second Quarter $ 7 5/8 $ 5 7/8
Third Quarter $ 13 7/8 $ 11 $ 6 1/4 $ 2 5/8
Fourth Quarter $ 12 1/2 $ 5 3/8 $ 3 5/8 $ 5/8
</TABLE>
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Boston EquiServe is the Company's transfer agent and registrar for the
common stock.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for
the Company for the periods indicated. The consolidated financial statements
as of December 31, 1995 and 1996, and for each of the years in the three-year
period ended December 31, 1996, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" should be read in conjunction
with the following data.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest and fee income on Installment
Contracts and securitizations $ 6,880 $ 6,514 $ 10,008 $ 12,449 $ 14,909
Other interest income 2 13 4 100 70
Interest expense (2,048) (1,193) (2,441) (3,587) (5,371)
-------- -------- -------- -------- --------
Net interest income before loss provisions 4,834 5,334 7,571 8,962 9,608
Provision for possible losses on
Installment Contracts (749) (924) (685) (826) (20,103)
Provision for impairment of amounts
due under Securitizations -- -- -- -- (3,000)
Provision for possible losses on
repossessed automobiles -- -- -- -- (2,800)
-------- -------- -------- -------- --------
Net interest income (loss) after loss provisions 4,085 4,410 6,886 8,136 (16,295)
Insurance commissions earned 155 667 1,456 1,823 1,329
Gains on securitizations 633 2,134 2,492 7,072 --
Service fee income 222 862 1,235 1,951 2,668
Experience refund on insurance policy -- 900 900 -- --
Other income 217 349 627 760 753
Operating expenses (3,152) (4,271) (6,589) (9,340) (15,104)
Income tax (expense) benefit (748) (1,890) (2,622) (3,901) 4,635
-------- -------- -------- -------- --------
Income (loss) from continuing operations 1,412 3,161 4,385 6,501 (22,014)
Income from operations of discontinued
subsidiary, net of income taxes 1,070 -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) $ 2,482 $ 3,161 $ 4,385 $ 6,501 $(22,014)
======== ======== ======== ======== ========
EARNINGS (LOSS) PER SHARE:
From continuing operations $ 0.15 $ 0.34 $ 0.47 $ 0.65 $ (2.11)
From operations of discontinued
subsidiary, net of income taxes 0.12 -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) $ 0.27 $ 0.34 $ 0.47 $ 0.65 $ (2.11)
======== ======== ======== ======== ========
Weighted average shares outstanding 9,332 9,332 9,332 9,932 10,433
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
PORTFOLIO DATA:
Number of contracts acquired during
period (not in thousands) 2,772 4,546 6,463 8,768 10,352
Principal amount of contracts acquired
during period $ 26,233 $ 45,172 $ 65,428 $ 86,973 $110,828
Net Managed Portfolio - end of period $ 42,640 $ 61,009 $ 88,589 $120,318 $130,371
Net Managed Portfolio - average during period $ 41,577 $ 52,383 $ 73,505 $106,309 $142,753
Average principal balance of securitized Installment
Contracts during period $ 2,025 $ 22,887 $ 35,244 $ 52,590 $ 72,212
Average principal balance of owned loans
during period $ 30,433 $ 26,096 $ 40,117 $ 56,095 $ 72,261
OPERATING DATA:
Owned Installment Contracts Receivable:
Average interest rate earned (1) (2) 22.6% 23.0% 21.4% 21.4% 20.5 %
Average interest rate paid (3) 6.7% 6.5% 8.1% 8.9% 10.2 %
-------- -------- -------- -------- --------
Net interest spread 15.9% 16.5% 13.3% 12.5% 10.3 %
======== ======== ======== ======== ========
Allowance for possible losses on Installment
Contracts as a percent of average Net
Managed Portfolio 2.1% 2.3% 1.8% 1.5% 7.0%
Operating expenses as a percent of average
Net Managed Portfolio (2) 7.6% 8.2% 9.0% 8.8% 10.6%
BALANCE SHEET DATA (AT PERIOD END):
Total assets $ 28,422 $ 32,902 $ 60,222 $ 49,718 $101,435
Notes payable 15,111 15,046 36,043 -- 75,813
Total liabilities 17,865 19,184 42,119 4,734 79,681
Stockholders' equity 10,557 13,718 18,103 44,984 21,754
</TABLE>
(1) Average interest rate earned represents net interest and fee income on
owned Installment Contracts divided by the average principal balance of
owned Installment Contracts.
(2) Averages are computed using monthly balances of owned or managed
contracts.
(3) Average interest rate paid represents the interest expense as a
percentage of average indebtedness. Average indebtedness is based on
the average dollar balance of borrowings outstanding under the revolving
credit facility.
14
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following management's discussion and analysis provides
information regarding the Company's consolidated financial condition as of
December 31, 1995 and 1996, and its results of operations for the years ended
December 31, 1994, 1995 and 1996. The management's discussion and analysis
should be read in conjunction with the "Selected Consolidated Financial Data"
and the Company's Consolidated Financial Statements and the notes thereto and
the other consolidated financial data. The ratios and the percentages provided
below are calculated using the detailed financial information contained in the
Company's Consolidated Financial Statements and the notes thereto.
OVERVIEW
The Company is a specialized consumer finance company engaged in
the purchase and servicing of Installment Contracts originated by automobile
dealers. The Company acquires Installment Contracts principally from Franchise
Dealers in connection with the 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 Ancillary Products sold in
conjunction with the Installment Contracts purchased by the Company through its
branch offices.
On February 7, 1997, the Company entered into a merger agreement with
Search. If the proposed merger is consummated, the Company will become a
wholly-owned subsidiary of Search and the Company's shareholders will become
shareholders of Search. For additional information, see Note 3 of the
Company's Consolidated Financial Statements.
HISTORICAL DEVELOPMENT AND GROWTH
From its inception until late 1996, the Company experienced
significant growth in its Managed Portfolio, corporate structure and
operations. This growth resulted from the development of a branch office
network, the regional marketing program and the implementation of a
securitization program, and it has been facilitated by the creation of an
independent corporate administrative infrastructure.
15
<PAGE> 16
BRANCH OFFICE NETWORK. In 1990, the Company began expanding
its business by opening branch offices in the Midwest, Southeast and Southwest
regions of the United States and servicing dealers in these regions. These
branch offices develop and improve relationships with dealers and customers,
generate Installment Contract applications and produce commission and fee
income through the sale of Ancillary Products. This commission and fee income
typically offsets each particular branch office's operating expenses within 12
months of its opening. As a result of the Company's branch office expansion,
the volume and number of Installment Contracts in its Managed Portfolio have
grown significantly in the last several years. The number of branch offices
reached a high of 23 in October 1996. Due to a lack of production and
profitability, and to reduce company overhead, a total of twelve branches were
closed during the fourth quarter of 1996. During 1994, 1995 and 1996 under
this program, the Company purchased Installment Contracts totalling $40,979,
$65,478 and $55,746, respectively.
CENTRAL MARKETING PROGRAM. In 1984, the Company began purchasing
Installment Contracts from MSD affiliated dealers located principally in
Mississippi and Tennessee. During 1996, the Company serviced approximately 45
affiliated dealers in Mississippi, Tennessee, and Alabama. During 1994, 1995
and 1996 under this program, the Company purchased Installment Contracts
totalling $24,449, $21,130 and $17,120, respectively.
REGIONAL MARKETING PROGRAM. In 1995, the Company initiated a
regional marketing program from four locations. Sales representatives develop
relationships with dealers in their market areas to generate Installment
Contract applications. Under this program, the contract is closed at the
dealership, and the dealer sells any ancillary products and retains the
commissions. During 1996, the Company closed 9 regional offices, and at
December 31, 1996 had only one remaining office located at Raleigh, N.C.
During 1995 and 1996 under this program, the Company purchased Installment
Contracts totalling $365 and $37,962, respectively.
USE OF SECURITIZATIONS. In 1992, the Company began selling
interests in pools of its Installment Contracts to investors through the annual
issuance of triple-A rated, asset-backed securities ("Securitization"). These
transactions provided a significant source of the Company's funding.
Securitizations also allowed the Company to (i) lock in the interest rate
spread on the underlying Installment Contracts by obtaining a fixed rate of
interest on the Securitization, (ii) record a gain or loss on the sale of the
Installment Contracts, (iii) receive residual income attributable to excess
cash flows on the Installment Contracts if and when payments on the Installment
Contracts are received and (iv) receive income from servicing the Installment
Contracts. This residual income and service fee income is included under
"Results of Operations," below, under the headings "Interest and fee income on
Installment Contracts and Securitizations" and "Service fee income,"
respectively. The
16
<PAGE> 17
Company's last securitization was closed in September, 1995.
ADMINISTRATIVE DEVELOPMENT. Prior to 1994, MSD provided most of
the Company's executive and administrative services, including its accounting,
payroll, data processing, human resource management and computer system
maintenance and development services. Between 1993 and 1994, MSD began to
charge the Company progressively higher administrative and other fees for these
services as the Company expanded its operations.
Beginning in January 1994, many of the individuals who had
performed these executive and administrative functions for the Company became
full-time employees of the Company. Some services, such as payroll processing,
mainframe computer usage and software maintenance and development, however,
continued to be performed by MSD under a cost sharing contractual arrangement.
As of January 1, 1995, the Company assumed responsibility for its own payroll
processing and recruited personnel from MSD's management information systems
("MIS") department to form the Company's own MIS department. All remaining fee
arrangements between the Company and MSD were discontinued at this time, other
than those relating to the Company's use of MSD's mainframe computer.
The following table sets forth information with regard to the
Company's growth in personnel, branch offices and Installment Contract
origination. Also set forth is information regarding portfolio growth,
borrowing levels and cost of funds.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Number of Branch and Regional Marketing Offices
Total at period end 23 24 12
Average for the period 17 23 21
Company Personnel
Executive 5 5 3
Headquarters operations 48 80 94
Branch offices 58 54 35
-------- -------- --------
Total at period end 111 139 132
Originated Installment Contracts (000's)
Central marketing program $ 24,449 $ 21,130 $ 17,120
Branch offices 40,979 65,478 55,746
Regional marketing program -- 365 37,962
-------- -------- --------
$ 65,428 $ 86,973 $110,828
======== ======== ========
Net Managed Portfolio (000's)
Total at period end $ 88,789 $120,318 $130,371
Average for the period 73,505 106,309 142,753
Owned installment and other contracts (000's)
Total at period end $ 48,852 $ 22,398 $ 86,972
Average for the period 39,406 58,903 72,261
Revolving credit facility balances (000's)
Total at period end $ 36,043 -- $ 75,813
Average for the period $ 30,213 $ 40,488 $ 52,653
Average interest rate paid 8.1% 8.9% 10.2%
</TABLE>
17
<PAGE> 18
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
COMPARISON OF 1995 TO 1996
INTEREST AND FEE INCOME ON INSTALLMENT CONTRACTS AND
SECURITIZATIONS. Interest and fee income on Installment Contracts and
Securitizations increased by $2,460, or 19.8%, from $12,449 in 1995 to $14,909
in 1996. Fee income includes late charges and extension fees which amounted to
$927 and $1,623 in 1995 and 1996, respectively. The increase in interest
income is primarily due to a 22.7% increase in average owned Installment
Contracts outstanding during the year. The increase in owned Installment
Contract balances results primarily from a 27.4% increase in the principal
balance of Installment Contracts acquired during 1996. Also, in 1996, the
Company failed to complete a Securitization, which contributed to the increase
in the owned portfolio. These increases were partially offset by a decrease in
residual income attributable to excess cash flows on Securitizations which
decreased 83.9% from $422 in 1995 to $68 in 1996. This reduction is primarily
the result of reduced cash flow from the Securitizations which was caused
primarily by increased delinquencies during the last half of 1995 and
throughout 1996. Residual income attributable to excess cash flows on
Securitizations is recognized based on actual and expected cash flows and the
estimated rate of return on the recorded investment.
INTEREST EXPENSE. Interest costs increased by $1,784, or 49.7%,
from $3,587 in 1995 to $5,371 in 1996. As a percentage of interest and fee
income, interest expense increased from 24.4% in 1994, to 28.8% in 1995 and 36%
in 1996. This increase in the amount of interest expense and the ratio of
interest expense to interest and fee income resulted from increases in average
borrowings outstanding under the revolving credit facility over those periods.
During 1996, the revolving credit facility was not reduced by proceeds from a
Securitization transaction which resulted in the average amount outstanding
under the credit line increasing to $52.7 million in 1996 compared to $40.5
million in 1995. The remainder of the increase in 1996 relates to an increase
in the interest rate on the revolving credit facility for the last two months
of 1996, which increased interest expense approximately $363, and the other
costs associated with restructuring the debt ($563). The revolving credit
facility was restructured in December as a result of the Company's rising
delinquency and loss rates. During the third quarter of 1995, the Company
completed a Securitization which resulted in
18
<PAGE> 19
$73.2 million in proceeds and received an equity infusion through the
completion of an initial public offering of $21.4 million. The net proceeds
were used to repay the Company's revolving credit facility which in turn
reduced the Company's interest cost for the last quarter of 1995.
PROVISION FOR POSSIBLE LOSSES. The provision for possible losses
on Installment Contracts increased by $19,277 from $826 in 1995 to $20,103 in
1996. The allowance for possible losses on Installment Contracts increased
from 1.3% of the Net Managed Portfolio in 1995 to 7.7% in 1996. This
significant increase is substantially the result of the Company's rising
delinquencies and loss rates on Installment Contracts and the total utilization
of the aggregate loss limits and available reserves at MS Casualty. At the end
of the Company's 1995 calendar year, a loss development methodology was
utilized that considered what proportion of the Company's losses were
developing after specific time frames based on month of loan origination.
Based on that static pool loss development, and considering the insurance that
MS Casualty provided the Company, allowance levels were established. The
Company utilized this approach exclusively through the second quarter of 1996.
Beginning in the third quarter of 1996, in consideration of the Company's
rising delinquency rates, the Company began supplementing the previously
existing methodology with additional methodologies that better considered the
rising delinquency and loss rates. The Company's management believed that,
with the trend in delinquencies, the previous methodology would not consider
the negative trends in the portfolio fast enough. Accordingly, two additional
methods were developed.
The first supplemental method is based on delinquency information
by year of origination. A probability of loss factor is estimated for each
delinquency category by year of origination and a percentage of loan dollar
loss factor is established for each year. The probability of loss factor
represents the ratio of accounts that went into repossession status to the
total accounts to reach delinquent status for each delinquency category. The
percentage of loan dollar loss factor represents the percentage of actual total
loss expected to the remaining balance on those loans. These factors are
applied to each delinquency category for each year and then totaled to
calculate the required allowance.
The second supplemental method considers both historical loss
rates and delinquencies. Delinquent balances are accumulated by month of
origination and by number of days delinquent. Those delinquent balances are
then expressed as a percentage of the remaining balance of loans originated in
the applicable month. Then the delinquency percentages are multiplied by the
annual probability of loss and percentage of loss factors to calculate a risk
weighted delinquency percentage for each category. A total risk weighted
delinquency rate is then calculated by totaling the risk weighted delinquency
percentage for each category. This rate is then averaged with the next year
loss percentage by month of origination. The next year loss percentage
represents the estimated losses to be realized in the next year to the
remaining balance using the historical loss development approach used by the
Company in prior years. The average expected loss rate by month of origination
is multiplied by the remaining balance of loans by month of origination and the
results are totaled to calculate the required allowance.
At December 31, 1996, management provided an allowance for
possible losses on repossessed automobiles of $2.8 million. A valuation
allowance was not previously considered
19
<PAGE> 20
necessary because of the Company's insurance arrangement with MS Casualty and
the relatively lower level of repossessed automobiles in prior periods. The
allowance takes into account management's estimate of a 55% recovery rate on
sales of repossessed vehicles. Also, at the end of 1996, the Company recorded a
provision for impairment of amounts due under securitizations of $3.0 million.
This provision was deemed necessary because the deterioration in performance of
the Company's sold portfolio has dramatically reduced the amount of residual
income attributable to excess cash flows expected to be received under the 1995
Securitization.
As reported in the Company's press release dated September 3,
1996 and in the Company's Form 8-K dated September 12, 1996, the Company had a
breakdown in its extension granting process that was identified and rectified
timely. The Company became aware that as of June 30, 1996, documentation of
extensions and internal controls related to extensions fell below the Company's
standards. In September 1996, independent auditors hired by the Company's
lenders conducted a=review of the Company's extension policies. At the
direction of the Company's audit committee, the Company's independent auditors
periodically audited extension practices beginning in September 1996. Search
reviewed the Company's extension practices in March 1997. The foregoing
reviews followed a substantial revision of the Company's extension policies in
November 1996. Assuming the Merger is effected with Search, Search employs an
internal auditor who will, among other things, be charged with the
responsibility of monitoring the Company's extension practices to ensure
compliance with established policies and procedures. The Company believes that
these periodic reviews and continued monitoring to be performed by Search's
internal auditor will be adequate to ensure material compliance with the
Company's established policies and procedures.
Because of the breakdown in the Company's extension granting
process, certain negative trends in the Company's loan portfolio were not
apparent as fast as management would have preferred. The Company's delinquency
experience (61 days and greater) increased dramatically in the last two
quarters of the calendar year but showed improvement by the end of the first
quarter of 1997. Specifically, such delinquencies for the gross managed
portfolio were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
NUMBER OF PRINCIPAL
CONTRACTS AMOUNT
---------------- --------------
<S> <C> <C>
March 31, 1996 3.9% 3.9%
June 30, 1996 3.5% 3.7%
September 30, 1996 9.7% 9.9%
December 31, 1996 8.8% 9.5%
March 31, 1997 4.3% 5.1%
</TABLE>
Management of the Company believes that the substantial loan loss
provisions made in the third and fourth quarters of 1996 were made timely with
the best information available and in consideration of management's loss
expectations at the time.
20
<PAGE> 21
INSURANCE COMMISSIONS. Insurance commissions decreased by $494,
or 27.1%, from $1,823 in 1995 to $1,329 in 1996, primarily as the result of a
14.9% decrease in Installment Contract originations from branch offices. In
addition, there has been an increase in the number of repossessions during
1996. At the time of repossession, any unearned commission is used to reduce
the carrying balance of the loss account. As a result, there has been a
decrease in unearned commission and commission amortized to income during the
year. Also, in the fall of 1995, the Company reduced emphasis on selling other
Ancillary Products in an effort to make the offerings more favorable to
automobile dealers without increasing credit risk to the Company. The Company
anticipated that as a percent of total revenue, commission income would
decrease since it anticipated that its portfolio growth would come primarily
from the regional marketing program, where the Company retains no commission on
the sale of Ancillary Products.
GAINS ON SECURITIZATIONS. During 1996, the Company did not
complete a Securitization. However, during 1995 the Company completed a $90.0
million securitization which resulted in a net gain on sale of $7.1 million.
For further information, see the discussion at "Liquidity and Capital
Resources-Securitization Programs".
SERVICE FEE INCOME. Service fee income on Installment Contracts
owned by Securitization Trusts increased by $717, or 36.8%, from $1,951 in 1995
to $2,668 in 1996, due primarily to the 37.3% increase in the average balance
of securitized Installment Contracts being serviced by the Company.
OTHER INCOME. Other income is primarily comprised of
miscellaneous fee income generated by the branch offices. Other income
decreased by $7, or 1.0%, from $760 in 1995 to $753 in 1996. This decrease is
due to a reduction in title fee income and other miscellaneous income.
OPERATING EXPENSES. Operating expenses increased $5,764, or
61.7%, from $9,340 in 1995 to $15,104 in 1996, partially due to a 24.2%
increase in the average number of personnel during the year and other expenses
associated with higher contract origination volume. The Company expanded the
customer service department by opening a customer service center in Mobile,
Alabama, adding to the yearly expenses with startup costs and personnel. In
addition, during the year the Company has incurred ongoing legal fees of $1.6
million, a significant portion of which related to defending lawsuits. For
further reference see discussion at "Legal Proceedings". Also, at the end of
1996, the Company accrued the expenses associated with the potential settlement
of various lawsuits in the state of Texas. The amount of this accrual totaled
$375,000. Also, during 1996 the Company expensed the remaining carrying value
of the cost of acquiring the Installment Contract origination program due to
the uncertainties associated with its value as a result of the Company's
substantial 1996 net loss. The carrying amount expensed totaled $257,000.
Previously this asset was being amortized on a straight-line basis over ten
years.
NET INCOME. As a result of the factors discussed above, net
income decreased by $28,515 from $6,501 in 1995 to a loss of $22,014 in 1996.
21
<PAGE> 22
COMPARISON OF 1994 TO 1995
INTEREST AND FEE INCOME ON INSTALLMENT CONTRACTS AND
SECURITIZATIONS. Interest and fee income on Installment Contracts and
Securitizations increased by $2,441, or 24.4%, from $10,008 in 1994 to $12,449
in 1995. The increase in interest income is primarily due to a 49.5% increase
in average owned Installment Contracts outstanding during the year. The
increase in owned Installment Contract balances results primarily from an 32.9%
increase in the volume of Installment Contracts acquired during 1995. These
increases were partially offset by a decrease in residual income attributable
to excess cash flows on Securitizations which decreased 70.6% from $1,434 in
1994 to $422 in 1995. This reduction in recognized residual income is
primarily the result of reduced cash flow from the Securitizations, which in
turn was caused primarily by increased delinquencies during the last half of
1995. Residual income attributable to excess cash flows on Securitizations is
recognized based on actual and expected cash flows and the estimated rate of
return on the recorded investment.
INTEREST EXPENSE. Interest costs increased by $1,146, or 46.9%,
from $2,441 in 1994 to $3,587 in 1995. This increase is partially due to a
34.0% increase in average borrowings under the revolving credit facility to
fund the acquisition of Installment Contracts. Also, interest rates were
higher during the first half of 1995 compared to the first half of 1994, which
is when the bulk of the Company's borrowings were outstanding. During the
third quarter of 1995, the Company completed a Securitization which resulted in
$73.2 million in proceeds and received an equity infusion through the
completion of an initial public offering of $21.4 million. The net proceeds
were used to repay the Company's revolving credit facility which in turn
reduced the Company's interest cost.
PROVISION FOR POSSIBLE LOSSES ON INSTALLMENT CONTRACTS.
Provision for possible losses on Installment Contracts increased by $141, or
20.6%, from $685 in 1994 to $826 in 1995. The allowance for possible losses on
Installment Contracts decreased from 1.5% of the Net Managed Portfolio in 1994
to 1.3% in 1995. The increase in the allowance was primarily attributable to a
$1,184 valuation allowance that was recorded through a reduction in the
recorded gain on the 1995 Securitization completed during the third quarter
offset by an increase in losses charged to the valuation allowance account.
The valuation allowance is intended to cover uninsured losses and 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 available
reserves and aggregate loss limits at MS Casualty to cover outstanding
contracts. Increases in the allowance are primarily based on the level of
Installment Contracts, historical loss experience and, to a lesser extent,
current economic conditions, operating practices and other factors which
management deems relevant. Losses on securitized Installment Contracts are
limited to amounts recorded as investment in the subordinated trust
certificates and amounts due under Securitizations.
INSURANCE COMMISSIONS. Insurance commissions increased by $367,
or 25.2%, from $1,456 in 1994 to $1,823 in 1995, primarily as the result of a
59.8% increase in Installment Contract originations from branch offices.
However, commissions on the sale of Ancillary Products have
22
<PAGE> 23
decreased as a percentage of total revenues from 1994 to 1995 due to the
Company's decision in July of 1995 to discontinue offering guaranteed asset
protection ("GAP") policies. Also, in the fall of 1995, the Company reduced
emphasis on selling other Ancillary Products in an effort to make the offerings
more favorable to automobile dealers without increasing credit risk to the
Company. The Company anticipates that as a percent of total revenue,
commission income will continue to decrease in the coming years since it
anticipates that portfolio growth will come primarily from the regional
marketing program, from which the Company retains no commission on the sale of
Ancillary Products.
GAINS ON SECURITIZATIONS. Gains on Securitizations increased by
$4,580, or 183.8%, from $2,492 in 1994 to $7,072 in 1995. This increase was
attributable to the Company's increase of 157.1% in total Installment Contracts
sold under Securitizations from $35,004 in 1994 to $90,000 in 1995, and an
overall improvement in efficiencies due primarily to the larger size of the
1995 Securitization. The 1995 gain on the Securitization was reduced by $1,250
of realized losses on hedging transactions and is net of a valuation allowance
of approximately $1,184.
SERVICE FEE INCOME. Service fee income increased by $716, or
58.0%, from $1,235 in 1994 to $1,951 in 1995, due primarily to the 49.2%
increase in the average balance of securitized Installment Contracts being
serviced by the Company.
OTHER INCOME. Other income increased by $133, or 21.2%, from
$627 in 1994 to $760 in 1995 due primarily to a 59.8% increase in the dollar
volume of Installment Contracts originated through branch offices, which was
partially offset by a 38.7% decrease in title fee income in several branch
offices and certain nonrecurring items in 1994.
OPERATING EXPENSES. Operating expenses increased $2,751, or
41.8%, from $6,589 in 1994 to $9,340 primarily due to a 43.7% growth of average
employees from 1994 to 1995. In addition, the Company had increased expense
related to the additional reporting requirements commencing after the
completion of its initial public offering during 1995.
NET INCOME. Net income increased by $2,116, or 48.3%, from
$4,385 in 1994 to $6,501 in 1995. The increase was primarily the result of a
35.7% increase in the number of Installment Contracts purchased during the year
and the large increase in the gain on Securitization of $4,580 from $2,492 in
1994 to $7,072 in 1995.
QUARTERLY FINANCIAL DATA AND EARNINGS
During 1996, the Company experienced a significant deterioration
of portfolio performance as shown by the increase in delinquencies quarter over
quarter. As a result of this deterioration, during the third and fourth
quarters of 1996 the Company increased the provision for loan losses to $7.0
million and $12.5 million respectively. Also, as a result of higher losses
during 1996, the Company
23
<PAGE> 24
recorded a provision for possible losses on repossessed automobiles of $2.8
million at year end. A valuation allowance was not previously considered
necessary because of the Company's insurance arrangement with MS Casualty.
However, at year end, the policy limits had been reached. In addition, at
December 31, 1996, the Company recorded a provision for impairment of amounts
due under securitizations of $3.0 million. This provision was deemed necessary
because of the deterioration of the performance of the Company's sold
portfolio. These increases resulted in a large net loss for both the third and
fourth quarters.
During the third and fourth quarters of 1995, the Company did
complete a $90.0 million Securitization which resulted in the Company
recognizing a gain on sale of $5.4 million in the third quarter and $1.7
million during the fourth quarter.
The following table sets forth selected consolidated financial
data and earnings information for the Company on a quarterly basis for 1996.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
3/31/96 6/30/96 9/30/96 12/31/96
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Number of contracts acquired
during period (not in thousands) 3,149 3,366 2,898 939
Principal amount of contracts
acquired during period $ 32,339 $ 34,979 $ 32,543 $ 10,967
Net Managed Portfolio - end of
period $ 133,277 $ 150,024 $ 163,837 $ 130,371
Net Managed Portfolio - average
during period $ 126,008 $ 142,106 $ 157,769 $ 149,848
Average principal balance of
securitized Installment
Contracts during period $ 93,520 $ 78,120 $ 64,399 $ 52,807
Average principal balance of
owned Installment Contracts
during period $ 30,887 $ 62,071 $ 91,948 $ 104,138
Net interest income before loss provisions $ 1,290 $ 2,535 $ 2,821 $ 2,962
Net interest spread $ 1,272 $ 2,511 $ 2,809 $ 2,946
Provision for possible losses on
Installment Contracts $ 250 $ 331 $ 7,009 $ 12,513
Provision for impairment of amounts
due under Securitizations -- -- -- $ 3,000
Provision for possible losses
on repossessed automobiles -- -- -- $ 2,800
Net income (loss) $ (360) $ 142 $ (3,986) $ (17,810)
Net income (loss) per share $ (0.03) $ 0.01 $ (0.38) $ (1.71)
Weighted average shares outstanding 10,452 10,856 10,427 10,428
Delinquency rate - end of period (1) 7.5% 8.3% 18.0% 19.3%
Loss rate - annualized average for the period (1) 1.1% 1.1% 0.3% 22.0%
Total assets $ 78,178 $ 108,987 $ 130,037 $ 101,435
Notes payable $ 26,500 $ 60,000 $ 83,000 $ 75,813
Total liabilities $ 34,779 $ 65,428 $ 90,459 $ 79,681
Stockholders' equity $ 43,399 $ 43,559 $ 39,578 $ 21,754
</TABLE>
24
<PAGE> 25
The following table sets forth selected consolidated financial
data and earnings information for the Company on a quarterly basis for 1995.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
3/31/95 6/30/95 9/30/95 12/31/95
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Number of contracts acquired
during period (not in thousands) 2,375 2,726 1,709 1,958
Principal amount of contracts
acquired during period $ 23,421 $ 26,394 $ 16,942 $ 20,216
Net Managed Portfolio - end of
period $ 98,629 $110,984 $112,407 $120,318
Net Managed Portfolio - average
during period $ 93,102 $105,040 $111,966 $115,903
Average principal balance of
securitized Installment
Contracts during period $ 38,616 $ 33,152 $ 45,405 $ 93,618
Average principal balance of
owned Installment Contracts
during period $ 53,667 $ 72,023 $ 86,843 $ 23,080
Net interest income before loss provisions $ 2,024 $ 2,751 $ 3,117 $ 1,070
Net interest spread $ 2,018 $ 2,749 $ 3,090 $ 1,005
Provision for possible losses
on Installment Contracts $ 159 $ 357 $ 171 $ 139
Provision for impairment of amounts
due under Securitizations -- -- -- --
Provision for possible losses
on repossessed automobiles -- -- -- --
Net Income $ 595 $ 781 $ 4,306 $ 819
Earnings per share $ 0.06 $ 0.08 $ 0.40 $ 0.07
Weighted average shares outstanding 9,332 9,332 10,882 11,227
Delinquency rate - end of period (1) 5.1% 6.9% 9.1% 12.6%
Loss rate - annualized average for the period (1) 0.7% 0.6% 2.0% 1.5%
Total assets $ 77,474 $ 97,122 $ 51,939 $ 49,718
Notes payable $ 51,793 $ 70,543 -- --
Total liabilities $ 58,776 $ 77,642 $ 6,653 $ 4,734
Stockholders' equity $ 18,698 $ 19,480 $ 45,286 $ 44,984
</TABLE>
(1) Percentages are based on the gross amount scheduled to be paid on each
Installment Contract, including unearned finance charges and other
charges.
25
<PAGE> 26
INSTALLMENT CONTRACT LOSS EXPERIENCE
On all Installment Contracts with a purchase date on or prior to
July 1, 1996, dealers purchased repossession loss insurance from MS Casualty,
an insurance company rated A- by A.M. Best & Co. For those contracts, MS
Casualty retains premiums paid by dealers 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. At the end of 1996, substantially all amounts available under the
insurance arrangement with MS Casualty have been recovered by the Company.
Effective July 1, 1996, the Company discontinued repossession loss insurance
and began retaining this premium, which averaged $729 per Installment Contract
and 6.43% of the amount financed. Accordingly, the Company will be bearing all
of the risks of loss on Installment Contracts originated subsequent to July 1,
1996. Through the fourth quarter of 1996 the Company has experienced increased
delinquency, losses and repossessions, as shown in the following credit
loss/repossession experience and delinquency tables. As a result of higher
losses and delinquencies, the Company substantially increased its allowance for
possible losses on Installment Contracts during the third and fourth quarters
of 1996.
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.
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<PAGE> 27
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. Also, beginning in
December 1996, any account which reaches 150 days contractually delinquent is
charged off.
The following table summarizes the Company's Installment Contract
and repossession loss experience:
CREDIT LOSS/REPOSSESSION EXPERIENCE (1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
(DOLLARS IN THOUSANDS)
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Average Gross Managed Portfolio $ 95,826 $139,959 $192,765
Average month-end number of
Installment Contracts 9,907 13,693 17,749
Repossessions settled as a percentage of
average month-end number of
Installment Contracts outstanding 7.7% 11.2% 17.3%
Gross Charge-offs (2) $ 2,288 $ 6,355 $ 21,336
Recoveries (3) 417 407 405
Claim Payments from MS Casualty (4) 1,315 4,200 9,288
-------- -------- --------
Net Charge-offs (5) $ 556 $ 1,748 $ 11,643
======== ======== ========
Net Charge-offs as a percentage of
average Gross Managed Portfolio
outstanding 0.6% 1.2% 6.0%
======== ======== ========
Experience refund (6) $ 900 $ -- $ --
</TABLE>
27
<PAGE> 28
(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.
(6) Represents amounts refunded to the Company pursuant to its agreement
with MS Casualty which allows the Company to recapture any profits from
positive underwriting experience after paying an administrative fee on
the repossession loss insurance policies.
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.
28
<PAGE> 29
<TABLE>
<CAPTION>
DELINQUENCY EXPERIENCE AT DECEMBER 31,
--------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
1994 1995 1996
---------------------- ---------------------- ----------------------
NUMBER OF NUMBER OF NUMBER OF
CONTRACTS AMOUNT CONTRACTS AMOUNT CONTRACTS AMOUNT
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Owned Installment Contracts
Portfolio 4,925 $ 55,349 1,310 $ 18,428 8,140 $ 115,318
Period of delinquency
31-60 days 134 1,336 60 629 753 10,634
61-90 days 45 475 28 304 356 5,055
91-119 days 18 231 27 266 168 2,444
120 days or more 35 393 131 1,660 205 2,983
--------- --------- --------- --------- --------- ---------
Total delinquencies 232 2,435 246 $ 2,859 1,482 $ 21,116
========= ========= ========= ========= ========= =========
Total delinquencies as a
percent of the 4.7% 4.4% 18.8% 15.5% 18.2% 18.3%
========= ========= ========= ========= ========= =========
Securitized Installment
Portfolio 5,979 $ 56,506 13,195 $ 135,000 7,424 $ 55,592
Period of delinquency
31-60 days 189 1,965 1,001 10,461 785 6,103
61-90 days 77 923 242 2,813 296 2,437
91-119 days 22 250 153 1,839 175 1,620
120 days or more 44 514 118 1,307 172 1,695
--------- --------- --------- --------- --------- ---------
Total delinquencies 332 3,652 1,514 $ 16,420 1,428 $ 11,855
========= ========= ========= ========= ========= =========
Total delinquencies as a
percent of the 5.6% 6.5% 11.5% 12.2% 19.2% 21.3%
========= ========= ========= ========= ========= =========
</TABLE>
Delinquent contracts and gross charge-offs increased throughout
1996. Though the Company worked diligently to reduce those trends, turnover in
the customer service department, management and staff have impeded the
Company's ability to rehabilitate delinquent loans and thus have resulted in
higher delinquencies, repossessions and charge-offs. In addition, management
of the Company believes there has been a general deterioration in the credit
quality for nonprime consumer credit obligations as is evidenced by national
trends in delinquencies for those 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. In July, the Company
installed a credit scoring system developed by independent=consultants. This
scoring system was developed with historical information based on the
performance of loans that the Company purchased from January 1, 1993 through
June 30, 1994. This system incorporated demographic information of the
customer and places heavy emphasis on the previous and current credit history
of the application. Each applicant was required to meet a minimum qualifying
score and satisfy normal underwriting criteria. Changes made to the credit
criteria included reducing advance rates on new vehicles from 115% to 100% of
invoice plus tax, title, and license, reducing the payment to income ratio from
25% to 20% of gross income, allowing only 50% of any manufacturer's rebate to
apply to the down payment, and tieing the term of Installment Contracts more
tightly to minimum NADA trade-in values and certain mileage restrictions.
29
<PAGE> 30
In the first quarter of 1997, the Company changed its
underwriting criteria to match those of Search. The changes included requiring
a minimum annual income of $12,000, increasing the maximum debt to income ratio
from 42% to 50% of gross income, requiring a three-year traceable residence and
employment history, requiring each applicant to have a minimum high credit of
$1,000 paid or paying satisfactorily within the last twelve months and
eliminating all vehicles with more than 80,000 miles or which are older than
six years.
During the third quarter of 1996, the Company's 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. As a result of these steps, along with an increased level of
repossessions and chargeoffs, the Company's delinquency has decreased from
19.3% at December 31, 1996 to 10.1% at March 31, 1997.
Pursuant to the terms of the Company's Securitization Trusts,
once average delinquencies exceed 10% on the 1994 Securitization and 12% on the
1995 Securitization for any two consecutive months, the Company could be
replaced as servicer. The Company exceeded these amounts at August 31, 1996
for the 1994 and 1995 Securitization. Delinquencies reached a high of 16.2%
for the 1994 Securitization at December 31, 1996 and 21.6% for the 1995
Securitization at October 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily for the purchase of
Installment Contracts and for working capital. In the past, the Company has
financed these requirements with borrowings under a revolving credit facility
and warehouse facility and through the Company's Securitization program.
During 1996, the Company suffered substantial losses and,
accordingly, substantial reductions in stockholders' equity. These negative
financial trends resulted from material increases in delinquencies and losses
on owned and serviced Installment Contracts. As a result, the Company is
facing a severe liquidity problem because of (i) the lack of availability of
funds under the Company's revolving credit facility; (ii) the termination of
the Company's warehouse facility; (iii) the Company's inability to complete a
Securitization in 1996; and (iv) the delay of payments to the Company under the
Company's prior Securitization programs. The Company has been unable to solve
its liquidity problems and, on February 7, 1997, executed the Merger Agreement
with Search, which, if consummated, will result in the Company becoming a
wholly-owned subsidiary of Search, and the Company's former stockholders
becoming stockholders of Search. If the Merger with Search is not consummated,
the Company will likely be forced to liquidate its portfolio of Installment
Contracts through normal collections and/or sales and cease operating as a
going concern, unless alternative financing sources become available to the
Company.
CASH FLOWS FROM OPERATING, INVESTING AND FINANCING ACTIVITIES.
As shown on the
30
<PAGE> 31
Consolidated Statements of Cash Flows, cash and cash equivalents increased by
$566 in 1996, to $1,454 at December 31, 1996. The increase reflected $74,597
net cash provided by financing activities, primarily from increased borrowings
under the Company's Revolving Credit Facility, and $4,645 net cash provided by
operating activities, offset by $78,676 net cash used in investing activities.
The net cash used in investing activities was primarily $109,796 in Installment
Contracts purchased, offset by $15,595 in repayment on Installment Contracts
and the $14,427 proceeds from sale of Installment Contracts. The net cash
provided by operating activities of $4,645 includes net income (loss), adjusted
for various noncash charges to income, as well as changes in certain balance
sheet items. Cash and cash equivalents increased to $4,296 at March 31, 1997
principally due to a decrease in the volume of Installment Contracts purchased.
REVOLVING CREDIT FACILITY. The revolving credit facility, which
provides funds to purchase Installment Contracts and for working capital,
previously consisted 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, the 364-day facility could have been converted into a two-year term
facility. The maximum amount available under the revolving credit facility was
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 February 28, 1997, the Company had $73.0 million principal
amount outstanding under the revolving credit facility at a rate of interest of
11.25%.
In November, 1996, the Company advised its lenders that it was in
default under certain covenants under the agreements governing the revolving
credit facility. Effective December 16, 1996, the Company and its lenders
reached an agreement to amend these agreements. The amended agreements
redefined eligible loans and reduced the advance rate from 90% to 85% of
eligible loans. The amendments obligated the Company to make certain mandatory
prepayments by January 31, 1997, increased the interest rate and imposed a
$562,500 restructuring fee. The lenders agreed to extend the prepayment date to
February 7, 1997. On February 19, 1997, the lenders, Search and the Company
entered into a letter agreement specifying the terms of certain agreements that
the parties agreed to execute and deliver (the "Term Sheet"). In addition, the
lenders consented to the execution by the Company of the Merger Agreement and
the consummation of the transactions contemplated therein. The provisions of
the Term Sheet were incorporated into an amended loan agreement which was
further amended as of May 15, 1997.
Under the Term Sheet, as amended, Search, the Company and the
lenders agreed to amend the agreements governing the revolving credit facility
pending consummation of the Merger to provide that the Company's obligations
will be payable in full on the earlier of June 30, 1997, the facility
Termination Date or the closing date of the Merger. The amount of the advances
under the revolving credit facility were reduced from $90,000,000 to
$75,000,000. Advances will only be made for Installment Contracts that comply
with Search's underwriting criteria, are within an agreed cash budget and are
purchased from dealers in the ordinary course of business. The Company will be
required to
31
<PAGE> 32
reduce the revolving credit facility by the amount of any proceeds from income
tax refunds, and any prepayments from federal income tax refunds will
permanently reduce the amount of the Company's Revolving Credit facility. The
lenders also required the establishment of a lock box account for collection of
the proceeds from the Company's receivables, with all proceeds to be applied as
a mandatory prepayment of the facility on a daily basis. The Company is
required to maintain the effectiveness of its collection operations in
Ridgeland, Mississippi and Mobile, Alabama. The Company may continue to sell
Installment Contracts originated by it prior to the Merger to Search in
accordance with its December 12, 1996, letter agreement with Search Funding
Corp. Search may also lend money to the Company for the purpose of purchasing
Installment Contracts originated by the Company, but this indebtedness, and any
liens in favor of Search on the Installment Contracts purchased by the Company
with these funds, will be subordinated to the indebtedness represented by, and
the liens securing, the revolving credit facility. The Term Sheet also
specifies that any material amendments to the Merger Agreement will require the
prior written consent of the lenders. If the Merger is terminated for any
reason, Search will be obligated, if requested by the lenders, to service the
Company's receivables for a period of 90 days following the termination, and
Search will purchase all receivables acquired by the Company since the
effective date of the amendments to the revolving credit facility. The Term
Sheet also specifies that Search and Merger Sub must agree to enter into
certain additional amendments to the revolving credit facility to be effective
at the time the Merger is consummated.
On the closing date of the Merger, under the Term Sheet, the
agreements governing the revolving credit facility will be amended to provide
that the Company will have available a revolving credit facility in an
aggregate amount equal to the outstanding principal balance of all of the
receivables on such date. Search will agree to guarantee the Company's
obligations to repay the facility. Under the amended facility, the Company
will be entitled to receive additional advances to the extent of any difference
between the borrowing base, as determined from time to time, and the
outstanding principal balance of the amended facility. These advances may be
used to pay operating expenses in the ordinary course of business and the
purchase cost of new Installment Contracts. The loan will bear interest at
prime plus one percent per annum and will terminate on the earlier of the first
anniversary of the Effective Time, any prepayment in full of the loan and any
date on which the lenders accelerate payment of the facility at which time all
outstanding balances will be payable in full. The Company will make principal
payments on the amended facility on a weekly basis in an amount equal to all
collections with respect to its Installment Contracts and repossessed vehicles.
All proceeds will be deposited in a lock box or blocked account collaterally
assigned to the lenders. On the six month anniversary of the Effective Time,
the commitment under the facility will be permanently reduced by $25,000,000
plus a proportionate reduction of certain "over advance" amounts owed by the
Company at the Effective Time. The Company must repay the outstanding balance
to the extent it exceeds the reduced commitment amount. Any proceeds from
restructuring of the Company's existing securitizations or from income tax
refunds must be employed as mandatory prepayments of the loan and will
permanently reduce the commitment amount. Mandatory prepayments must also be
made in the amount of any proceeds from sales or other dispositions of
Installment Contracts and other collateral. The Company will be required to
deliver weekly borrowing base certificates. If the outstanding principal
balance of the loan exceeds the borrowing base, the Company will be required to
32
<PAGE> 33
make additional prepayments or cause additional eligible receivables to be
transferred to the Company for inclusion in the borrowing base, in either case,
in an amount sufficient to eliminate the excess. The facility will be secured
by a first priority security interest in all of the Company's assets. If, upon
termination of the facility, any balance remains outstanding, the Company has
agreed to pay the lenders a refinancing fee equal to five percent of the
outstanding balance on such debt. In addition, the Company has agreed to pay
to the lenders a $350,000 fee on the earlier of the full repayment of the
amended facility, the termination of the facility or the first anniversary of
the closing date of the Merger. Effectiveness of the amended facility is
subject to the following conditions: (i) consummation of the Merger; (ii)
receipt of all necessary consents and approvals from all third parties for the
consummation of the Merger and the execution of the amendments to the revolving
credit facility; and (iii) receipt of all necessary consents and approvals from
Search's existing lenders and of any reasonably required intercreditor
agreements.
WAREHOUSE FACILITY. The Company, through a special purpose
subsidiary, established a $50.0 million structured "warehouse" revolving
credit securitization facility.
The warehouse facility was structured like a Securitization.
However, unlike a typical Securitization, (i) the Installment Contracts sold
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 sale of the
Installment Contracts is accounted for as a financing rather than a sale.
Loans made pursuant to the warehouse facility are insured by
Financial Security Assurance, Inc. ("FSA").
In September, 1996, FSA advised the Company that it would not
insure any loans made pursuant to the warehouse facility on terms which were
acceptable to the Company, effectively terminating the availability of this
facility. See the heading "Legal Proceedings" for a description of certain
claims made against the Company for fees payable under 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 1994 and 1995, the Company securitized $35.0 million and
$90.0 million, respectively, of the Company's Installment Contracts, for an
aggregate of $125.0 million. The average APR on Installment Contracts
securitized in 1994 and 1995 was approximately 20.6%.
In each of its Securitizations, the Company sold its Installment
Contracts to a special purpose subsidiary corporation ("SPC"), which then sold
the Installment Contracts to a newly formed grantor trust in exchange for
certificates of beneficial interests in the trust. In the 1994 Securitization,
33
<PAGE> 34
the certificates consisted of $1.75 million in subordinated certificates
retained by the Company and $33.25 million in senior certificates sold to
investors. The Company did not retain any portion of the certificates issued
in connection with the Securitization closed in 1995. 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. As a credit enhancement for each Securitization,
FSA issued an insurance policy which guarantees principal and interest payments
due to the holders of that portion of the certificates sold to investors. The
Company services the Installment Contracts sold to the trust 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 securitized Installment
Contracts. The service fee of 3.75% is considered reasonable based on the
expense of servicing subprime 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.
Gains from the sale of Installment Contracts in Securitizations
have provided a significant portion of the Company's revenues. SFAS No. 77
requires that the gain be calculated as the difference between the sales price
and the net receivables, less any necessary accrual for recourse provisions.
The specific methodology for the gain calculation for these transactions is
provided by EITF Issue No. 88-11 and is described as follows: (i) sales price
for any senior certificates is calculated as the proceeds received; and (ii)
the recorded investment in the loans is the net carrying value under the simple
interest methodology and is allocated between the senior and subordinate
certificates based on the relative fair values of those portions at the date of
sale. If excess servicing is retained, a portion of the recorded investment is
allocated to excess servicing based on its relative fair value.
To allocate the recorded investment in the loans, the fair value
of the senior certificates is determined to be the sales price. The fair value
of the subordinate certificates is determined based on the original terms of
the portion retained, estimating prepayments and discounting such cash flows
using a discount rate which reflects the term, risk and other considerations.
The fair value of the excess servicing is calculated (i) using cash flow
projections of payments to be received assuming prepayments, (ii) less payments
to the senior certificate holders, (iii) less payments for servicing fee,
standby servicing fee and surety premiums to the certificate insurer, (iv) plus
an estimate of interest to be earned on the collection account and
subordination spread account and (v) less payments to the subordinate
certificate holders.
Prepayment levels used in the original projections for the
Company's Securitizations were 1.5 ABS (absolute prepayment speed). This
estimate was derived by the Company's financial advisors based on historical
performance of similar loans. The Company's tracking models were updated
monthly for actual performance within each Securitization. The formulae in the
models would recalculate the projections continuing to apply the 1.5 ABS
assumption to future months. Although the Company did not recalculate a
revised prepayment speed, per se, at December 31, 1996, adjustments
34
<PAGE> 35
were made to the 1995-1 Securitization model to incorporate the faster
prepayment speeds observed in the life cycles of the three prior Securitization
models.
The interest rate paid to investors in the Company's
Securitizations was fixed upon the close of each Securitization and ranged from
4.66% on 1993-1, to 6.75% on 1994-1, to 6.2% on 1995-1.
The collection account and subordination spread account are
trustee accounts for the accumulation of funds until remittance in accordance
with terms of the agreement. Cash flows after payment of the senior
certificates and after payment of fees and expenses are used to fund a
subordination spread account held by the trustee. This account is provided for
the benefit of the certificate insurer and would be used by the trustee to fund
any shortfalls to the senior certificate holders. Once this account is funded,
all remaining cash goes to the Company as collections on subordinate
certificates and as interest differential. At the end of the Securitization,
the funds in the subordination spread account go to the Company. The fair
value of cash flows is calculated using the expected net cash flows to the
Company, discounted at a rate of approximately 12%.
Once the recorded investment in the loans has been allocated,
gain is recorded as the difference between the sales price for the senior
certificates and the allocated basis in the senior certificates. The
subordinate certificates are recorded at their allocated basis, and the excess
servicing is recorded at its allocated basis. Prior to January 1, 1997, the
subordinated certificates and the excess servicing were carried by the Company
in its financial statements at their historical cost. Since the Company's
adoption of SFAS No. 125 effective January 1, 1997, these assets are carried at
their fair value. The Company also nets expenses incurred in the
Securitization against the gain calculation.
In the Company's financial statements, the subordinated
certificates are classified as "Retained portion of contracts sold in
securitizations", the excess servicing (interest differential) and cash used to
fund the collateral accounts are classified as "amounts due under
securitizations." The simple interest balance of installment contracts sold is
removed from installment contracts owned and shown as installment contracts
sold in Note 4 to the Company's Consolidated Financial Statements. From the
income statement side, the gain on sale is shown as such on the income
statement, and earnings from the retained subordinated certificates and amounts
due under securitizations are classified as interest and fee income on
installment contracts and securitizations. The Company does not recognize
earnings on amounts due under securitizations until cash is received by the
Company.
As disclosed in Note 5 to the Company's Consolidated Financial
Statements, the Company is contingently liable on the securitized receivables
for losses attributable to default. In accordance with SFAS No. 77, the
Company accrues those estimated losses at the time the loans are sold. In the
Company's financial records, those losses affect the Company's ability to fully
collect the amounts shown in Note 4 as retained portion of installment
contracts sold and amounts due under securitizations. However, as disclosed in
Note 5, such risk of accounting loss does not exceed amounts recorded as assets
in the consolidated balance sheet. Nonetheless, when the Company believes that
amounts to be received are less than the recorded amount of the asset based on
discounted cash flows, an impairment loss is taken and the asset written down.
35
<PAGE> 36
In 1996, the Company exceeded certain delinquency and loss
triggers in the outstanding Securitizations. As a consequence, excess cash
flow otherwise payable to the Company from the Securitizations was retained
within the Securitizations as additional collateral for the certificate
holders. Pursuant to the terms of the Securitization documents, in October
1996 FSA increased the premiums on the policies issued to insure the
certificates. Because of the violation of the delinquency and loss triggers,
FSA has the right to remove the Company as servicer.
In September 1996, FSA advised the Company that it would not
insure the Company's Securitization planned for September, and the Company was
unable to complete a Securitization in 1996.
LOAN SALES. During November 1996, the Company sold approximately
$15 million in loans to Search for approximately $14.4 million. $13.5 million
of the proceeds were used to reduce the balance outstanding under the revolving
credit facility. The Company has no continuing interest in these loans or loan
repurchase obligations.
INTEREST RATE EXPOSURE AND HEDGING STRATEGY
Increases in interest rates generally result in increases in the
Company's expenses and, to the extent not offset by increases in the volume of
Installment Contracts purchased, can lead to decreases in profitability. The
Company's borrowings under the revolving credit facility and the warehouse
facility are at variable rates. Installment Contracts bear interest at fixed
rates which are generally at or near the maximum rates permitted by law.
Higher interest rates increase the Company's borrowing costs, and such
increased borrowing costs generally cannot be offset by increases in the rates
with respect to Installment Contracts purchased.
Historically, other than pursuant to Securitizations, the Company
had not entered into hedging transactions to limit its exposure to short-term
interest rate fluctuations. In 1995, however, the Company entered into $80.0
million notional amount of U.S. Treasury interest rate futures contracts that
closely paralleled the average life and the net amount of the senior
certificates issued in connection with the Securitization in 1995. The
accumulated loss on the contracts of $1.25 million was paid at the settlement
of the contracts and included in the measurement of the gain on the
Securitization transaction.
INFLATION
Increase in inflation generally results in higher interest rates.
Higher interest rates generally result in increases in the Company's expenses
and, to the extent not offset by increases in the volume
36
<PAGE> 37
of Installment Contracts purchased, can lead to decreases in its profitability,
as described above.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Although the Company's operations do not fluctuate seasonally or
quarterly, its revenues and net income have, historically, been higher in the
quarters in which it completes a Securitization. However, no assurances can be
made that the Company's revenue and net income will be higher in future periods
in which the Company completes a securitization.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated balance sheets as of December 31, 1995
and 1996, and its consolidated statements of operations, stockholders' equity
and cash flows and notes to the consolidated financial statements for the years
ended December 31, 1994, 1995 and 1996 and the independent auditors' report
thereon are included under Item 14 of this report and are incorporated by
reference herein. Unaudited quarterly results of operations are presented in
Item 7 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
37
<PAGE> 38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION FOR
NAME OF POSITION WITH LAST FIVE YEARS
DIRECTOR AGE THE COMPANY AND DIRECTORSHIPS
-------- --- ----------- -----------------
<S> <C> <C>
Philip J. Hubbuch, Jr. 56 Vice Chairman and Mr. Hubbuch has served as Vice Chairman
Chief Executive and Chief Executive Officer of the Company
Officer; Director and the Company's predecessor, MS
since 1995; resigned Financial Services, Inc. ("MSFS"), since
effective February MSFS's inception in 1989. From 1979 to
28, 1997 1993, Mr. Hubbuch served as Vice President
of MS Diversified Corporation ("MSD"),
which founded the Company and is one of
the Company's principal stockholders, and
President of the Financial Services
Division of MSD after joining MSD in 1977.
Mr. Hubbuch received a Bachelor of Science
degree in finance from Indiana University
and a Master of Business Administration
degree from the University of Kentucky.
From 1992 to May 1995, Mr. Hubbuch also
served as Vice Chairman and Chief
Executive Officer of MS Byrider Sales,
Inc. ("MSB"), which is an affiliate of the
Company.
Reed Bramlett 47 Director since 1994 Mr. Bramlett has served as President of Grant
County Bank in Medford, Oklahoma since 1992.
From 1977 to 1992, Mr. Bramlett was
Vice President/Cashier of Grant County Bank.
Mr. Bramlett holds a Bachelor of Science degree
and a Master of Science degree in industrial
engineering from Oklahoma State University.
Carl Herrin 72 Director since 1994 Since 1968, Mr. Herrin has been the President
of five automobile dealerships in the State of
Mississippi. Mr. Herrin received a Bachelor of
Science degree from the University of Mississippi.
Mr. Herrin serves as the Chairman and as a director
of MSD. Mr. Herrin also serves as a director of
MSB and MSFS.
</TABLE>
38
<PAGE> 39
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION FOR
NAME OF POSITION WITH LAST FIVE YEARS
DIRECTOR AGE THE COMPANY AND DIRECTORSHIPS
-------- --- ----------- -----------------
<S> <C> <C>
Philip A. Canfield 29 Director since 1994 Mr. Canfield has been an associate of
Golder, Thoma, Cressey, Rauner, Inc. ("GTCR")
since 1992. From 1990 to 1992, Mr. Canfield
worked for Kidder, Peabody & Co. Incorporated
in its Corporate Finance Department. Mr. Canfield
received his Bachelor of Business Administration
degree from the University of Texas.
Robert P. Plummer 66 Director since 1996 Since 1989, Mr. Plummer has been a financial
consultant for the consumer finance and banking
industry, specializing in business valuation and
litigation support. Prior to 1989, Mr. Plummer spent
30 years with American General Finance, which
operates more than 1,200 offices in 41 states, as a
Senior Vice President, Controller and Director.
Mr. Plummer received a Bachelor of Science
degree in accounting from the University of Evansville
and is a graduate of the Executive Program at
Indiana University's Graduate School of Business.
Mr. Plummer is a certified public accountant.
James B. Stuart, Jr. 69 Chairman since 1995 Mr. Stuart replaced the late Harold Busching as
and Director since Chairman of the Board in December 1995.
1994 Mr. Stuart has served as President and Chief
Executive Officer of MSD since December
1995. From 1983 to December 1995, Mr.
Stuart served as Senior Vice President of
MSD and President of MS Loan Center, Inc.,
a consumer loan subsidiary of MSD. Mr.
Stuart holds a Bachelor of Science degree
in finance and banking from Mississippi
State University. Mr. Stuart also serves
as a director of MSFS, MSD and MSB.
</TABLE>
39
<PAGE> 40
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION FOR
NAME OF POSITION WITH LAST FIVE YEARS
DIRECTOR AGE THE COMPANY AND DIRECTORSHIPS
-------- --- ----------- -----------------
<S> <C> <C> <C>
Harold Hogue 48 Director since 1995 Mr. Hogue has served as Vice President and Chief
Financial Officer of MSD since 1995. From 1992
to 1995, Mr. Hogue served as Vice
President-Corporate Operations of MSD. Mr. Hogue
also served as Corporate Controller of MSD from
1988 to 1992. Mr. Hogue received a Bachelor of
Science degree in accounting from Mississippi
State University.
Bruce L. Miller 55 Director since 1996 Mr. Miller has been a strategy, operating and
financial consultant with various companies since
1995. From 1992 to 1994, Mr. Miller served as
Chairman, President and Chief Executive
Officer of CoreSource, Inc. From 1989 to 1992,
Mr. Miller served as President and Chief Executive
Officer of Crabtree Capital Corporation. Mr. Miller
received a Bachelor of Arts degree in economics from
Cornell University and a Master of Business
Administration degree in marketing from Wharton
School, University of Pennsylvania. Mr. Miller
currently serves on the Board of Directors of
Ultradata Systems, Inc.
Carl D. Thoma 48 Director since 1994 Mr. Thoma has been a principal of GTCR
since 1980. Mr. Thoma holds a Bachelor of
Science degree from Oklahoma State University
and a Master of Business Administration
degree from Stanford University. Mr. Thoma is a
director of Paging Network, Inc.
</TABLE>
COMPENSATION OF DIRECTORS
The Company pays each nonemployee director $1,000 for each board
meeting attended and reimburses them for expenses incurred in the performance
of their duties. In addition, outside directors are eligible to participate in
the Nonemployee Directors' Stock Option Plan. See "EXECUTIVE
COMPENSATION--BENEFIT PLANS" below. The Company has obtained directors' and
officers' liability insurance and the Restated Certificate of Incorporation and
Bylaws of the Company provide for mandatory indemnification of directors and
officers to the fullest extent permitted by Delaware law. As of July 21, 1995,
the Company entered into indemnification agreements with each of its directors
and executive officers. In addition, the Company's Restated Certificate of
Incorporation limits the liability of the directors to the Company and its
stockholders for breaches of the directors' fiduciary duty to the fullest
extent permitted by Delaware law.
40
<PAGE> 41
BOARD COMMITTEES AND MEETINGS
During 1996, the Board held four formal meetings and several
telephonic meetings and took a number of actions by written consent. No
director attended fewer than 75% of the aggregate of (i) the number of meetings
of the Board of Directors held during the period he served on the Board and
(ii) the number of meetings of committees of the Board of Directors held during
the period he served on such committees. The Board of Directors has an Audit
Committee and a Compensation Committee but has not delegated any of its
responsibilities to a Nominating Committee.
AUDIT COMMITTEE
The Audit Committee has the responsibility of making
recommendations to the Board of Directors concerning the engagement of the
Company's independent auditors, reviewing the overall scope and results of the
annual audit on behalf of the Board of Directors and performing such other
functions as may be prescribed by the Board of Directors. The members of the
Audit Committee are elected annually by the directors. The Audit Committee
currently is comprised of Messrs. Hogue and Bramlett. Mr. Hogue replaced Mr.
Stuart on the Audit Committee in December 1995. The Audit Committee met on
three occasions during 1996.
COMPENSATION COMMITTEE
The Compensation Committee is authorized to: (i) review the
contribution and salaries of the Chief Executive Officer, the President and
Chief Operating Officer, and the Vice President and Chief Financial Officer of
the Company to the success of the Company, (ii) establish appropriate levels of
compensation for such officers, including any incentive compensation to be
awarded, (iii) review employee benefit programs, (iv) review proposed
compensation plans applicable to the Company's officers and employees, (v)
administer the Company's stock option plans, and (vi) perform such other
functions as the Board of Directors may direct. The members of the Compensation
Committee are elected annually by the directors. The Compensation Committee
currently is comprised of Messrs. Miller, Stuart and Thoma. The Compensation
Committee held four meetings during 1996.
41
<PAGE> 42
EXECUTIVE OFFICERS AND KEY EMPLOYEES
Set forth below is certain information regarding the Company's executive
officers and key employees:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Philip J. Hubbuch, Jr................. 56 Vice Chairman, Chief Executive Officer and Director
Vann R. Martin........................ 42 President and Chief Operating Officer
E. Peter Healey....................... 43 Vice President, Chief Financial Officer
and Secretary
Dwayne A. Cooper...................... 38 Vice President and Treasurer
R. Dale Miller........................ 33 Controller
</TABLE>
Philip J. Hubbuch, Jr. Mr. Hubbuch has served as Vice Chairman and
Chief Executive Officer of the Company since its inception. Mr. Hubbuch was
appointed as a director of the Company in July 1995. From 1979 to 1993, Mr.
Hubbuch also served as Vice President of MSD and President of the Financial
Services Division of MSD after joining MSD in 1977. Mr. Hubbuch received a
Bachelor of Science degree in finance from Indiana University and a Master of
Business Administration from the University of Kentucky. From 1992 to May 1995,
Mr. Hubbuch also served as Vice Chairman and Chief Executive Officer of MSB.
Mr. Hubbuch resigned from the Company effective February 28, 1997.
Vann R. Martin. Mr. Martin has been with the Company and its
predecessors since inception and has served as President and Chief Operating
Officer of the Company and its immediate predecessor since 1989. Mr. Martin
attended the University of Tennessee.
E. Peter Healey. Mr. Healey served as Vice President, Chief
Financial Officer and Secretary of the Company from February 1994 to July 1996.
Mr. Healey's employment with the Company was terminated effective December 31,
1996. From April 1988 to December 1993, Mr. Healey served as Vice President and
Treasurer of Zale Corporation and its subsidiaries. Zale Corporation and its
subsidiaries emerged from bankruptcy proceedings in 1993. Mr. Healey holds a
Bachelor of Science in Business Administration degree in finance from the
University of Missouri and is a certified public accountant. From February 1994
to May 1995, Mr. Healey also served as Vice President, Chief Financial Officer
and Secretary of MSB. From February 1994 to March 1996, Mr. Healey also served
as Treasurer of the Company.
Dwayne A. Cooper. Mr. Cooper has served as Vice President and
Treasurer of the Company since March 1996. From April 1992 to January 1996, Mr.
Cooper served as Assistant Treasurer of Zale
42
<PAGE> 43
Corporation and its subsidiaries. From July 1988 to April 1992, Mr. Cooper
served as Director-Tax Compliance of Zale Corporation. Mr. Cooper holds a
Bachelor of Science degree in accounting and Master of Accounting Science
degree from the University of Illinois. Mr. Cooper is a certified public
accountant.
R. Dale Miller. Mr. Miller has served as Controller and Assistant
Secretary of the Company and its predecessor since 1992. From 1990 to 1992, Mr.
Miller was an auditor with Emerson, Stokes, Elliott and Harper, a public
accounting firm in Jackson, Mississippi. Mr. Miller received a Bachelor of
Business Administration degree in finance from Mississippi State University and
a Bachelor of Business Administration degree in accounting from Belhaven
College. Mr. Miller is a certified public accountant.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the
Company to its Chief Executive Officer and its two other most highly
compensated executive officer whose total annual salary and bonus exceeded
$100,000 for services rendered for the fiscal years ended December 31, 1994,
1995 and 1996 (the"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------- ----------
SECURITIES
UNDERLYING ALL OTHER
OPTIONS COMPENSATION
NAME AND PRINCIPAL YEAR SALARY($) BONUS ($) (#) (1) ($)(2)
- ------------------ ---- --------- --------- -------- ------
POSITION
- --------
<S> <C> <C> <C> <C> <C>
Philip J. Hubbuch, Jr. (3) 1996 165,000 -0- -0- 7,600
Chief Executive Officer 1995 150,000 105,000 195,560 8,750
and Vice Chairman 1994 135,000 70,000 293,328 8,245
Vann R. Martin 1996 131,827 -0- -0- 7,000
President and Chief 1995 120,000 48,000 97,780 7,870
Operating Officer 1994 100,000 40,000 146,664 7,750
E. Peter Healey (4) 1996 81,750 -0- -0- 58,000
Vice President and Chief 1995 120,000 48,000 97,780 22,065(5)
Financial Officer 1994 96,250 44,000 97,776 24,315
</TABLE>
- -------------------------
(1) Under the Employee's Equity Incentive Plan, Messrs. Hubbuch,
Martin and Healey were granted options for the purchase of (a) up
to 293,328, 146,664 and 97,776 shares of Common Stock,
respectively, at an exercise price of $2.50 per share in 1994, (b)
up to 39,112, 19,556 and 19,556 shares of Common Stock,
respectively, at an exercise price of $2.50 per share in January
1995 and (c) up to 156,448, 78,224 and 78,224 shares of Common
Stock, respectively, at an exercise price of $12.00 per share in
July 1995.
(2) Reflects amounts contributed by the Company under the Company's
Profit Sharing 401(k) Plan and Trust and director fees paid by the
Company and/or its subsidiaries.
(3) Mr. Hubbuch resigned from the Company effective February 28, 1997.
(4) Mr. Healey became an employee of the Company in February 1994. He
ceased performing services on behalf of the Company in July, 1996
and his employment was terminated effective December 31, 1996.
(5) Includes $14,315 earned under a deferred compensation arrangement.
43
<PAGE> 44
OPTION GRANTS
The following table sets forth information concerning individual
grants of stock options made during the fiscal year ended December 31, 1996 to
the Named Executive Officers.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
NUMBER PERCENT OF TOTAL OF STOCK PRICE APPRECIATION
OF SECURITIES OPTIONS GRANTED TO EXERCISE OR FOR OPTION TERMS
NAME AND UNDERLYING OPTIONS EMPLOYEES IN FISCAL BASE PRICE EXPIRATION -----------------------------
DATE OF GRANT GRANTED(#) YEAR ($/SH) DATE 5%($) 10%($)
- -------------- ------------------- -------------------- ----------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Philip J. Hubbuch, Jr. None
Vann R. Martin None
E. Peter Healey None
</TABLE>
- --------------------
OPTION EXERCISES AND FISCAL YEAR END VALUES
The following table sets forth information with respect to each of the
Named Executive Officers concerning the exercise of stock options and
unexercised stock options held at December 31, 1996. No options were granted to
Messrs. Hubbuch, Martin and Healey in 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF
UNEXERCISED UNEXERCISED IN-THE-MONEY
SHARES ACQUIRED OPTIONS AT FY-END(#) OPTIONS AT FY-END ($)
NAME ON EXERCISE(#) VALUE REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- --------------------- ----------------- ------------------- -------------------------- ----------------------------
<S> <C> <C> <C> <C>
Philip J. Hubbuch, Jr. - - 156,443/332,445 (1) 0/0
Vann R. Martin - - 78,222/166,222 0/0
E. Peter Healey - - 58,667/136,889 0/0
</TABLE>
(1) The Company may accelerate the vesting and extend the exercise date of Mr.
Hubbuch's options.
EMPLOYMENT AGREEMENTS AND COMPENSATION ARRANGEMENTS
The Company's employment contract with Mr. Hubbuch provided for an
annual base salary of $150,000, subject to periodic increases by the Board of
Directors, and an annual bonus up to 70% of his annual base salary. In
addition, Mr. Hubbuch was eligible to participate in all present and future
fringe
44
<PAGE> 45
benefit plans of the Company including option, profit-sharing, insurance and
similar plans. Mr. Hubbuch's employment contract provided for one year of
severance pay in the event of termination of his employment with the Company.
Mr. Hubbuch resigned as CEO and Vice-Chairman effective February 28, 1997. Mr.
Hubbuch is subject to a one year noncompete covenant following the termination
of his employment.
The Company's employment contract with Mr. Martin provides that he
will be entitled to receive an annual base salary of $120,000, subject to
periodic increases by the Board of Directors, and an annual bonus up to 40% of
his annual base salary. Mr. Martin's base salary was increased to $147,000 in
September, 1996. In addition, Mr. Martin is eligible to participate in all
present and future fringe benefit plans of the Company including option,
profit-sharing, insurance and similar plans. The employment agreement with Mr.
Martin states that he will be provided with one year of severance pay in the
event he is terminated or resigns with good reason following a change of
control of the Company. Further, Mr. Martin's employment contract provides that
he will be prohibited from competing with the business of the Company during
the period he is receiving severance pay.
Pursuant to a settlement agreement entered into between the
Company and Mr. Healey , Mr. Healey will be paid a total of $164,608 in sixteen
monthly installments of $10,288 per month. Also, the expiration date for
exercise of 58,667 of Mr. Healey's vested options was extended to October 30,
1997. The exercise price was reduced from $2.50 per share to $1.50 per share on
43,022 of these options. The remaining 15,645 options have an exercise price of
$12.00 per share.
BENEFIT PLANS
EMPLOYEE EQUITY INCENTIVE PLAN.
Effective July 21, 1995, the Company amended and restated its
employees' equity incentive plan, which was approved by the Company's
stockholders in May 1995 (the "Employees' Plan"). The purpose of the Employees'
Plan is to provide long-term incentives to the Company's officers, employees
and consultants. The Employees' Plan provides for an initial authorization of
1,177,776 shares of Common Stock for issuance thereunder (including 1,002,784
shares issuable upon exercise of outstanding options). Under the Employees'
Plan, the Company may grant to its officers, employees and consultants awards
of stock options and performance awards or any combination thereof.
The Employees' Plan is administered by the Compensation Committee.
Subject to the terms of the Employees' Plan, the Compensation Committee
determines the persons to whom awards are granted, the type of award granted,
the number of shares granted, the vesting schedule, the type of consideration
to be paid to the Company upon exercise of options and the terms of any option
(which cannot exceed ten years).
Under the Employees' Plan, the Company may grant both incentive
stock options ("incentive stock options") intended to qualify under Section 422
of the Internal Revenue Code of 1986, as amended
45
<PAGE> 46
(the "Code"), and options that are not qualified as incentive stock options
("nonstatutory stock options"). Incentive stock options may be granted only to
persons who are employees of the Company, while nonstatutory stock options may
also be granted to persons who are consultants to the Company.
Incentive stock options may not be granted at an exercise price of
less than the fair market value of the Common Stock on the date of grant. The
exercise price of nonstatutory stock options granted under the Employees' Plan
may be less than the fair market value of the Common Stock on the date of grant
at the discretion of the Compensation Committee. These options have a term of
up to ten years from the date of grant. The exercise price of incentive stock
options granted to holders of more than 10% of the Common Stock must be at
least 110% of the fair market value of the Common Stock on the date of grant,
and the terms of these options cannot exceed five years.
The Employees' Plan provides for adjustments in the number of
shares subject to the Employees' Plan and subject to outstanding options, at
the discretion of the Compensation Committee, in the event of a stock dividend,
stock split, recapitalization, merger or other similar event.
Under the performance award component of the Employees' Plan,
eligible participants designated by the Compensation Committee, who may be
officers, employees or consultants of the Company, may be granted an award
denominated in shares of Common Stock or in dollars or any combination thereof.
As of February 28, 1997, 865,895 shares of Common Stock are
issuable upon the exercise of outstanding options granted under the Employees'
Plan. Of such aggregate amount, options to purchase 423,402 shares of Common
Stock have vested and are immediately exercisable, and options to purchase
442,493 shares of Common Stock scheduled to vest and become exercisable over
the next five years. Messrs. Hubbuch and Martin hold options to purchase
488,888 and 244,444 shares of Common Stock, respectively, of which 332,440 and
166,220 shares, respectively, have an exercise price of $2.50 and 156,448 and
78,224 shares, respectively, have an exercise price of $12.00. Mr. Healey holds
options to purchase 58,667 shares of Common Stock of which 43,022 have an
exercise price of $1.50 and 15,645 have an exercise price of $12.00.
Upon a change in control of the Company, stock options outstanding
under the Employees' Plan shall immediately become fully vested and
exercisable. Also, in the event of a merger or consolidation in which the
Company is not the surviving corporation, the sale of all or substantially all
of the Company's assets, the acquisition of more than 50% of the Company's
outstanding voting stock, certain reorganizations, special or extraordinary
dividends, or the liquidation of the Company, the Compensation Committee or the
board of directors of the corporation assuming the Company's obligations may
set the terms and conditions for the exercise or modification of any
outstanding stock options.
46
<PAGE> 47
NONEMPLOYEE DIRECTORS' STOCK OPTION PLAN.
Under the Nonemployee Directors' Stock Option Plan (the
"Directors' Plan"), which was approved by the Company's stockholders in May
1995, nonemployee directors of the Company receive stock options on a
non-discretionary basis to encourage and provide incentives for a high level of
performance. Only directors who are not also employees of the Company or any of
its subsidiaries are eligible to participate in the Directors' Plan. Currently,
the Company has eight nonemployee directors.
An aggregate of 50,000 shares of Common Stock have been reserved
for issuance under the Directors' Plan. The Directors' Plan provides for an
automatic grant of an option to purchase 5,000 shares of Common Stock to each
nonemployee director at the commencement of his or her initial term of service
on the Board, which options become exercisable at the rate of 1,000 shares on
each of the first five anniversaries of the initial date of grant.
Upon a Director ceasing to serve as a director for any reason, all
then exercisable options shall remain exercisable for three months, unless
termination is by reason of death or disability in which case such period shall
be one year, and nonexercisable options shall be forfeited; provided, however,
upon a director's removal following a change in control of the Company, all
options outstanding under the Directors' Plan shall immediately become fully
vested and exercisable for a period of three months. The Directors' Plan is
administered by the Compensation Committee.
Except as provided above, each option granted under the Directors'
Plan will expire ten years from the date of grant. The option exercise price
must be equal to 100% of the fair market value of the Common Stock on the date
of grant of the option. Options granted to directors under the Directors' Plan
will be treated as nonstatutory stock options under the Code.
As of February 28, 1997, the Company had granted under the
Directors' Plan options on a total of 45,000 shares of Common Stock of which
40,000 shares are outstanding and 6,000 vested. Options granted to Messrs.
Busching, Stuart, Bramlett, Canfield, Herrin and Thoma were granted at an
exercise price of $12 per share. Options granted to Mr. Hogue were granted at
an exercise price of $7.3125 per share. Options granted to Messrs. Miller and
Plummer were granted at an exercise price of $5.25 per share.
Mr. Harold W. Busching served as the Chairman of the Board and a
Director of the Company until his death in December 1995. Mr. Busching was
granted 5,000 options under the Director's Plan, which expired unexercised on
December 2, 1996.
AMENDMENT OF PLANS.
The Board of Directors may amend the Employee's Plan and the
Directors' Plan at any time or may terminate such plans without approval of the
stockholders; provided, however, that stockholder approval is required for any
amendment to the Employee's Plan or the Directors' Plan which increases the
number of shares for which options may be granted, changes the designation of
the class of persons eligible
47
<PAGE> 48
to participate or changes in any material respect the limitations or provisions
of the options subject to the Employee's Plan or the Directors' Plan, as the
case may be. However, no action by the Board of Directors or stockholders may
alter or impair any option previously granted without the consent of the
optionee.
PROFIT SHARING 401(k) PLAN AND TRUST.
In 1994, the Company adopted the Profit Sharing 401(k) Plan and
Trust (the "401(k) Plan"). All full time employees of the Company are eligible
to participate in the 401(k) Plan on the first day of the quarter following
three months of continuous employment with the Company.
Under the 401(k) Plan, eligible employees are permitted to defer
receipt of between 2% to 16% of their monthly compensation. The Company
currently matches 50% of the employees' deferrals up to a maximum of 6% of
their monthly base pay. Subject to certain restrictions, contributions to the
401(k) Plan will be invested by the trustees of the 401(k) Plan in accordance
with the directions of each participant. The Company's contribution vests
immediately.
Participants or their beneficiaries are entitled to payment of
benefits (i) upon retirement either at or after age 65, (ii) upon death or
disability or (iii) upon termination of employment, if the participant elects
to receive a distribution of his account balance prior to one of the events
listed in (i) or (ii) above. In addition, hardship distributions and loans to
participants from the 401(k) Plan are available under certain circumstances.
The amount of benefits ultimately payable to a participant under the 401(k)
Plan will depend on the performance of the investments to which contributions
are made on the participant's behalf.
During 1996, the Company contributed $110,876.15 to the 401(k) Plan.
EMPLOYEE STOCK PURCHASE PLAN.
The Company's Stock Purchase Plan (the "Stock Purchase Plan"),
which was approved by the stockholders of the Company in May 1995, covers
200,000 shares of Common Stock. Under the Stock Purchase Plan, employees and
officers of the Company are eligible to participate in the Stock Purchase Plan
after one year of full time employment with the Company. Each plan offering
will be made quarterly utilizing payroll deductions to purchase shares of
Common Stock. The purchase price of such shares will be equal to at least 85%
of the lower of the fair market value of the Common Stock on the first and last
day of the offering period. The first offering period under the Stock Purchase
Plan commenced on April 1, 1996. During 1996, 2,390 shares were purchased with
proceeds to the Company totalling $9,297.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company's executive compensation program is administered by
the Compensation Committee of the Company's Board of Directors, which is
comprised of Messrs. Miller, Stuart and Thoma. Messrs. Miller, Stuart and Thoma
are nonemployee directors of the Company. The Compensation Committee (i)
reviews the contribution and salaries of the Named Executive Officers in
relation to the success of the Company, (ii) establishes appropriate levels of
compensation for such officers, including
48
<PAGE> 49
any incentive compensation to be awarded, (iii) reviews employee benefit
programs, (iv) reviews proposed compensation plans applicable to the Company's
other officers and employees, and (v) administers the Company's stock option
plans. In reviewing the compensation of individual executive officers, the
Compensation Committee takes under consideration the recommendations of
management and current market conditions.
COMPENSATION PROGRAMS
The Company's compensation programs are aimed at enabling it to
attract and retain highly- talented executives and rewarding those executives
commensurately with their ability and performance. The Company's compensation
programs consist of base salary, a bonus plan and an employee equity incentive
plan.
BASE SALARY
Base salaries for executive officers are determined by the
Compensation Committee based on recommendations of the Company's Chief
Executive Officer and on the person's performance against personal objectives
for the year, as well as the Company's performance against certain corporate
objectives such as comparisons of budgeted amounts to actual amounts and
overall profitability of the Company.
BONUS PLAN
The Company maintains an incentive bonus plan pursuant to which
executive officers may be awarded an annual bonus depending on his attainment
of certain defined budget and corporate objectives as set by the Compensation
Committee. No bonuses were granted for the 1996 year.
EMPLOYEE EQUITY INCENTIVE PLAN
The Employees' Plan authorizes the Company to grant awards of
stock options and performance awards, or a combination thereof, to qualified
officers, employees and consultants of the Company.
The Employees' Plan is intended to help the Company achieve its
long-range goals by aligning the interests of the Company's officers, employees
and consultants with its stockholders. The purpose of the Employees' Plan is to
enable the Company to attract, retain and motivate its employees and to enable
employees to participate in the long-term growth of the Company by providing
for or increasing the proprietary interest of such employees in the Company.
Subject to the terms and conditions of the Employees' Plan, the
Compensation Committee determines the individuals to whom awards are granted,
the type of award granted, the number of shares granted and, within certain
limits set by the Employees' Plan, the vesting schedule, the type of
consideration to be paid to the Company upon exercise of options and the terms
of any option.
49
<PAGE> 50
No awards were made pursuant to the Employees' Plan in 1996.
OTHER BENEFITS
In order to attract, motivate and retain high quality employees,
the Company also maintains a broad-based benefits package, participation in
which is not dependent upon performance. In general, executive officers
participate on the same basis as other full time employees in the Company's
employee benefit plans: the 401(k) Plan and the Stock Purchase Plan. See
"--BENEFIT PLANS" above for information concerning such plans.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Mr. Hubbuch's base salary and bonus formula for fiscal year 1996
were established in the Hubbuch Employment Agreement. The principal
performance-related component of his compensation is his annual bonus, which is
detailed in the Hubbuch Employment Agreement. No bonus was awarded for the 1996
year.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 1996, executive officer compensation decisions were made by the
Compensation Committee, consisting of Messrs. Miller, Stuart and Thoma. No
member of the Compensation Committee was an officer or employee of the Company
or any of its subsidiaries during 1996. None of the Company's directors or
officers were customers of, or had borrowing transactions with, the Company or
its subsidiaries in the past fiscal year, and none of the executive officers
have interlocking or other relationships with other boards that require
disclosure under Item 402(j) of Regulation S-K of the Securities and Exchange
Act of 1934, as amended.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES AND EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors, executive officers and persons who
beneficially own greater than 10% of a registered class of the Company's equity
securities to file initial reports of ownership and changes in ownership with
the Securities and Exchange Commission and the Nasdaq Stock Market. Based
solely upon its review of copies of the Section 16(a) reports the Company has
received, the Company believes that during its fiscal year ended December 31,
1996, all of its directors, executive officers and greater than 10% beneficial
were in compliance with their filing requirements.
50
<PAGE> 51
PERFORMANCE GRAPH
The following graph provides a comparison of the cumulative total
stockholder return on the Company's Common Stock since the Company's initial
public offering on July 21, 1995 with the cumulative total return on the Nasdaq
Composite and the Peer Group over the same period assuming the investment of
$100 in the Company's Common Stock, the Nasdaq Composite and the Peer Group on
July 21, 1995 and the reinvestment of all dividends.
[GRAPH]
<TABLE>
<CAPTION>
PERIOD ENDING
=============================================================================
INDEX 7/21/95 12/31/95 3/31/96 6/30/96 9/30/96 12/31/96
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
MS Financial, Inc. 100.00 53.40 48.54 48.54 26.70 7.29
MASDAQ - Total US 100.00 109.95 115.09 124.48 128.92 135.25
SNL SUBPRIME SubPrime Lenders Index 100.00 105.94 127.61 123.56 124.10 135.87
</TABLE>
51
<PAGE> 52
Item 12. Security Ownership of Certain Beneficial Owners and Management
Except as set forth below, the Company does not know of any person
who beneficially owns more than five percent of the Company's Common Stock (the
only class of equity securities of the Company beneficially owned by the
following persons) or has the right to acquire more than 5% of the Common Stock
within 60 days of February 28, 1997. Except as otherwise indicated, the Company
believes that the beneficial owners of the Common Stock listed below, based on
information furnished by such owners, have sole investment and voting power
with respect to such shares.
<TABLE>
<CAPTION>
Unrestricted
Stock Beneficially OPTION SHARES
NAME AND ADDRESS Owned, Excluding EXERCISABLE Percent
OF BENEFICIAL OWNER Options WITHIN 60 DAYS of Class
------------------- ------- -------------- --------
<S> <C> <C> <C>
MS Diversified Corporation(1) 4,320,000 -- 41.42%
715 S. Pear Orchard Road
Suite 400
Ridgeland, Mississippi 39157
Golder, Thoma, Cressey, Rauner, 3,720,000 -- 35.67%
Inc.(2)
6100 Sears Tower
Chicago, Illinois 60606
</TABLE>
- ------------------
(1) All of such shares of Common Stock are held by MS Financial Services, Inc.,
a wholly owned subsidiary of MS Diversified Corporation.
(2) All of such shares of Common Stock are held by Golder, Thoma, Cressey,
Rauner Fund IV, L.P. ("GTCR IV"). Golder, Thoma, Cressey, Rauner, Inc.
serves as the general partner of Golder, Thoma, Cressey, Rauner IV, L.P.,
which in turn serves as the general partner of GTCR IV.
52
<PAGE> 53
The following table sets forth the shares of Common Stock (the
only class of equity securities of the Company beneficially owned by the
following persons) beneficially owned on February 28, 1997 by: (i) by each
director of the Company and each executive officer named in the Summary
Compensation Table and (ii) by all directors and executive officers as a group.
Except as otherwise indicated, the Company believes that the beneficial owners
of the Common Stock listed below, based on information furnished by such
owners, have sole investment and voting power with respect to such shares.
<TABLE>
<CAPTION>
UNRESTRICTED
STOCK BENEFICIALLY OPTION SHARES
OWNED, EXCLUDING EXERCISABLE PERCENT
NAME OPTIONS WITHIN 60 DAYS OF CLASS
---- ---------------- -------------- --------
<S> <C> <C> <C>
James B. Stuart, Jr 3,680 1,000 .04%
Philip J. Hubbuch, Jr -- 222,932 --
Philip A. Canfield 2,000 1,000 .02%
Carl Herrin -- 1,000 --
Harold A. Hogue 3,500 30,338 .03%
Robert P. Plummer 500 1,000 *
Vann R. Martin 5,461 111,465 .05%
E. Peter Healey 19,478 58,667 .19%
Reed Bramlett -- 1,000 --
Carl Thoma -- 1,000 --
Bruce Miller -- 1,000 --
All other officers 1,602 5,000 .02%
All directors and current
officers as a group 36,221 435,402 .35%
</TABLE>
- ---------------------
* The total number of shares of Common Stock owned by Mr. Plummer constitutes
less than .01% of the shares of Common Stock outstanding.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MS Casualty. In 1982, MSD founded MS Casualty Insurance Company
("MS Casualty") to provide casualty insurance in connection with the purchase
of motor vehicles. Each automotive dealer from which the Company purchases
retail installment contracts ("Installment Contracts"), which are
53
<PAGE> 54
originated by a dealership that sells new and used automobiles and light duty
trucks, currently obtains a repossession loss policy from MS Casualty with
respect to each vehicle financed. The Company acts as administrative agent for
MS Casualty in the sale of such repossession loss policies. If an automobile
is subsequently repossessed and sold, MS Casualty pays benefits to the Company
for certain losses associated therewith. During 1996, the Company received
from MS Casualty $10,554,071 in claim payments associated with losses on such
repossession loss policies. In addition, during 1996, repossession insurance
premiums of $4,506,917 were received from automotive dealers by the Company and
paid to MS Casualty in respect of Installment Contracts purchased by the
Company. Pursuant to an experience refund agreement between MS Casualty and
the Company, MS Casualty also pays the Company underwriting profits, if any,
calculated in accordance with an agreed upon formula. The Company did not
record any experience refund income on the MS Casualty insurance contract in
1996.
MS Life. In 1973, MSD founded MS Life Insurance Company ("MS
Life") to provide life and accident and health insurance in connection with the
purchase of motor vehicles. The Company receives commissions on certain
Installment Contracts from the sale of MS Life insurance policies to automobile
purchasers for which the Company has purchased an Installment Contract. During
1996, the Company received commissions of $685,704 on written insurance
premiums of $1,685,138 from the sale of MS Life insurance policies. Pursuant
to an experience refund agreement between MS Life and the Company, MS Life also
annually pays the Company underwriting profits, if any.
Other MSD Affiliates. MS Dealer Service Corporation and United
Service Protection Corporation, also affiliated companies, together with MS
Casualty, provide warranty extension contracts to borrowers under certain of
its Installment Contracts. The Company is named as an additional insured under
the contractual liability policy that insures the warranty extension
Installment Contracts. Premiums for such insurance are financed in the
Installment Contract. During 1996, written premiums totaling $1,379,908 for
such insurance were financed in the Installment Contracts for which the Company
received commissions of $747,815.
Lease with MSD. The Company presently leases its approximately
14,000 square foot headquarters from MSD pursuant to a sublease entered into in
December 1993. In 1996, the Company paid MSD $174,133 for such sublease.
Affiliated Dealers. In 1996, the Company purchased approximately
5.8% of the Company's outstanding Installment Contracts from a dealership that
is partially owned by Carl Herrin, a director of the Company.
This report contains statements as to the future events or plans
which are uncertain and subject to change. Uncertainties include changes in
the quality of the Company's portfolio of Installment Contracts, the Company's
ability to comply with its loan covenants, the potential loss of revenues from
servicing fees, the Company's inability to maintain adequate funding sources,
and the possibility that the proposed Merger with Search will not be
consummated.
54
<PAGE> 55
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report.
(1) Consoliated financial statements
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 1995 and
1996
Consolidated Statements of Operations, years ended
December 31, 1994, 1995 and 1996
Consolidated Statements of Stockholders' Equity,
years ended
December 31, 1994, 1995 and 1996
Consolidated Statements of Cash Flows, years ended
December 31, 1994, 1995 and 1996
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules normally required on Form 10-K
are omitted since they either are not applicable or the required
information is included in the notes to the consolidated
financial statements.
(3) Exhibit index is below at item (c) and exhibits are filed
herewith.
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
(c) Exhibits
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.
10.2* -- 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.
55
<PAGE> 56
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.
56
<PAGE> 57
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.
21** -- List of material subsidiaries.
23+ -- Independent Auditors' Consent
- --------------------
* 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 10K dated March 27, 1996.
+ Filed herewith
57
<PAGE> 58
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, this 10-K
has been signed below by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ James B. Stuart, Jr. Chairman of the Board June 23, 1997
- -------------------------------
James B. Stuart, Jr.
/s/ Vann R. Martin President and Chief June 23, 1997
- ------------------------------- Operating Officer
Vann R. Martin
/s/ Reed Bramlett Director June 23, 1997
- -------------------------------
Reed Bramlett
/s/ Philip A. Canfield Director June 23, 1997
- -------------------------------
Philip A. Canfield
/s/ Carl Herrin Director June 23, 1997
- -------------------------------
Carl Herrin
/s/ Harold A. Hogue Director June 23, 1997
- -------------------------------
Harold A. Hogue
/s/ Bruce Miller Director June 23, 1997
- -------------------------------
Bruce Miller
/s/ Robert Plummer Director June 23, 1997
- -------------------------------
Robert Plummer
/s/ Carl D. Thoma Director June 23, 1997
- -------------------------------
Carl D. Thoma
/s/ Dale Miller Controller June 23, 1997
- ------------------------------- (Principal Accounting Officer)
Dale Miller
</TABLE>
58
<PAGE> 59
MS FINANCIAL, INC.
Consolidated Financial Statements
December 31, 1995 and 1996
(With Independent Auditors' Report Thereon)
<PAGE> 60
MS FINANCIAL, INC.
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 F-3
Consolidated Statements of Operations, years ended
December 31, 1994, 1995 and 1996 F-4
Consolidated Statements of Stockholders' Equity, years
ended December 31, 1994, 1995 and 1996 F-5
Consolidated Statements of Cash Flows, years ended
December 31, 1994, 1995 and 1996 F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-31
</TABLE>
F-1
<PAGE> 61
Independent Auditors' Report
The Board of Directors and Stockholders
MS Financial, Inc.:
We have audited the accompanying consolidated balance sheets of MS Financial,
Inc. and subsidiary as of December 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MS Financial, Inc.
and subsidiary at December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 2 to
the consolidated financial statements, the Company experienced in 1996 material
increases in delinquencies and losses on owned and serviced installment
contracts, a substantial net loss, and reduced availability of financing. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in note 2. The accompanying consolidated financial statements do not include
any adjustments that might be necessary should the Company be unable to
continue as a going concern.
Jackson, Mississippi KPMG Peat Marwick LLP
February 24, 1997
F-2
<PAGE> 62
MS FINANCIAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1995 and 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
Assets
December 31,
----------------------
1995 1996
-------- -------
<S> <C> <C>
Cash and cash equivalents $ 888 1,454
Installment contracts 22,398 86,972
Amounts due under securitizations 19,720 9,784
-------- -------
42,118 96,756
Allowance for possible losses (1,602) (10,062)
-------- -------
Installment contracts and amounts due
under securitizations, net 40,516 86,694
-------- -------
Property and equipment, net 1,211 1,561
Repossessed automobiles, net of valuation allowance of $2,800 in 1996 1,388 2,933
Installment contract origination program acquisition cost,
net of accumulated amortization of $537 in 1995 346 --
Income taxes receivable 223 6,234
Deferred income taxes 1,022 --
Other assets 4,124 2,559
-------- -------
Total assets $ 49,718 101,435
======== =======
Liabilities and Stockholders' Equity
Liabilities:
Notes payable $ -- 75,813
Collections due investors 5 27
Dealer reserve and holdback accounts 290 222
Unearned commissions 1,695 987
Accounts payable and accrued expenses 2,744 2,632
-------- -------
Total liabilities 4,734 79,681
-------- -------
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 27,660
Unrealized gain on securities available for sale -- --
Retained earnings (accumulated deficit) 18,373 (3,641)
-------- -------
46,044 24,030
Treasury stock, 174,000 and 371,610 shares of common, at cost (1,060) (2,276)
-------- -------
Total stockholders' equity 44,984 21,754
-------- -------
Commitments and contingencies
$ 49,718 101,435
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 63
MS FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 1994, 1995 and 1996
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Interest and fee income on installment contracts
and securitizations $ 10,008 12,449 14,909
Other interest income 4 100 70
Interest expense (2,441) (3,587) (5,371)
------- ------- -------
Net interest income before loss provisions 7,571 8,962 9,608
Provision for possible losses on installment contracts 685 826 20,103
Provision for impairment of amounts due under securitizations -- -- 3,000
Provision for possible losses on repossessed automobiles -- -- 2,800
------- ------- -------
Net interest income (loss) after loss provisions 6,886 8,136 (16,295)
------- ------- -------
Other income:
Insurance commissions 1,456 1,823 1,329
Gains on securitizations 2,492 7,072 --
Service fee income 1,235 1,951 2,668
Experience refund on insurance policy 900 -- --
Other income 627 760 753
------- ------- -------
Total other income 6,710 11,606 4,750
------- ------- -------
Operating expenses:
Salaries and employee benefits 3,398 5,046 6,942
Loss on sale of installment contracts -- -- 81
Legal, professional and accounting fees 478 660 2,171
Office supplies and telephone expense 887 1,053 1,630
Rent and other office occupancy expense 510 684 936
Direct loan servicing expenses 301 562 624
Travel and entertainment expense 499 649 770
Advertising and other promotional expenses 131 97 293
Other operating expenses 385 589 1,657
------- ------- -------
Total operating expenses 6,589 9,340 15,104
------- ------- -------
Income (loss) before income taxes 7,007 10,402 (26,649)
Income tax expense (benefit) 2,622 3,901 (4,635)
------- ------- -------
Net income (loss) $ 4,385 6,501 (22,014)
======= ======= =======
Net income (loss) per share $ .47 .65 (2.11)
======= ======= =======
Average shares and common equivalent shares outstanding 9,332 9,932 10,433
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 64
MS FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1994, 1995 and 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
Unrealized
gain (loss) Retained
Additional on securities earnings
Common paid-in available (accumulated Treasury
stock capital for sale deficit) stock Total
------ ---------- ------------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 9 6,222 -- 7,487 -- 13,718
Net income -- -- -- 4,385 -- 4,385
--- ------- ------- -------- ------- -------
Balance, December 31, 1994 9 6,222 -- 11,872 -- 18,103
Proceeds of initial public offering of
2,000,000 shares of common stock,
net of offering costs of $877 2 21,438 -- -- -- 21,440
Purchase of 174,000 shares of
common stock -- -- -- -- (1,060) (1,060)
Net income -- -- -- 6,501 -- 6,501
--- ------- ------- -------- ------- -------
Balance, December 31, 1995 11 27,660 -- 18,373 (1,060) 44,984
Purchase of 200,000 shares of
common stock -- -- -- -- (1,225) (1,225)
Proceeds from sale of 2,390 shares
of treasury stock under Stock
Purchase Plan -- -- -- -- 9 9
Net loss -- -- -- (22,014) -- (22,014)
--- ------- ------- -------- ------- -------
Balance, December 31, 1996 $ 11 27,660 -- (3,641) (2,276) 21,754
=== ======= ======= ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 65
MS FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1994, 1995 and 1996
(in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
1994 1995 1996
------- ------ -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,385 6,501 (22,014)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Provision for possible losses on installment contracts 685 826 20,103
Provision for impairment of amounts due under securitizations -- -- 3,000
Provision for possible losses on repossessed automobiles -- -- 2,800
Provision for deferred income taxes 70 186 1,022
Depreciation and amortization 241 321 723
Gains on securitizations (2,492) (7,072) --
Loss on sale of installment contracts -- -- 81
Changes in operating assets and liabilities, net (1,662) 504 (1,070)
------- ------ -------
Net cash provided by (used in) operating activities 1,227 1,266 4,645
------- ------ -------
Cash flows from investing activities:
Installment contracts originated (63,855) (83,077) (109,796)
Installment contracts repaid, including repossession proceeds 10,181 16,711 15,595
Proceeds from securitizations 33,248 81,560 --
Proceeds from sale of installment contracts -- -- 14,427
Repayment of amounts due under securitizations 2,205 2,425 1,681
Investment in MS Auto Credit, Inc. (500) -- --
Repurchase of installment contracts sold in
1992 and 1993 securitizations (4,349) -- --
Surety premiums paid under securitizations (273) (248) (356)
Capital expenditures (720) (693) (727)
Proceeds from sale of investment in MS Auto Credit, Inc. -- -- 500
------- ------ -------
Net cash provided by (used in) investing activities (24,063) 16,678 (78,676)
------- ------ -------
Cash flows from financing activities:
Net proceeds from issuance of common stock -- 21,440 --
Proceeds from notes payable 50,750 56,050 93,100
Repayments of notes payable (29,753) (92,093) (17,287)
Purchase of treasury stock -- (1,060) (1,225)
Proceeds from sale of treasury stock -- -- 9
Net change in pending advances under notes payable 1,903 (1,903) --
------- ------ -------
Net cash provided by (used in) financing activities 22,900 (17,566) 74,597
------- ------ -------
Net increase in cash and cash equivalents 64 378 566
Cash and cash equivalents, beginning of period 446 510 888
------- ------ -------
Cash and cash equivalents, end of period $ 510 888 1,454
======= ====== =======
</TABLE>
F-6
<PAGE> 66
MS FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,653 3,649 3,558
====== ====== ======
Income taxes $ 3,818 4,077 266
====== ====== ======
Noncash investing activity:
Repossession of automobiles $ 6,367 17,272 37,989
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 67
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1994, 1995 and 1996
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation and Business
The consolidated financial statements include the accounts of MS
Financial, Inc. (the Company) and its wholly-owned subsidiary,
MS Auto Receivables Company (MARCO). All significant
intercompany accounts have been eliminated in consolidation.
The Company's principal business activity is to purchase, resell to
investors and service retail automobile sales contracts.
Several of the dealers from whom the Company purchases such
retail sales contracts are affiliates of stockholders of MS
Diversified Corporation (MS Diversified). Retail sales
contracts are purchased from dealers located principally in the
Southeast, Southwest and Midwest regions of the United States.
(b) Income Recognition
Interest income from installment contracts is recognized using the
interest method adjusted for estimated prepayments of the
installment contracts. Prepayments are estimated based on
historical performance of the Company's loan portfolio. Accrual
of interest income does not cease for delinquent installment
contracts because any amounts are immaterial to the financial
statements due to the short delinquency period allowed before
repossession of the underlying collateral or charge-off of the
installment contract balance. At December 31, 1996, the Company
had charged-off all installment contracts, including delinquent
interest, that were at least 150 days delinquent.
Interest income from securitizations is recognized using the
interest method based on actual and expected cash flows and the
estimated rate of return on the recorded investment. For each
securitization, the Company periodically evaluates amounts due
under securitizations for impairment based on expected
discounted cash flows, as revised for actual cash flows through
the evaluation date. As a result of such analyses, the Company
recognized a $3.0 million impairment in 1996 on amounts due
under its 1995 securitization.
F-8
(Continued)
<PAGE> 68
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Insurance commissions are recognized as income using methods which
approximate the method indicated:
Credit life insurance - interest method
Accident and health insurance - relation to anticipated
claims Warranty extension insurance - straight-line
Installment contract extension fees are recognized when collected.
During 1995, the Company began deferring collection of
extension fees from certain borrowers and adding those fees to
the installment contract balance. Such deferred extension fees
are recorded as deferred income and are recognized when
collected after the full repayment of the installment contract.
Deferrable costs on the origination of installment contracts are
not material and are expensed when incurred. Servicing fee
income is recognized when earned.
(c) Securitization Transactions
Sales of installment contracts under securitization transactions
are recognized under the provisions of Statement of Financial
Accounting Standards (SFAS) No. 77, "Reporting by Transferors
for Transfers of Receivables with Recourse." Gains on
securitization transactions are calculated based on the
difference between the sales price and the allocated basis of
the installment contracts sold. The investment in installment
contracts is allocated between the portion sold and the portion
retained based on the relative fair values of the portion sold
and the portion retained on the date of sale. In estimating
fair values, the Company considers prepayment and default risks
and discounts estimated cash flows at interest rates that are
commensurate with the risks involved and consistent with rates
a non-affiliated purchaser may require. All anticipated costs,
including estimated recourse obligations, associated with the
securitizations are offset against the gain recognized.
(d) Allowance for Possible Losses on Installment Contracts
The allowance for possible losses is intended to cover losses on
owned installment contracts, as well as securitized installment
contracts. Losses on securitized installment contracts are
limited to amounts recorded as investment in the subordinated
trust certificates and amounts due under securitizations.
Provisions
F-9
(Continued)
<PAGE> 69
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
for possible losses on installment contracts are charged to
income in amounts sufficient to absorb any repossession
expenses, delinquent interest and unpaid installment contracts
balances in excess of the insurance provided by MS Casualty
Insurance Company (MS Casualty - see note 8). Credit loss
experience, contractual delinquency of installment contracts,
the value of underlying collateral, repossession loss insurance
and other factors are considered by management in assessing the
adequacy of the allowance for possible losses on installment
contracts.
(e) Property and Equipment and Repossessed Automobiles
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation is provided for furniture and
fixtures using the straight-line method over the estimated
useful lives of the related assets which range from five to six
years. Leasehold improvements are depreciated using the
straight-line method over the lives of the leases which range
from seven to eight years.
Repossessed automobiles are carried at the lower of cost (unpaid
installment contract balance) or fair value, less the costs of
disposition. In determining fair value, management considers
the estimated selling price of the automobile, repossession
loss insurance proceeds from MS Casualty and rebates on credit
life insurance, other insurance and extended warranties. At
December 31, 1996, management provided an allowance for
possible losses on repossessed automobiles of $2.8 million. A
valuation allowance was not previously considered necessary
because of expected reimbursements under the Company's
insurance arrangement with MS Casualty (see note 8) and the
relatively lower levels of repossessed automobiles in prior
periods.
(f) Installment Contract Origination Program Acquisition Cost
The cost of acquiring the installment contract origination program
was being amortized on a straight-line basis over ten years.
During 1996, the remaining carrying value of this intangible
asset ($257 thousand) was expensed because of the uncertainties
associated with its value as a result of the Company's
substantial 1996 net loss.
F-10
(Continued)
<PAGE> 70
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(g) Income Taxes
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
Prior to December 1993, the results of the Company's operations
(including its predecessor) were included in MS Diversified's
consolidated income tax returns and income taxes were allocated
to and provided for by the Company (including its predecessor)
as if it filed separate income tax returns. MS Diversified has
agreed to hold the Company harmless from any deficiency if any
tax return filed by the Company, or any tax return filed by MS
Diversified on behalf of the Company, for any period prior to
December 1993 was not true and correct in all material respects
in accordance with all applicable tax laws then in effect.
(h) Cash Equivalents
The Company considers highly liquid investments with original
maturities of three months or less to be cash equivalents.
(i) Net Income (Loss) Per Share
Net income (loss) per share is computed by dividing net income
(loss) for the period by the weighted average number of common
shares outstanding plus common stock equivalent shares issuable
upon exercise of stock options. Stock options issued prior to
the Company's initial public offering of stock are treated as
outstanding for all periods presented.
(j) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-11
(Continued)
<PAGE> 71
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Material estimates that are particularly susceptible to
significant change in the near term relate to the determination
of the allowance for possible losses on installment contracts,
the carrying value of amounts due under securitizations and the
valuation of repossessed automobiles. The Company believes that
the allowance for possible losses on installment contracts is
adequate. While the Company uses available information to
recognize losses on installment contracts, future adjustments
to the allowance may be necessary based on changes in economic
conditions. The Company also believes that discounted cash
flows will be adequate to recover the Company's carrying value
of amounts due under securitizations and the carrying value of
repossessed automobiles. It is reasonably possible that the
expectations associated with these estimates could change in
the near term (i.e., within one year) and that the effect of
any such changes could be material to the consolidated
financial statements.
(k) Reclassifications
Certain prior period amounts have been reclassified to conform with
the 1996 presentation.
(l) Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (SFAS No. 125). SFAS No. 125
requires that an entity recognize the financial and servicing
assets it controls and the liabilities it has incurred and
derecognize financial assets when control has been surrendered
and derecognize liabilities when extinguished. Standards are
provided by this statement for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings. This statement is generally effective for transfers
and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996 and is to be
applied prospectively. The Company plans to adopt SFAS No. 125
in its 1997 consolidated financial statements.
Management of the Company believes that SFAS No. 125 will have a
material impact on its future financial statements,
particularly in those periods when the Company completes a
securitization transaction (see note 5). SFAS No. 125 will
modify the Company's gain on securitization calculation,
principally by allowing the Company
F-12
(Continued)
<PAGE> 72
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
to establish a servicing asset or liability for installment
contracts sold based on relative fair values. Subsequently, the
Company will be required to amortize its servicing asset or
liability in proportion to and over the period of net servicing
income or net servicing loss. The servicing asset or liability
will then be assessed for impairment or increased obligation
based on its fair value. Finally, the Company's retained
interest in securitizations will be measured like investments
in debt securities available-for-sale or trading and
adjustments to fair value will be reflected as a component of
stockholders' equity for available-for-sale debt securities or
as a component of net income or loss for debt securities held
for trading. The Company is not aware of any other significant
matters that might result from the adoption of SFAS No. 125.
The impact of adopting SFAS No. 125 at January 1, 1997 was to
reduce stockholders' equity by $347 to reflect the unrealized
loss on the Company's retained interest in securitizations
(including the interest differential) as a component of
stockholders' equity.
(2) Liquidity
As reflected in the accompanying 1996 consolidated financial
statements, the Company has suffered substantial losses and,
accordingly, substantial reductions in stockholders' equity. These
negative financial trends have resulted from material increases in
delinquencies and losses on owned and serviced installment
contracts. As a result, the Company is facing a severe liquidity
problem because of (i) the lack of availability of funds under the
Company's revolving credit facility (see note 7); (ii) the lack of
availability of funds under the Warehouse Facility (see note 7);
(iii) the Company's inability to complete a securitization in 1996;
and (iv) the delay of payments to the Company under the Company's
prior securitization programs (see note 5).
To address the Company's liquidity problem, the Company engaged an
investment banker to advise the Company on alternatives, formed a
board committee to assist in addressing financial issues,
renegotiated the terms of its revolving credit facility, sold $14.5
million of its installment contracts, reduced the number of its
employees, scaled back the extent of its operations and is pursuing
the merger of the Company (see note 3).
There can be no assurance that the Company's efforts to alleviate its
liquidity problems and restore its operations will be successful.
If the Company is unsuccessful in its efforts, it may be unable
to meet its obligations, which raises substantial doubt about the
Company's ability to continue as a going concern. If the Company
is unable
F-13
(Continued)
<PAGE> 73
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
to continue as a going concern and is forced to liquidate assets
to meet its obligations, the Company may not be able to recover the
recorded amounts of such assets. The Company's consolidated
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
(3) Merger Agreement
On February 7, 1997, the Company entered into an agreement and plan of
merger (the Agreement) with Search Capital Group, Inc. (Search).
The Agreement, if consummated, will result in the Company becoming
a subsidiary of Search through the mutual exchange of common stock.
Under the Agreement, each stockholder of the Company would receive
between .34 and .46 shares of Search common stock for each share of
the Company's common stock, subject to adjustment in certain
events. The exchange ratio will be determined based on the market
price of Search's common stock during a prescribed valuation period
preceding the Company's stockholder vote on the merger and an
assumed $2.00 per share value of the Company's common stock,
subject to adjustment in certain events. Among other conditions,
the Agreement is subject to the filing of certain documents with,
and approval of such documents by, the Securities and Exchange
Commission and the affirmative vote of a majority of the Company's
stockholders and Search's stockholders.
If the Agreement is terminated under certain conditions, the Company
may be obligated to pay a fee to Search of up to $700 thousand.
Further, the Agreement calls for a monthly fee of $100 thousand
payable to Search for operational assistance to be provided by
Search to the Company between February 7, 1997, and consummation of
the merger. Such operational assistance fee is to be applied
against the termination fee described above, if applicable.
(4) Installment Contracts and Amounts Due Under Securitizations
A summary of installment contracts and amounts due under securitizations
at December 31, 1995 and 1996 follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1996
--------- -------
<S> <C> <C>
Gross automobile installment contracts $ 158,461 177,655
Unearned finance charges (38,143) (47,284)
--------- -------
Net automobile installment contracts 120,318 130,371
Installment contracts sold (99,382) (44,053)
--------- -------
20,936 86,318
</TABLE>
F-14
(Continued)
<PAGE> 74
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(4), Continued
<TABLE>
<CAPTION>
December 31,
-------------------
1995 1996
------- ------
<S> <C> <C>
Retained portion of installment contracts
sold in securitizations 1,328 585
Other consumer installment contracts, net 134 69
------- ------
Installment contracts 22,398 86,972
Amounts due under securitizations 19,720 9,784
------- ------
42,118 96,756
Allowance for possible losses (1,602) (10,062)
------- ------
Installment contracts and amounts
due under securitizations, net $ 40,516 86,694
======= ======
</TABLE>
At December 31, 1996, contractual maturities of installment contracts
owned were (in thousands):
<TABLE>
<CAPTION>
Portion Other
Automobile retained of consumer
installment installment installment
contracts contracts contracts
owned sold owned Total
------------- ----------- ----------- ------
<S> <C> <C> <C> <C>
1997 $ 29,664 204 69 29,937
1998 26,152 176 - 26,328
1999 18,392 124 - 18,516
2000 9,141 61 - 9,202
2001 2,969 20 - 2,989
------------ ------ ----- ------
$ 86,318 585 69 86,972
============ ====== ===== ======
</TABLE>
It is the Company's experience that a substantial portion of the
installment contracts portfolio is either repaid or extended before
contractual maturity dates. Further, the Company periodically sells
installment contracts to investors and experiences repossessions
and losses on its installment contracts. Therefore, the above
tabulation is not to be regarded as a forecast of future cash
collections. At December 31, 1995 and 1996, the Company had $5.1
million and $8.7 million of gross amounts due under installment
contracts which had one or more payments delinquent more than 90
days.
F-15
(Continued)
<PAGE> 75
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
A summary of amounts due under securitizations at December 31, 1995 and 1996
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------
1995 1996
-------- -------
<S> <C> <C>
1996 $ 14,055 --
1997 7,667 6,188
1998 1,755 5,382
Later years 392 --
-------- -------
23,869 11,570
Less: amounts representing interest at
14.6% and 14.5%, respectively (4,149) (1,786)
-------- -------
Present value of estimated future net cash receipts $ 19,720 9,784
======== =======
</TABLE>
Amounts due under securitizations represent the present value of
estimated future cash flows for the interest differential on the
installment contracts sold, net of surety premiums and other costs.
A summary of transactions affecting amounts due under securitizations
follows (in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------
1994 1995 1996
------- ------ ------
<S> <C> <C> <C>
Balance at beginning of year $ 4,943 6,272 19,720
Cash received (2,490) (2,815) (1,571)
Earnings recognized 1,434 422 68
Recognition of amounts due under:
1994 securitization 3,684 -- --
1995 securitization -- 17,513 --
Repurchase of installment contracts sold
in 1992 and 1993 securitizations (1,757) -- --
Advances on delinquent payments -- (1,729) (4,967)
Impairment writedown -- -- (3,000)
Other, net 458 57 (466)
------- ------ ------
Balance at end of year $ 6,272 19,720 9,784
======= ====== ======
</TABLE>
F-16
(Continued)
<PAGE> 76
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Transactions in the allowance for possible losses on installment
contracts follow (in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------
1994 1995 1996
------- ------ -------
<S> <C> <C> <C>
Balance at beginning of year $ 1,211 1,340 1,602
Charge-offs and repossession expenses (2,288) (6,355) (21,336)
Recoveries, principally insurance
proceeds, net of deductibles of $330,
$1,195 and $828 (see note 8) 1,732 4,607 9,693
------ ------ -------
Net charge-offs and repossession
expenses (556) (1,748) (11,643)
Provision for recourse obligation on
1995 securitization -- 1,184 --
Provision for possible losses on
installment contracts 685 826 20,103
------ ------ -------
Balance at end of year $ 1,340 1,602 10,062
====== ====== =======
</TABLE>
(5) Installment Contract Sales and Securitizations
The Company periodically sells to investors automobile installment
contracts purchased from automobile dealers and assigned to the
Company. During 1994 and 1995, $35 million and $90 million,
respectively, of installment contracts were sold in transactions
whereby the installment contracts were transferred to trusts in
which beneficial ownership interests were purchased by investors in
the form of trust certificates. The Company purchased the
subordinated portion of the trust certificates in the 1994
transaction. The Company remains contingently liable on the
installment contracts sold, principally for losses attributable to
default and prepayment risks. Under SFAS No. 77, the installment
contracts purchased by outside investors are accounted for as sales
and the corresponding net gains are recognized in the Company's
consolidated financial statements. The Company's risk of accounting
loss does not exceed amounts recorded as assets in the consolidated
balance sheets as a result of the Company's securitization
transactions.
If delinquencies on installment contracts sold in securitizations
exceed certain predefined levels, the funding of cash collateral
accounts that are held in trust for the benefit of the senior
certificate holders is increased. The increase in the cash
collateral accounts is funded with cash flows from the securitized
installment contracts that otherwise would
F-17
(Continued)
<PAGE> 77
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
be forwarded to the Company. Further, the Company can be replaced
as servicer by the issuer of the Company's financial guaranty
insurance policy (see below). During 1996 these restrictive
covenants were exceeded on the Company's 1993, 1994, and 1995
securitizations and the funding of the respective cash collateral
accounts was increased as described above. At December 31, 1996,
the cash collateral accounts for the 1994 and 1995 securitizations
remained underfunded by approximately $10.5 million. This
underfunding, which decreases as the principal balance of the
installment contracts securitized decreases, will continue to defer
cash available to the Company from the securitizations until
certain reduced levels of delinquencies are achieved for specified
time periods or required cash has been provided to fully fund the
cash collateral accounts. Additionally, the Company has not been
notified, nor does management expect for the Company to be
notified, of any request for the Company's replacement as servicer
on the installment contracts sold.
In March and May of 1995, the Company entered into $80 million of U.
S. Treasury interest rate futures that hedged the securitization
which was consummated in September, 1995. Accordingly, the
accumulated loss on the contracts of $1.25 million was paid at
settlement of the contracts and included in the measurement of the
gain on the securitization transaction.
The Company obtains a financial guaranty insurance policy for the
benefit of the senior certificate holders from an unrelated party.
Distributions under the subordinated certificates are pledged to
the issuer of the financial guaranty insurance policy and the stock
of MARCO is pledged on a junior-lien basis to further secure the
financial guaranty insurance policy.
At December 31, 1995 and 1996, the Company was servicing for third
parties installment contracts totaling approximately $99.4 million
and $44.1 million, respectively. Of these amounts, $98.8 million
and $44.0 million, respectively, represented the aggregate
uncollected principal balance of installment contracts sold in
securitizations. The Company remains contingently liable for loans
serviced for third parties. The Company services these installment
contracts and receives a service fee based on a percent of the
outstanding principal balance.
At December 31, 1995 and 1996, the Company held approximately $1.3
million and $585 thousand of subordinated trust certificates
arising from prior securitizations. These certificates are
classified as installment contracts and amounts due under
securitiza-tions in the accompanying balance sheets and are carried
at amortized cost as
F-18
(Continued)
<PAGE> 78
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
the Company has the positive intent and ability to hold these
securities to maturity. These securities are not due at a single
maturity date because principal repayments are dependent on the
cash flows of the underlying installment contracts. The following
table reflects the carrying value and estimated fair value of these
securities (in thousands):
<TABLE>
<CAPTION>
Carrying Unrealized Unrealized Estimated
value gains losses fair value
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1995 $ 1,328 - (75) 1,253
=========== ======= ===== ======
December 31, 1996 $ 585 - (19) 566
=========== ======= ===== ======
</TABLE>
Fair values have been estimated using anticipated cash flows discounted
at rates a buyer of comparable certificates may require.
(6) Property and Equipment
A summary of property and equipment at December 31, 1995 and 1996
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1995 1996
------- ------
<S> <C> <C>
Leasehold improvements $ 92 94
Furniture and fixtures 1,724 2,448
------ ------
1,816 2,542
Less accumulated depreciation (605) (981)
------ ------
Property and equipment, net $ 1,211 1,561
====== ======
</TABLE>
(7) Notes Payable
Notes payable consist of borrowings under a revolving credit facility
with several commercial banks. This agreement, as amended December
16, 1996, provides for borrowings of up to $90 million; however,
the agreement requires a mandatory reduction of the total facility
to $65 million effective January 31, 1997. The borrowing base for
the commitment is generally equal to 85% of the net amount of
eligible installment contracts, as defined. At December 31, 1996,
the Company was over-advanced approximately $16.5 million based on
the borrowing base formula.
F-19
(Continued)
<PAGE> 79
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Advances under the revolving credit facility are secured by all
assets of the Company. The final maturity of the facility, as
amended December 16, 1996, is April 30, 1997. As described below,
the revolving credit facility is expected to be amended further.
In consideration of the pending merger described in note 3 and
noncompliance with certain provisions of the revolving credit
facility occurring subsequent to December 31, 1996, the Company and
the banks involved entered into a letter agreement and consent
dated February 19, 1997 that is intended to effectively amend the
revolving credit facility described above. Under this agreement,
the maturity of the revolving credit facility is extended to the
earlier of May 15, 1997, the merger closing date or repayment of
amounts due under the facility. Further, the aggregate commitment
is reduced from $90 million to $75 million. The Company can request
advances under the facility as long as the aggregate advances do
not exceed $75 million and the over-advance (as described above)
does not exceed $20 million. Additionally, the interest rate on the
facility is reduced to the prime rate plus 100 basis points (9.25%
on February 19, 1997).
The agreement also provides for certain amendments to the facility to
be entered into on the merger closing. These amendments are
expected to provide for the refinancing of outstanding advances, a
$25 million mandatory reduction of the commitment plus a
proportionate reduction of the over-advance six months after the
effective date of the merger, interest at the prime rate plus 100
basis points (1%), an additional fee to the banks of $350 thousand,
and an extended maturity to the earlier of the first anniversary of
the merger closing date, repayment of the then outstanding advances
or any date that the repayment of the advances is accelerated under
the agreement.
Under the agreement in effect at December 31, 1996, interest was payable
at the prime rate plus 300 basis points (11.25% at December 31,
1996). This rate of interest constitutes the default rate as
defined in the agreement and is the contractual rate of interest
from November 22, 1996 and continuing until the aggregate advances
do not exceed $50 million and the over-advance does not exceed $5
million. Previously, the rate of interest was substantially lower
and varied under a series of formulas based on the prime rate or
LIBOR. The higher rate of interest was imposed under the revolving
credit facility based on certain events of default that occurred in
the fourth quarter of 1996, principally because of the Company's
increasing delinquencies and losses on its owned and serviced
installment contracts. The weighted average interest rate under the
revolving credit facility was 8.1%, 8.9% and 10.2%, respectively,
during 1994, 1995 and 1996.
F-20
(Continued)
<PAGE> 80
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Company was required to pay a restructuring fee of 625 basis points
(.625%) on the full amount of the commitment in three equal
installments on the last business day of November, 1996, December,
1996 and January, 1997. The agreement contains certain restrictive
covenants relative to delinquencies, capital expenditures,
indebtedness, dividends and certain other items. Under these
covenants the Company is presently unable to pay dividends on its
common stock and does not expect to be able to pay dividends in the
near future. At December 31, 1996, management believes the Company
was in compliance with these restrictive covenants.
Also, prior to the fourth quarter of 1996, the Company had available a
$50 million "warehouse" revolving credit securitization facility
(the Warehouse Facility). The Warehouse Facility allowed the
Company to transfer pools of installment contracts for a term
securitization. Accordingly, the Company was required to repurchase
installment contracts that had been in the Warehouse Facility for
more than twelve months. Transfers of installment contracts under
the Warehouse Facility were accounted for as financing
transactions. Advances under the Warehouse Facility were secured by
the transferred installment contracts and interest was computed
based on the 30-day LIBOR rate. The initial commitment was through
April 1996, but was automatically extended monthly with a final
termination date of May 5, 2000, unless a party to the agreement
objected to the extension or the agreement was otherwise
effectively canceled. In the fourth quarter of 1996, the Company
was informed by a party to the Warehouse Facility that this
financing source was no longer available to the Company as a result
of certain events of default occurring on the Company's prior
securitization transactions.
(8) Related Party Transactions
The Company had agreements with MS Diversified for human resources and
data processing services. The Company reimbursed MS Diversified
generally on a fee basis determined annually, and such fees were
intended to approximate the cost of obtaining comparable services
from unaffiliated parties. Subsequent to December 31, 1994, the
Company initiated its own human resources and data processing
departments and discontinued these agreements with MS Diversified.
The Company does continue to share certain computer hardware with
MS Diversified. Company management believes that expenses reflected
in the consolidated statements of operations under these agreements
with MS Diversified are not materially different from the costs
that would have been incurred by the Company if such services had
been provided by an unrelated party. The Company reimbursed MS
Diversified approximately $381 thousand in 1994, $170 thousand in
1995 and $268 thousand in 1996, for these services.
F-21
(Continued)
<PAGE> 81
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Direct expenses incurred by MS Diversified on behalf of the Company are
allocated to the Company based on the actual costs incurred. MS
Diversified billed the Company $1.9 million and $140 thousand for
costs incurred during 1994 and 1995, respectively. There were no
expenses incurred by MS Diversified on behalf of the Company in
1996. The Company had a payable balance to MS Diversified of $1
thousand at December 31, 1994.
The Company leases office space from MS Diversified pursuant to a
sublease entered into in December 1993 and expiring in December
1997. In 1994, 1995 and 1996, the Company paid MS Diversified an
aggregate of $159 thousand, $170 thousand and $174 thousand,
respectively, for this sublease. The Company has the option to
renew the sublease for up to three additional terms of five years
each, at prescribed increasing rates.
For installment contracts originated prior to July 1, 1996, MS Casualty
insured the Company against loss on retail automobile sales
contracts, subject to a limitation of $7 thousand per vehicle.
Additionally, the total liability of MS Casualty for all contracts
insured during a policy coverage year could not exceed the product
of $600 and the number of automobile contracts written during that
year. During 1996, the Company recovered from MS Casualty
substantially all amounts due under the insurance arrangement.
Additionally, effective July 1, 1996, the Company discontinued the
practice of insuring its installment contracts with MS Casualty and
began purchasing such installment contracts at a discount. Claim
payments received by the Company from MS Casualty under this
insurance arrangement aggregated $1.3 million, $4.2 million and
$9.3 million in 1994, 1995 and 1996, respectively.
While the insurance arrangement described above did not require the
Company to apply a deductible on each claim, the Company
periodically elected to apply a deductible to selected claims and
absorb certain losses on the installment contracts. Company
management believes that this process altered the timing of
charge-offs on installment contracts, but did not alter the
ultimate amount of losses to be incurred by the Company. Had the
Company filed all claims for the full amount of the loss, amounts
available from MS Casualty under the insurance arrangement would
have been reduced and the Company's allowance for possible losses
on installment contracts would have been greater at December 31,
1995; however, management believes that the Company's 1995 and 1996
provision for possible losses on installment contracts would have
been unchanged.
F-22
(Continued)
<PAGE> 82
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Premiums for such insurance coverage were based on a percentage of the
amount financed and were either paid by the automobile dealers at
the time the installment contracts were purchased by the Company or
withheld from the loan proceeds to the dealers and paid by the
Company. Premium payments to MS Casualty by either the Company or
the dealers for such insurance coverage aggregated $4.3 million,
$5.7 million and $4.4 million in 1994, 1995 and 1996, respectively.
At December 31, 1995, the Company had a payable balance of $394
thousand to MS Casualty for payment of such premiums. At December
31, 1995, the Company had a receivable balance from MS Casualty of
$1.0 million for losses insured under this arrangement. The Company
shared in the profitability of this insurance arrangement with MS
Casualty based on a contractual determination of profitability
consistent with standard insurance industry practices. The Company
recorded experience refund income on the MS Casualty insurance
contract of $900 thousand in 1994. No experience refund was earned
in 1995 or 1996.
MS Life Insurance Company, also a subsidiary of MS Diversified,
insures the borrowers against loss under credit life insurance and
accident and health insurance. MS Dealer Service Corporation and
United Service Protection Corporation, also related companies,
insure the borrowers against loss under warranty extension
insurance. The Company is named as loss payee on the various
insurance policies. Premiums for such insurance are financed in the
retail sales contract. During 1994, 1995 and 1996, premiums
totaling $7.0 million, $6.7 million and $7.5 million, respectively,
for such insurance were financed in the retail sales contracts.
During 1994, 1995 and 1996, the Company received $263 thousand,
$327 thousand and $506 thousand of proceeds under the credit life
and accident and health insurance policies. At December 31, 1995,
the Company had payable balances to these companies of $138
thousand. At December 31, 1996, the Company had a receivable
balance from these companies of $82 thousand.
Through May 1995 MS Byrider Sales, Inc., a related company, reimbursed
the Company for its share of certain officers' salaries. In May
1995, in contemplation of the Company's initial public offering of
stock in July 1995, the officers resigned their positions at MS
Byrider Sales, Inc. The Company purchased 350 shares of 7%
cumulative preferred stock of MS Auto Credit, Inc., a 26% voting
interest, for $500 thousand on December 28, 1994. MS Auto Credit,
Inc. is a subsidiary of MS Byrider Sales, Inc. The preferred shares
had a liquidation preference of $500 thousand, but otherwise had
the same rights and benefits as the common shares of MS Auto
Credit, Inc. Accordingly, this investment was accounted for using
the equity method of
F-23
(Continued)
<PAGE> 83
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
accounting and is included in other assets in the December 31,
1995 balance sheet. During 1996, the Company sold its preferred
stock investment in MS Auto Credit, Inc. to MS Diversified for $500
thousand cash plus the value of accrued dividends.
The Company also had a $500 thousand line of credit with MS Auto
Credit, Inc. At December 31, 1995, no advances were outstanding
under this credit agreement. This line of credit matured in 1996.
In 1994, 1995 and 1996, the Company purchased an aggregate of $6.7
million, $6.9 million and $3.4 million, respectively, in
installment contracts from two dealers partially owned by a
director of the Company. In 1994, 1995 and 1996, the Company
purchased an aggregate of $24.4 million, $21.1 million and $17.1
million of installment contracts from affiliates of stockholders of
MS Diversified.
(9) Income Taxes
The current and deferred components of income tax expense (benefit)
follow (in thousands):
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
1994:
Federal $ 2,208 62 2,270
State 344 8 352
------ ----- -----
$ 2,552 70 2,622
====== ===== =====
1995:
Federal $ 3,217 161 3,378
State 498 25 523
------ ----- -----
$ 3,715 186 3,901
====== ===== =====
1996:
Federal $(5,433) 885 (4,548)
State (224) 137 (87)
------ ----- -----
$(5,657) 1,022 (4,635)
====== ===== =====
</TABLE>
Income taxes recovered by the Company as a result of the 1996 operating
loss are to be used by the Company to reduce advances under the
revolving credit facility described in note 7. Income tax expense
(benefit) differs from the amount computed by applying the Federal
income tax rate of 35% to income before income taxes as a result of
the following (in thousands):
F-24
(Continued)
<PAGE> 84
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(9), Continued
<TABLE>
<CAPTION>
1994 1995 1996
------- ------ ------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $ 2,453 3,641 (9,327)
Increase (reduction) in income taxes resulting from:
State income taxes, net of Federal benefit 229 340 (57)
Nondeductible expenses 21 22 140
Change in valuation allowance for
deferred tax assets -- -- 5,427
Other, net (81) (102) (818)
------ ------ ------
Income tax expense (benefit) $ 2,622 3,901 (4,635)
====== ====== ======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as
of December 31, 1995 and 1996 are presented below (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- ------
<S> <C> <C>
Deferred tax assets:
Allowance for possible losses on
installment contracts $ 598 1,209
Valuation allowance on repossessed automobiles -- 1,044
Accrued compensated absences 32 50
Unearned commissions 632 368
Deferred compensation 36 3
Accrual for litigation settlements -- 198
Net operating loss carryforward -- 3,971
Alternative minimum tax credit carryforward -- 303
------ ------
Total gross deferred tax assets 1,298 7,146
Valuation allowance -- 5,427
------ ------
Net deferred tax asset 1,298 1,719
------ ------
Deferred tax liabilities:
Installment contracts and amounts due
under securitizations (247) (1,190)
Unearned finance charges (11) (365)
Property and equipment (18) (134)
Other -- (30)
------ ------
Total gross deferred tax liabilities (276) (1,719)
------ ------
Net deferred tax asset $ 1,022 --
====== ======
</TABLE>
F-25
(Continued)
<PAGE> 85
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those
temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this
assessment. Based upon the level of taxable loss in 1996 and
uncertainties for future taxable income over the periods which the
deferred tax assets are deductible, management believes it is more
likely than not that the Company will not realize the benefits of
these deductible differences and has fully offset the net deferred
tax asset with a valuation allowance. Future changes in the
valuation allowance will be recorded as a component of net income
or loss on the statement of operations.
During 1996, the Internal Revenue Service commenced and completed a
review of the Company's 1994 Federal tax return. The results of
this examination resulted in an additional assessment of $94
thousand, including interest, which was accrued by the Company in
1996.
(10) Commitments
The Company leases office space under operating lease agreements with
MS Diversified and unrelated parties which expire, subject to
renewal options, from 1996 to 1998.
The following is a summary of future minimum lease payments under the
leases (in thousands):
<TABLE>
<S> <C>
1997 $ 250
1998 36
1999 4
--------
$ 290
========
</TABLE>
Rent expense for office space under lease agreements totaled $296
thousand for 1994, $377 thousand in 1995 and $402 thousand for
1996.
F-26
(Continued)
<PAGE> 86
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(11) Employee Benefit Plans
During 1994, the Company adopted a 401(k) plan for substantially all of
its employees. Under the Company's 401(k) plan, employees may elect
to contribute from 2% to 16% of monthly base pay, with the Company
providing matching contributions of one-half of employee
contributions up to 6% of monthly base pay. Total expense under the
plan amounted to $40 thousand in 1994, $75 thousand in 1995 and
$111 thousand in 1996.
The Board of Directors of the Company has adopted an employees' equity
incentive plan (the Employees' Plan) under which the Company has
reserved 1,177,776 shares of common stock for issuance. Stock
options, restricted stock and performance awards or any combination
thereof may be granted to officers, employees and consultants of
the Company. The Compensation Committee of the Board of Directors
in its sole discretion determines the recipients and the amounts of
all awards. Options granted vest over a five year period. Each
option granted expires ten years from the date of grant. The option
exercise price must be equal to the fair value of the Company's
common stock on the date of grant.
In May 1995, the Board of Directors of the Company adopted a
Non-employee Directors' Stock Option Plan (the Directors' Plan).
Under the Directors' Plan, non-employee directors may be granted
options to purchase common stock. An aggregate of 50,000 shares of
common stock are reserved for issuance under the Directors' Plan.
The Directors' Plan provides for the automatic grant of an option
to purchase 5,000 shares of common stock to each director at the
commencement of his or her initial term of service on the Board,
exercisable at the rate of 1,000 shares on each of the first five
anniversaries of the initial date of grant. Each option granted
expires ten years from the date of grant. The option exercise price
must be equal to the fair value of the Company's common stock on
the date of grant.
F-27
(Continued)
<PAGE> 87
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The following table summarizes the Company's option activity:
<TABLE>
<CAPTION>
Employees' Plan Directors' Plan
----------------------- ----------------------
Average price Average price
per share Shares per share Shares
------------- ------- ------------- ------
<S> <C> <C> <C> <C>
Granted during 1994 and outstanding
at December 31, 1994 $ 2.50 586,664 -- --
Granted during 1995 10.05 396,120 $ 11.33 35,000
--------- ------
Outstanding at December 31, 1995 5.54 982,784 11.33 35,000
Granted during 1996 5.25 20,000 5.25 10,000
Expired during 1996 -- -- 12.00 (5,000)
--------- ------
Outstanding at December 31, 1996 $ 5.53 1,002,784 $ 9.73 40,000
======== ========= ======== ======
Shares exercisable at
December 31, 1996 $ 4.40 313,890 $ 11.22 6,000
======== ========= ======== ======
</TABLE>
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS No. 123). SFAS No. 123 provides
accounting and reporting standards for stock-based employee
compensation plans and also applies to transactions in which the
Company acquires goods and services from nonemployees in exchange
for the Company's equity instruments. SFAS No. 123 defines a fair
value based method of accounting for an employee stock option or
similar equity instrument and encourages all entities to adopt that
method of accounting for all employee stock compensation plans.
Entities electing to remain with the accounting treatment outlined in
APB Opinion No. 25, "Accounting for Stock Issued to Employees" are
required to make pro forma disclosures of net income and net income
per share, as if the fair value based method had been adopted. The
Company accounts for its stock based compensation plans under APB
Opinion No. 25, under which no compensation cost has been
recognized. Had compensation costs for the plans been determined
consistent with SFAS No. 123, the Company's net income (loss) and
net income (loss) per share would have been adjusted to the
following pro forma amounts for options issued during the
respective year shown below (in thousands, except per share data):
F-28
(Continued)
<PAGE> 88
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(11), Continued
1995 1996
-------- --------
Net income (loss):
As reported $ 6,501 (22,014)
Pro forma 6,091 (22,938)
Net income (loss) per share:
As reported .65 (2.11)
Pro forma .61 (2.20)
======== ========
The fair value of each option grant is estimated on the date of grant
using an option pricing model with the following weighted average
assumptions used for grants in 1995 and 1996: risk-free investment
rate of 6.74% in 1995 and 6.28% in 1996, no expected dividends,
expected life of ten years, and expected volatility of 60% in both
years.
In May 1995, the stockholders of the Company adopted a Stock Purchase
Plan (the Stock Purchase Plan) which covers 200,000 shares of
common stock. Beginning in 1996, eligible employees can purchase
common stock at a discount by participating in quarterly Stock
Purchase Plan offerings in which payroll deductions may be used to
purchase shares of common stock. Common stock issuable under the
Stock Purchase Plan must be shares reacquired by the Company.
(12) Business and Credit Concentrations
During the normal conduct of its operations, the Company engages in the
extension of credit to automobile consumers through dealers. The
risks associated with these credits include economic, competitive
and other risks. A substantial portion of the risk is limited due
to the number of customers and their dispersion throughout eleven
principally southeastern states; however, operations are
concentrated in one industry. In 1995, approximately 33%, 23% and
19% of the amount of installment contracts originated were
originated in Texas, Mississippi and North Carolina, respectively.
In 1996, approximately 36%, 16% and 20% of the amount of
installment contracts originated were originated in Texas,
Mississippi and North Carolina, respectively. No other state
represented more than 10% of the total originations in 1995 and
1996. Management believes that the securitization of the
installment contracts does not change the nature of credit risk
concentration.
F-29
(Continued)
<PAGE> 89
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(13) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires that the Company
disclose estimated fair values for its financial instruments.
Because no market exists for a significant portion of the financial
instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore,
cannot be determined with precision. Changes in assumptions
significantly affect the estimates and, as such, the derived fair
value may not be indicative of the value negotiated in an actual
sale and may not be comparable to that reported by other companies.
In addition, the fair value estimates are based on existing financial
instruments without attempting to estimate the value of anticipated
business and the value of assets and liabilities that are not
considered financial instruments. In addition, the tax
ramifications related to the realization of the unrealized gains
and losses can have a significant effect on fair value estimates
and have not been considered in the estimates. Fair value
estimates, methods and assumptions for significant financial
instruments are set forth below (in thousands):
<TABLE>
<CAPTION>
Carrying Estimated
value fair value
------- ----------
<S> <C> <C>
December 31, 1995
Installment contracts $22,398 23,966
====== ======
Amounts due under securitizations $19,720 20,363
====== ======
December 31, 1996
Installment contracts $86,972 80,152
====== ======
Amounts due under securitizations $ 9,784 9,456
====== ======
</TABLE>
Installment Contracts
The fair values are estimated for loans in bankruptcy status and
the retained portion of installment contracts sold in
securitizations by discounting projected gross cash flows using
an interest rate that is commensurate with the risks involved
and consistent with rates a non-affiliated purchaser may
require. The fair values for performing loans and delinquent
loans are estimated as a discounted value of the amount due.
The discount factors for delinquent loans are based on the
number of payments delinquent.
F-30
(Continued)
<PAGE> 90
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Amounts Due Under Securitizations
The fair values are estimated for amounts due under securitization
by discounting projected gross cash flows using an interest
rate that is commensurate with the risks involved and
consistent with rates a non-affiliated purchaser may require.
(14) Contingencies
The Company is a defendant in litigation in which the plaintiffs
contend that the Company's practice of selling and financing of
ancillary products is unlawful. The plaintiffs also contend that
the Company required the plaintiffs to purchase one or more
ancillary products as a condition of purchasing the plaintiffs'
installment contracts. The plaintiffs seek unspecified actual,
statutory and exemplary damages, cancellation of finance charges
under their installment contract, recovery of finance charges
previously paid, prejudgment and post judgment interest and
attorneys' fees. Although the Company denies any liability or fault
with respect to these allegations, the Company agreed to a
tentative net cash settlement of $375 thousand in January 1997, if
such settlement is paid by July 1, 1997 ($425 thousand if paid
afterwards). During 1996, the Company accrued $375 thousand as a
liability based on the tentative settlement agreement. Management
anticipates that the settlement will be finalized under these terms
prior to July 1, 1997.
On January 15, 1997, an action was commenced against the Company to
recover certain fees pursuant to the Warehouse Facility discussed
in note 7. The plaintiff seeks to recover $438 thousand, plus
interest costs, attorneys fees and other costs incurred by the
plaintiff as a result of the Company's alleged breach of contract.
In the opinion of management, this litigation will not have a
material effect on the Company's results of operations or financial
condition.
In addition, in the normal course of business, the Company is subject
to various other pending and threatened litigation. In the opinion
of management, the ultimate outcome of the matters will not have a
material impact on the Company's financial statements.
F-31
<PAGE> 91
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
--------- -------------
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.
10.2* -- 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.
<PAGE> 92
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.
<PAGE> 93
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.
21** -- List of material subsidiaries.
23+ -- Independent Auditors' Consent
- --------------------
* 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 10K dated March 27, 1996.
+ Filed herewith
<PAGE> 1
EXHIBIT 11
MS FINANCIAL, INC.
COMPUTATION OF PER SHARE INCOME (LOSS)
(in thousands except per share data)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1994 December 31, 1995 December 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Weighted Average Shares:
Common Stock Outstanding 8,800 9,685 10,433
Option Shares Outstanding 978 333(1) 0(1)
Shares assumed repurchased
using treasury stock
method (446) (86)(1) 0(1)
-------- -------- --------
Weighted Average Shares Outstanding: 9,332 9,932 10,433
======== ======== ========
Net Income (Loss) $ 4,385 $ 6,501 $(22,014)
======== ======== ========
Computation of net income (loss) per share:
Net income (loss) divided
by weighted average
shares outstanding $ 0.47 $ 0.65 $ (2.11)
======== ======== ========
</TABLE>
(1) Excludes antidilutive options
<PAGE> 1
EXHIBIT 23
Independent Auditors' Consent
The Board of Directors
MS Financial, Inc.:
We consent to incorporation by reference in the registration statement (No.
33-306373) on Form S-8 of MS Financial, Inc. of our report dated February 24,
1997 relating to the consolidated balance sheets of MS Financial, Inc. and
subsidiary as of December 31, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1996, which report appears in
the December 31, 1996 annual report on Form 10-K of MS Financial, Inc.
Our report dated February 24, 1997, contains an explanatory paragraph that
states that MS Financial, Inc.'s material increases in delinquencies and losses
on owned and serviced installment contracts, substantial net loss in 1996 and
reduced availability of financing raise substantial doubt about the entity's
ability to continue as a going concern. The consolidated financial statements
do not include any adjustments that might result from the outcome of that
uncertainty.
KPMG Peat Marwick LLP
Jackson, Mississippi
June 23, 1997
