SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number [ 0-26474 ]
MS FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 64-0835847
(State or other jurisdiction of ( I.R.S. Employer
incorporation or organization) Identification Number)
715 South Pear Orchard Road
Suite 300
Ridgeland, Mississippi 39157
(Address of principal executive offices) (Zip Code)
(601) 978-6737
(Registrant's telephone number
including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding twelve months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
Yes X No
As of May 1, 1997, the Registrant had 10,431,010 shares of common
stock, par value $.001 per share, outstanding.
<PAGE>
MS FINANCIAL, INC.
FORM 10-Q FOR THREE MONTHS ENDED MARCH 31, 1997
INDEX
Page
PART I - FINANCIAL INFORMATION . . . . . . . . . . . . . . . . 1
Item 1. Condensed Consolidated Financial Statements . 1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . 17
Item 1. Legal Proceedings . . . . . . . . . . . . . 17
Item 2. Changes in Securities . . . . . . . . . . . 18
Item 3. Defaults upon Senior Securities . . . . . . 18
Item 4. Submission of Matters to a Vote of
Securityholders. . . . . . . . . . . . .. . 18
Item 5. Other Information . . . . . . . . . . . . . 18
Item 6. Exhibits and Reports on Form 8-K. . . . . . 18
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 19
<PAGE>
PART 1 - FINANCIAL INFORMATION
<TABLE>
MS FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
December 31, 1996 and March 31, 1997
(in thousands, except share data)
<CAPTION>
ASSETS
December 31, March 31,
1996 1997
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 1,454 $ 4,296
Installment contracts 86,972 72,803
Amounts due under securitizations 9,784 7,580
Allowance for possible losses (10,062) (6,364)
Installment contracts and amounts
due under securitizations, net 86,694 74,019
Property and equipment, net 1,561 1,497
Repossessed automobiles, net of valuation
allowance of $2,800 and $2,500 2,933 3,048
Income taxes receivable 6,234 5,636
Other assets 2,559 2,519
Total assets $ 101,435 $ 91,015
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 75,813 $ 71,442
Collections due investors 27 -----
Dealer reserve and holdback accounts 222 171
Unearned commissions 987 469
Accounts payable and accrued expenses 2,632 1,770
Total liabilities 79,681 73,852
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 ----- 450
Accumulated deficit (3,641) (8,684)
24,030 19,437
Treasury stock, 371,610 and 370,074
shares of common, at cost (2,276) (2,274)
Total stockholders' equity 21,754 17,163
Commitments and contingencies
$ 101,435 $ 91,015
</TABLE>
<PAGE>
<TABLE>
MS FINANCIAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Month Periods ended March 31, 1996 and 1997
(in thousands, except per share data)
<CAPTION>
Three Months Ended
March 31, March 31,
1996 1997
(Unaudited) (Unaudited)
<S> <C> <C>
Interest and fee income on installment
contracts and securitizations $ 1,645 $ 4,440
Other interest income 18 13
Interest expense ( 373) (2,208)
Net interest income before provision
for possible losses 1,290 2,245
Provision for possible losses (250) (4,342)
Net interest income (loss) 1,040 (2,097)
Other income:
Insurance commissions 361 81
Service fee income 864 371
Other income 257 22
Total other income 1,482 474
Operating expenses:
Salaries and employee benefits 1,598 1,447
Loss on sale of installment contracts ----- 39
Other operating expenses 1,500 1,933
Total operating expenses 3,098 3,419
Loss before income taxes (576) (5,042)
Income tax benefit (216) -----
Net loss $ (360) $ (5,042)
Net loss per share $ (0.03) $ (0.48)
Average shares and common share equivalents
outstanding 10,452 10,430
</TABLE>
<PAGE>
<PAGE>
<TABLE>
MS FINANCIAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Month Periods ended March 31, 1996 and 1997
(in thousands)
<CAPTION>
Three Months Ended
March 31, March 31,
1996 1997
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (360) $ (5,042)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Provision for possible losses on
installment contracts 250 4,342
Depreciation and amortization 98 105
Loss on sale of installment contracts ----- 39
Changes in operating assets and
liabilities, net 849 (986)
Net cash provided by (used by)
operating activities 837 (1,542)
Cash flows from investing activities:
Installment contracts originated (31,663) (1,577)
Installment contracts repaid, including
repossession proceeds 1,342 10,437
Repayment of amounts due under
securitizations 180 -----
Proceeds from sale of installment contracts ----- 728
Repurchase of installment contracts
sold in 1993 securitization ----- (794)
Capital expenditures (195) (40)
Net cash provided by (used by)
investing activities (30,336) 8,754
Cash flows from financing activities:
Proceeds from notes payable 26,500 -----
Repayments of notes payable ----- (4,371)
Purchase of treasury stock (1,225) ------
Proceeds from sale of treasury stock ----- 1
Net change in pending advances under
notes payable 3,462 ------
Net cash provided by (used by)
financing activities 28,737 (4,370)
Net increase (decrease) in cash
and cash equivalents (762) 2,842
Cash and cash equivalents, beginning of period 888 1,454
Cash and cash equivalents, end of period $ 126 $ 4,296
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 114 $ 2,115
Income taxes $ 137 $ 89
Noncash investing activity:
Repossession of automobiles $ 7,862 $ 11,742
</TABLE>
<PAGE>
MS FINANCIAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED MARCH 31, 1997
Note 1: Basis of Presentation
The interim financial statements have been prepared by MS
Financial, Inc. and Subsidiary (the "Company") pursuant to the rules
and regulations of the Securities and Exchange Commission applicable
to quarterly reports on Form 10-Q. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. These
financial statements should be read in conjunction with the audited
consolidated financial statements and related notes and schedules
included in the Company's 1996 Form 10-K.
The results for the interim periods are not necessarily indicative
of the results of operations that may be expected for the fiscal year.
In the opinion of management, the information furnished reflects all
adjustments (which are of a normal recurring nature and those
necessary for the adoption of new accounting pronouncements) which are
necessary for a fair presentation of the Company's financial position,
results of operations and cash flows for the periods presented.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. All significant intercompany
accounts and transactions have been eliminated.
<PAGE>
MS FINANCIAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2: Installment Contracts and Amounts Due Under Securitizations
The following table summarizes installment contracts and amounts
due under securitizations (in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
(Unaudited)
<S> <C> <C>
Gross automobile installment contracts $177,655 $142,005
Unearned finance charges (47,284) (37,039)
Net automobile installment contracts 130,371 104,966
Installment contracts sold (44,053) (32,585)
86,318 72,381
Retained portion of installment contracts
sold in securitizations 585 356
Other consumer installment contracts, net 69 66
Installment contracts 86,972 72,803
Amounts due under securitizations 9,784 7,580
96,756 80,383
Allowance for possible losses (10,062) (6,364)
Installment contracts and amounts
due under securitizations, net $86,694 $74,019
</TABLE>
<PAGE>
Note 3: Rollforward of allowance for possible losses
Transactions in the allowance for possible losses on installment
contracts follow (in thousands):
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Balance at January 1 $ 1,602 $ 10,062
Charge-offs and repossession expenses (2,920) (9,176)
Recoveries 2,490 1,136
Net charge-offs and repossession
expenses (430) (8,040)
Provision for possible losses on
installment contracts 250 4,342
Balance at March 31 $ 1,422 $ 6,364
</TABLE>
Note 4: FASB Statement No. 125
FASB Statement No. 125 was issued in June 1996. This statement
impacts the accounting for transfers of and servicing of financial
assets which includes any securitization program the Company completes
after the statement's effective date of January 1, 1997. The Company's
financial statements at March 31, 1997 reflect an increase to
stockholders' equity of $450 thousand as a result of adjusting the
Company's retained portion of installment contracts sold in
securitizations and amounts due under securitizations to estimated
fair value as required by FASB Statement No. 125.
<PAGE>
Note 5: Liquidity and Merger Agreement
As previously reported during 1996, the Company suffered
substantial losses and, accordingly, substantial reductions in
stockholders' equity caused by material increases in delinquencies and
losses on owned and serviced installment contracts. On February 7,
1997, the Company executed a Merger Agreement with Search Capital
Group, Inc. ("Search"), which, if consummated, will result in the
Company becoming a wholly-owned subsidiary of Search (the "Merger"),
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 loan sales and cease operating as a going
concern, unless alternative financing sources become available to the
Company.
On March 17, 1997, the Company and the lenders entered into a
Second Amendment to the Fourth Amended and Restated Loan Agreement
which provided that the Company's obligations will be payable in full
on the earlier of May 15, 1997, the facility Termination Date or the
closing date of the Merger. The Company and its lenders are
currently negotiating to extend the May 15 date to June 30.
Note 6: Contingencies
In 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 require the Company to pay $400,000
prior to July 1, 1997. Another defendant in the case has agreed to
pay $25,000 of this $400,000.
On January 15, 1997, the Company was named as a defendant in a
lawsuit filed by Telluride Funding Corp. in the New York State Court.
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 Declaratory
Judgement action in Mississippi State Court requesting a determination
of the parties' rights and obligations under the Letter Agreement
relating to a 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
the business, income, assets or operation of the Company. The Company
is not aware of any other material threatened litigation which might
involve the Company.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion of the results of operations and financial
condition should be read in conjunction with the Company's unaudited
condensed consolidated financial statements and notes thereto.
Overview
The Company is a specialized consumer finance company engaged in
the purchase and servicing of installment contracts originated by
automobile dealers. The Company acquires installment contracts
principally from franchise dealers in connection with their sale of
used and new automobiles and light duty trucks to approved non-prime
consumers. The Company also generates revenue from commissions which
it receives from the sale of insurance and other ancillary products
sold in conjunction with the installment contracts purchased by the
Company through its branch offices.
Liquidity and Capital Resources
The Company requires capital primarily for the purchase of
installment contracts and for working capital. The Company has
historically financed these requirements with borrowings under the
revolving credit facility and through the Company's Securitization
program.
As previously reported during 1996, the Company suffered
substantial losses and, accordingly, substantial reductions in
stockholders' equity caused by material increases in delinquencies and
losses on owned and serviced installment contracts. On February 7,
1997, the Company executed a Merger Agreement with Search Capital
Group, Inc. ("Search"), which, if consummated, will result in the
Company becoming a wholly-owned subsidiary of Search (the "Merger"),
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 loan sales and cease operating as a going
concern, unless alternative financing sources become available to the
Company.
Revolving Credit Facility. The revolving credit facility, which
provides funds to purchase installment contracts and for working
capital, provides up to $75 million of available borrowings, limited
to a borrowing base principally consisting of 85% 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.
<PAGE>
At May 1, 1997, the Company had $67.8 million principal amount
outstanding under the revolving credit facility at a rate of interest
of 9.5 %.
In November, 1996, the Company advised its lenders that it was in
default under certain covenants under the agreements governing the
revolving credit facility. 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 Term Sheet 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 (the
"Effective Time").
At the Effective Time, 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
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
daily 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 "overadvance"
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. Mandatory prepayments must also
be made in the amount of any proceeds from sales or other dispositions
of installment contracts and other collateral, but these prepayments
will not permanently reduce the commitment amount. 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 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.
On March 17, 1997, the Company and the lenders entered into a
Second Amendment to the Fourth Amended and Restated Loan Agreement
which provided that the Company's obligations will be payable in full
on the earlier of May 15, 1997, the facility Termination Date or the
closing date of the Merger. The Company and its lenders are
currently negotiating to extend the May 15 date to June 30. The
amount of the advances available 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 prepay the revolving credit facility by the amount of any
proceeds from federal income tax refunds. 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 collection operations at certain predefined
levels 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 November 19, 1996 letter
agreement with Search. 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.
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,
thereby making such facility 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.
In each of its Securitizations, the Company sold its installment
contracts to the SPC, which then sold the installment contracts to a
newly formed grantor trust in exchange for senior and , until 1995,
subordinated classes of certificates of beneficial interests in the
trust. The senior certificates were sold to institutional investors
and the holders of such certificates are entitled to a proportionate
amount of monthly principal reductions in the underlying installment
contracts and interest at a fixed pass-through rate each month. As a
credit enhancement for each Securitization, FSA issued an insurance
policy for the benefit of the holders of the senior certificates. 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 the
securitized installment contracts.
The Securitization transactions allow the Company to repurchase
installment contracts when the balances have been reduced to a level
not greater than 10% of the original pool balance. As a result, on
March 17, 1997, the Company repurchased the installment contracts
securitized in 1993.
Gains from the sale of installment contracts in Securitizations
have provided a significant portion of the Company's revenues.
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 the first quarter of 1997, the Company sold
installment contracts totaling $728 thousand to Search for $689
thousand. The Company has no continuing interest in these loans or
loan repurchase obligations.
<PAGE>
Results of Operations (dollars in thousands)
Comparison of Three Months Ended March 31, 1996 to Three Months
Ended March 31, 1997
Interest and fee income on installment contracts and
securitizations. Interest and fee income on installment contracts and
securitizations represent interest and fee income on owned installment
contracts, interest income on the retained subordinated interest in
securitized installment contracts and the residual income attributable
to excess cash flows on securitizations. This income increased by
$2,795 or 169.9% from $1,645 for the three months ended March 31, 1996
to $4,440 for the three months ended March 31, 1997. This increase is
primarily due to the 166.4% increase in average principal balance of
owned loans from $30,887 in the first quarter of 1996 compared to
$82,279 in the first quarter of 1997. Also, the Company was unable to
complete a securitization transaction 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 from $38 in the first quarter
of 1996 to $0 in the first quarter of 1997. 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 and throughout
1996, particularly the last six months of 1996, which slowed the
excess cash flows from these securitized portfolios. 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 expense increased by $1,835 or
492.0%, from $373 for the three months ended March 31, 1996 to $2,208
in the comparable quarter of 1997. This increase is primarily due to
a 544.9% increase in average borrowings from $11,429 for the quarter
ended March 31, 1996 to $73,705 for the quarter ended March 31, 1997.
The revolving credit facility was not reduced by proceeds from a
securitization transaction during 1996 as it was at the end of the
year of 1995, which resulted in the average amount outstanding under
the credit line increasing by $62,276. Also contributing to the
increase was an increase in the interest rate on the revolving credit
facility associated with the restructuring the revolving credit
facility as a result of the Company's rising delinquency and loss
rates at the end of 1996.
Provision for possible losses. The provision for possible losses
increased by $4,092 from $373 for the three months ended March 31,
1996 to $4,342 for the three months ended March 31, 1997. The
allowance for possible losses on Installment Contracts increased from
1.1% of the Net Managed Portfolio for the quarter ended March 31, 1996
to 6.1% for the quarter ended March 31, 1997. 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. A valuation allowance was not previously considered
necessary because of the Company's insurance arrangement with MS
Casualty and the relatively lower level of repossessed automobiles in
prior periods. The allowance is intended to cover losses on owned
installment contracts as well as securitized installment contracts
after taking into account loss reserves and other amounts available at
MS Casualty. For further reference, see discussion at "Installment
Contract Loss Experience".
Insurance commissions. Insurance commissions represent
commission and fee income earned on insurance and other ancillary
products sold by the branch offices. This income decreased by $280,
or 77.6%, from $361 for the three months ended March 31, 1996 to $81
for the period ending March 31, 1997, primarily as the result of a
large decrease in installment contract originations from branch
offices. In addition, there has been an increase in the number of
repossessions during the first quarter of 1997, as compared to the
first quarter of 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 quarter. 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.
Service fee income. Service fee income represents amounts
received by the Company to collect and administer installment
contracts previously sold into securitizations. These fees decreased
by $493, or 57.1%, from $864 for the quarter ended March 31, 1996 to
$371 for the quarter ended March 31, 1997. This decrease was due to
a 57.2% decrease in the average balance of securitized installment
contracts being serviced by the Company comparing the averages for the
three month periods ending March 31, 1996 and March 31, 1997.
Other income. Other income is primarily comprised of
miscellaneous fee income generated by the branch offices. Other
income decreased by $235, or 91.4%, from $257 for the quarter ended
March 31, 1996 to $22 for the quarter ended March 31, 1997 due to a
decrease in title fee income and other miscellaneous income.
Operating expenses. Operating expenses increased by $321 or
10.4% from $3,098 for the quarter ended March 31, 1996 to $3,419 for
the quarter ended March 31,1997 primarily due to increased legal and
professional fees associated with the proposed merger between the
Company and Search Capital Group. In addition, during the quarter
ended March 31, 1997, the Company also had a loss on sale of
installment contracts sold to Search of $39.
Net loss. As a result of the factors discussed above, net loss
increased by $4,682 from $360 for the quarter ended March 31, 1996 to
$5,042 for the quarter ended March 31, 1997.
<PAGE>
Installment Contract Loss Experience
On all installment contracts with a purchase date 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 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 began purchasing contracts net of
a discount. Accordingly, the Company bears all of the risks of loss on
installment contracts originated subsequent to July 1, 1996. Through
the first quarter of 1997 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.
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.
<PAGE>
<TABLE>
The following table summarizes the Company's installment
contract and repossession loss experience:
<CAPTION>
Credit Loss/Repossession Experience (1)
Three Months Three Months
Ended Ended
3/31/96 03/31/97
(dollars in thousands)
<S> <C> <C>
Average Gross Managed Portfolio $ 167,245 $ 159,579
Average month-end number of
Installment Contracts 15,965 15,489
Repossessions as a percentage of
average month-end number of
Installment Contracts outstanding 12.38% 26.12%
Gross Charge-offs (2) $ 2,920 $ 9,176
Recoveries (3) 112 1,068
Claim Payments from MS Casualty (4) 2,378 68
Net Charge-offs (5) $ 430 $ 8,040
Annualized Net Charge-offs as a percentage
of average Gross Managed Portfolio
outstanding 1.0 % 20.2%
<FN>
(1) All amounts and percentages are based on the gross amount scheduled
to be paid on each installment contract, including unearned finance
charges and other charges. The information in the table includes
installment contracts previously sold through Securitizations which
the Company continues to service.
(2) Gross charge-offs include principal, late charges, and repossession
expenses and are net of insurance (other than repossession loss
insurance) claims and rebates and proceeds from the sale of
repossessed financed vehicles.
(3) Recoveries are collections net of attorney fees and court costs.
(4) Refers to claims paid for repossession losses under the MS Casualty
repossession loss insurance policies maintained on the installment
contracts, purchased prior to July 1, 1996, net of recoveries.
(5) Net charge-offs equal gross charge-offs minus recoveries and
insurance claim payments.
</FN>
</TABLE>
<PAGE>
Installment Contract Delinquency Experience
The Company considers an installment contract to be
delinquent if the borrower fails to make any payment in full on or
before the due date as specified by the terms of the installment
contract. The Company typically initiates contact with borrowers
whose payments are not received within eight days of the due date.
The period-end delinquencies on the Company's gross managed
portfolio set forth in the table below are not necessarily
representative of average delinquencies during the periods
indicated.
<TABLE>
Delinquency Experience
<CAPTION>
Owned Installment Contracts
March 1996 March 1997
Number of Amount Number of Amount
Contracts (in thousands) Contracts (in thousands)
<S> <C> <C> <C> <C>
Portfolio 4,211 $ 62,008 7,402 $ 94,731
Period of delinquency
31-60 days 92 1,297 396 5,178
61-90 days 38 430 122 1,701
91 days or more 63 684 210 3,009
Total delinquencies 193 $ 2,411 728 $ 9,888
Total delinquencies
as a percent of
the portfolio 4.6% 3.9% 9.8% 10.4%
<CAPTION>
Securitized Installment Contracts
March 1996 March 1997
Number of Amount Number of Amount
Contracts (in thousands) Contracts (in thousands)
<S> <C> <C> <C> <C>
Portfolio 11,760 $110,782 5,752 $39,882
Period of delinquency
31-60 days 476 4,908 201 1,552
61-90 days 227 2,433 88 732
91 days or more 291 3,125 144 1,478
Total delinquencies 994 $10,466 433 $ 3,762
Total delinquencies
as a percent of
the portfolio 8.5% 9.4% 7.5% 9.4%
</TABLE>
<PAGE>
As reported in previous filings, delinquent contracts and
gross charge-offs increased throughout 1996. The Company has taken
numerous steps to improve its delinquency ratios and charge-offs.
During 1996, the Company adopted a new, more stringent credit
scoring system and tightened its credit standards. During the third
quarter of 1996, Company management reorganized certain functional
areas and reassigned responsibilities to place more emphasis on
collection efforts. During October 1996, the Company opened a
second customer service office in Mobile, Alabama. Management
believes this customer service office will allow the Company to hire
more experienced personnel. Further, as a result of the loss per
automobile increasing, the Company tightened its lending criteria to
reduce the acceptable mileage level on used cars. 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In 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 require the Company to
pay $400,000 prior to July 1, 1997. Another defendant in the case
has agreed to pay $25,000 of this $400,000.
On January 15, 1997, the Company was named as a defendant in
a lawsuit filed by Telluride Funding Corp. in the New York State
Court. 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 Declaratory Judgement action in Mississippi State
Court requesting a determination of the parties' rights and
obligations under the Letter Agreement relating to a 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 the business, income, assets or
operation of the Company. The Company is not aware of any other
material threatened litigation which might involve the Company.
<PAGE>
Item 2. Changes in Securities
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
11 Computation of Per Share Income (Loss)
(b) Reports on Form 8-K
Not applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MS FINANCIAL, INC.
May 14, 1997 By: /s/Vann R. Martin
Vann R. Martin
President and Chief Operating
Officer
May 14, 1997 By: /s/R. Dale Miller
R. Dale Miller
Controller and Principal
Accounting Officer
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
3.1.1* --Amended and Restated Certificate of Incorporation
of the Company dated December 15, 1993.
3.1.2* --Form of Second Amended and Restated Certificate
of Incorporation.
3.2.1* --Bylaws of the Company.
3.2.2* --Form of Amended and Restated Bylaws of the Company.
4.1**** --Form of Common Stock Certificate
10.1* --Third Amended and Restated Revolving Loan Agreement
(the "Revolving Credit Facility") dated as of April 1,
1995 among National Westminster Bank, N.A. ("NatWest
Bank"), as agent, the banks signatories thereto and the
Company.
10.1.1# --Fourth Amended and Restated Revolving Loan Agreement dated
as of May 1, 1996 among NatWest Bank, N.A., as agent, the
banks signatories thereto and the Company.
10.2* --Form of Consent dated April __, 1995 of NatWest,
as agent, and the banks signatories to the
Revolving Credit Facility.
10.3** --Amended and Restated Security Agreement dated as of
June 15, 1994 between the Company and NatWest Bank,
as agent.
10.4** --Amended and Restated Pledge Agreement dated as of
June 15, 1994 between NatWest Bank and the
Company.
10.5* --Receivables Purchase Agreement and Assignment dated as of
April 1, 1995 among the Company, MS Auto Receivables
Company ("MARCO") and MS Auto Credit, Inc. ("MS Auto").
10.6* --Repurchase Agreement dated as of April 1, 1995 among
Telluride Funding Corp. ("Telluride") and MARCO.
10.7* --Servicing Agreement dated as of April 1, 1995 among the
Company, Telluride, MARCO, MS Auto, Black Diamond
Advisers, Inc. and Norwest Bank Minnesota,
National Association ("Norwest").
10.8* --Security Agreement dated as of April 1, 1995
among the Company, MS Auto, MARCO, Telluride,
Financial Security Assurance Inc. ("FSA") and
Norwest.
10.9* --Custodian Agreement dated as of April 1, 1995
among the Company, MS Auto, Norwest,
Telluride, MARCO and FSA.
10.10* --Registration Rights Agreement dated January 3,
1994 among the Company, MSFS and GTCR IV.
10.11* --Stockholders Agreement dated January 3, 1994
among the Company, MSFS and GTCR IV.
10.12** --Form of Employees' Stock Purchase Plan.
10.13** --Form of Directors' Stock Option Plan.
10.14.1* --Employees' Equity Incentive Plan dated December
15, 1993.
10.14.2** --Form of Amended and Restated Employee's Equity
Incentive Plan.
10.15* --Form of Indemnification Agreement.
10.16* --Consultant Agreement dated as of January 1, 1994
between the Company and Harold Hogue.
10.17* --Non-Qualified Stock Option Agreement with Harold
Hogue dated January 3, 1994.
10.18* --Experience Refund Agreement dated December 15,
1993 between MS Life and the Company.
10.19* --Experience Refund Agreement dated December 15,
1993 between MS Casualty and the Company.
10.20* --Experience Refund Agreement dated December 15,
1993 between MS Casualty, NatWest Bank and the
Company.
10.21* --Managing General Agency Agreement dated January
1, 1994 between MS Casualty and the Company.
10.22* --Office Building Sublease Agreement dated
January 1, 1994 between MS Diversified, Inc.
("MSD") and the Company.
10.23* --Tax Indemnification Agreement dated as of
November 30, 1993 among MSD, MS Financial
Services, Inc. ("MSFS") and the Company.
10.24* --Agreement for Purchase and Sale of Assets and Assumption
of Liabilities dated November 15, 1993 between MSFS and
the Company.
10.25** --Purchase Agreement dated as of September 1, 1994 between
the Company and MARCO.
10.26** --Pooling and Servicing Agreement dated as of September 1,
1994 among MARCO, the Company and Norwest.
10.27** --Servicing Assumption Agreement dated as of September 1,
1994 between the Company and Norwest.
10.28** --Letter Agreement dated September 14, 1994 among the
Company, MARCO, Norwest and FSA.
10.29** --Insurance and Indemnity Agreement dated as of
September 14, 1994 among FSA, MARCO and the Company.
10.30** --Indemnification Agreement dated as of September 14, 1994
among FSA, MARCO, the Company and Kidder,
Peabody & Co. Incorporated.
10.31** --Financial Guaranty Insurance Policy No. 50316-N
dated September 14, 1994 from FSA.
10.32** --Letter Agreement dated September 14, 1994 among FSA,
MARCO and the Company.
10.33* --Second Amended and Restated Stock Pledge Agreement dated
as of April 1, 1995 between MSFS, FSA and Norwest.
10.34* --Spread Account Agreement dated as of April 11, 1995 among
MARCO, FSA and Norwest and related warehouse series
supplement.
10.35** --Pooling and Servicing Agreement dated as of September 1,
1993 among MARCO, MSFS and Norwest.
10.36** --Purchase Agreement dated as of September 1, 1993
between MSFS, and MARCO.
10.37** --Financial Guaranty Insurance Policy No. 50264-N
dated September 28, 1993.
10.38** --Insurance and Indemnity Agreement dated as of September
28, 1993, among FSA, MARCO and MSFS.
10.39** --Indemnification Agreement dated as of September 28, 1993
among FSA, MARCO, MSFS and Bear Stearns & Co. Inc.
10.40** --Letter Agreement dated September 28, 1993 among
MSFS, MARCO and FSA.
10.41** --Amended and Restated Stock Pledge Agreement dated as of
September 28, 1993 among MSFS, MARCO, FSA and Norwest.
10.42** --Pledge and Security Agreement dated September 28, 1993
among MARCO, FSA and Norwest.
10.43** --Letter Agreement dated September 28, 1993 among
MARCO, MSFS, Norwest and FSA.
10.44* --Insurance and Indemnity Agreement dated as of
April 1, 1995, among FSA, MARCO, the Company
and Telluride.
10.45.1* --Management Agreement dated January 1, 1994 among
the Company, MSB and Philip J. Hubbuch, Jr.
("Hubbuch").
10.45.2** --Form of Amended and Restated Management Agreement dated
July 21, 1995 among the Company, MSB and Hubbuch.
10.46.1* --Management Agreement dated February 15, 1994 among
the Company, MS Byrider, Inc. ("MSB") and E. Peter
Healey ("Healey").
10.46.2** --Form of Amended and Restated Management Agreement dated
July 21, 1995 among the Company, MSB and Healey.
10.47.1* --Management Agreement dated January 1, 1994
between the Company and Vann R. Martin
("Martin").
10.47.2** --Form of Amended and Restated Management Agreement dated
July 21, 1995 between the Company and Martin.
10.48* --Option Agreement with Hubbuch dated January 3,
1994.
10.49* --Option Agreement with Healey dated February 15,
1994.
10.50* --Option Agreement with Martin dated January 3,
1994.
10.51* --Equity Purchase Agreement dated January 3, 1994
among the Company, MSFS and GTCR IV.
10.52** --Premium Letter dated April 20, 1995 among the
Company, MARCO and FSA.
10.53*** --Conversion Agreement among the Company, GTCR IV,
MSD and MSFS.
10.54***** --Purchase Agreement dated as of September 1, 1995,
among the Company and MARCO.
10.55***** --Pooling and Servicing Agreement dated as of September 1,
1995 among MARCO, the Company, and LaSalle National Bank.
10.56***** --Servicing Assumption Agreement dated as of September 1,
1995 between the Company and LaSalle National Bank.
10.57***** --Insurance and Indemnity Agreement dated as of September
1, 1995 among FSA, MARCO and the Company.
10.58***** --Indemnification Agreement dated as of September 1,
1995 among FSA, MARCO, the Company and Bear Stearns
& Co., Inc.
10.59***** --Financial Guaranty Insurance Policy No.50395-N
dated September 21, 1995 from FSA.
10.60***** --Letter Agreement dated September 21, 1995 among
FSA, MARCO and the Company.
11^ --Computation of earnings per share.
_______________
* Incorporated herein by reference from the Registration Statement
dated May 30, 1995.
** Incorporated herein by reference from the Amendment No. 1 to the
Registration Statement dated June 16, 1995.
*** Incorporated herein by reference from the Amendment No. 2 to the
Registration Statement dated July 13, 1995.
**** Incorporated herein by reference from the Amendment No. 3 to the
Registration Statement dated July 21, 1995.
***** Incorporated herein by reference from the 1995 10-K dated
April 1, 1996.
# Incorporated herein by reference from the 10Q dated May 3, 1996.
^ Filed herewith.
EXHIBIT 11
<TABLE>
MS FINANCIAL, INC.
COMPUTATION OF PER SHARE INCOME (LOSS)
(in thousands except per share data)
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1996 March 31, 1997
<S> <C> <C>
Weighted Average Shares:
Common Stock Outstanding 10,452 10,430
Option Shares Outstanding 0 (1) 0 (1)
Shares assumed repurchased using
treasury stock method 0 (1) 0 (1)
Weighted Average Shares
Outstanding: 10,452 10,430
Net Income (Loss) ($360) ($5,042)
Computation of net income (loss) per share:
Net income (loss) divided by
weighted average shares
outstanding ($0.03) ($0.48)
<FN>
(1) Excludes antidilutive options
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000946014
<NAME> MS FINANCIAL, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,296
<SECURITIES> 0
<RECEIVABLES> 80,383
<ALLOWANCES> 6,364
<INVENTORY> 0
<CURRENT-ASSETS> 11,203
<PP&E> 2,582
<DEPRECIATION> 1,085
<TOTAL-ASSETS> 91,015
<CURRENT-LIABILITIES> 73,852
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 17,152
<TOTAL-LIABILITY-AND-EQUITY> 91,015
<SALES> 4,453
<TOTAL-REVENUES> 4,927
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,419
<LOSS-PROVISION> 4,342
<INTEREST-EXPENSE> 2,208
<INCOME-PRETAX> (5,042)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,042)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,042)
<EPS-PRIMARY> (.48)
<EPS-DILUTED> (.48)
</TABLE>
