<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 1996
REGISTRATION NO. 333-
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
___________
RAC FINANCIAL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 6141 75-2561052
(State or other jurisdiction of (Primary industrial (I.R.S. Employer
incorporation or organization) classification Identification No.)
code number)
RONALD M. MANKOFF
GENERAL COUNSEL
1250 WEST MOCKINGBIRD LANE RAC FINANCIAL GROUP, INC.
DALLAS, TEXAS 75247 1250 WEST MOCKINGBIRD LANE
(214) 630-6006 DALLAS, TEXAS 75247
(Address, including zip code, and (214) 630-6006
telephone number, including area (Name, address, including zip code, and
code, of registrant's principal telephone number, including area code,
executive offices and principal of agent for service)
place of business)
___________
COPIES TO:
RONALD J. FRAPPIER
JENKENS & GILCHRIST, A PROFESSIONAL CORPORATION
1445 ROSS AVENUE, SUITE 3200
DALLAS, TEXAS 75202
___________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
___________
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /__________
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /__________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /X/
CALCULATION OF REGISTRATION FEE
<TABLE>
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
TITLE OF EACH AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
CLASS OF SECURITIES TO BE OFFERING AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PRICE PER SECURITY OFFERING PRICE FEE (1)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
7.25% Convertible
Subordinated Notes
Due 2003 . . . . . . 100,000,000 100% $100,000,000 $30,304
- ----------------------------------------------------------------------------------------------
Common Stock,
$0.01 par value . . . 3,067,485 SHARES (2) -- -- --
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) Calculated pursuant to Rule 457(i) of the Securities Act of 1933, as
amended.
(2) Based on a conversion price of $32.60 per share, but deemed to include any
additional shares of Common Stock that may be issuable upon conversion of
the notes as a result of the antidilution provisions thereof. Pursuant to
Rule 457(i), no registration fee is required for these shares.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(a), MAY DETERMINE.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFER TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 15, 1996
<PAGE>
PROSPECTUS
RAC FINANCIAL GROUP, INC.
$100,000,000 7.25% CONVERTIBLE SUBORDINATED NOTES DUE 2003
3,067,485 SHARES OF COMMON STOCK
The 7.25% Convertible Subordinated Notes Due 2003 (the "Notes") of RAC
Financial Group, Inc., a Nevada corporation (the "Company"), and the shares of
the Company's Common Stock, par value $.01 per share (the "Common Stock,"
together with the notes, the "Securities"), issuable upon conversion of the
Notes, may be offered for sale from time to time for the account of certain
holders of the Securities (the "Selling Holders") as described under "Selling
Holders." The Selling Holders may, from time to time, sell the Securities
offered hereby to or through one or more underwriters, directly to other
purchasers or through agents in ordinary brokerage transactions, in negotiated
transactions or otherwise, at market prices prevailing at the time of sale, at
prices related to then prevailing market prices or at negotiated prices. See
"Plan of Distribution."
The notes mature on August 15, 2003, unless previously redeemed. Interest
on the Notes is payable semi-annually on February 15 and August 15 of each year,
commencing February 15, 1997. Holders of the Notes ("Holders") are entitled, at
any time after 60 days following the latest date of original issuance through
August 15, 2003, subject to prior redemption, to convert any Notes or portions
thereof into Common Stock at a conversion price of $32.60 per share, subject to
certain adjustments. See "Description of the Notes -- Conversion of Notes."
The notes have been designated for trading in the Private Offerings, Resales and
Trading through Automated Linkages ("PORTAL") market. The Common Stock is
quoted on the Nasdaq National Market under the symbol "RACF." On October 8,
1996, the last reported sale price of the Common Stock as reported by the Nasdaq
National Market was $48.50 per share.
The Notes are redeemable, in whole or in part, at the option of the
Company, at any time on or after August 16, 1999, at the declining redemption
prices set forth herein, plus accrued interest. In the event of a Change of
Control (as defined herein), each Holder may require the Company to repurchase
such Holder's Notes in whole or in part at a redemption price of 101% of the
principal amount thereof plus accrued interest. See "Description of the Notes
- -- optional redemption by the Company" and "Description of the Notes -- Change
of Control."
The notes represent unsecured obligations of the Company and are
subordinated in right of payment to all existing and future Senior Indebtedness
(as defined herein) of the Company. In addition, because the Company's
operations are conducted primarily through its operating subsidiaries, claims of
regulators, creditors and holders of indebtedness of such subsidiaries have
priority with respect to the assets and earnings of such subsidiaries over the
claims of creditors of the Company, including Holders of the Notes.
The Notes were originally issued on August 20, 1996 in transactions exempt
from registration under the Securities Act of 1933, as amended (the "Securities
Act").
The Company will not receive any of the proceeds from the sale of any of
the Notes, or the Common Stock issuable upon conversion thereof, offered by the
Selling Holders.
___________
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED
HEREBY.
___________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
OCTOBER , 1996
<PAGE>
___________
INFORMATION CONTAINED IN THIS PROSPECTUS CONTAINS "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH
AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR THE
NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. THE
STATEMENTS IN "RISK FACTORS" BEGINNING ON PAGE 8 OF THE PROSPECTUS CONSTITUTE
CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS, INCLUDING CERTAIN RISKS AND
UNCERTAINTIES, WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED IN SUCH FORWARD-LOOKING
STATEMENTS.
___________
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
___________
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN
ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. IN
ADDITION TO OTHER INFORMATION IN THIS PROSPECTUS, THE FACTORS SET FORTH UNDER
"RISK FACTORS" BELOW SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT
IN THE NOTES OFFERED HEREBY. UNLESS THE CONTEXT INDICATES OTHERWISE, ALL
REFERENCES HEREIN TO THE "COMPANY" REFER TO RAC FINANCIAL GROUP, INC. AND ITS
SUBSIDIARIES. EXCEPT AS OTHERWISE NOTED HEREIN, ALL INFORMATION IN THIS
PROSPECTUS RELATING TO THE COMPANY'S CAPITAL STOCK HAS BEEN ADJUSTED TO REFLECT
A 67-FOR-ONE SPLIT OF THE COMMON STOCK IN JULY 1995 EFFECTED AS A STOCK
DIVIDEND. UNLESS THE CONTEXT INDICATES OTHERWISE, ALL REFERENCES HEREIN TO
"COMMON STOCK" INCLUDE THE COMPANY'S NON-VOTING COMMON STOCK (AS HEREINAFTER
DEFINED).
THE COMPANY
RAC Financial Group, Inc. is a specialized consumer finance company that
operates under the trade name FIRSTPLUS. The Company originates, purchases,
services and sells consumer finance receivables, substantially all of which are
home improvement or debt consolidation loans secured by liens on real property.
The Company offers uninsured home improvement and uninsured debt consolidation
loans ("Conventional Loans") and partially insured Title I home improvement
loans ("Title I Loans") under the Title I credit insurance program (the "Title I
Program"). The Company sells substantially all of its Conventional Loans and
Title I Loans (together, the Company's "strategic loans") primarily through its
securitization program and retains rights to service these loans. For fiscal
1995 and the nine months ended June 30, 1996, the Company had total revenues of
$33.9 million and $108.6 million, respectively, Gain on Sale (as hereinafter
defined) of loans, net, of $29.1 million (of which $4.1 million is related to
non-strategic loans) and $89.8 million (of which $8.5 million is related to
non-strategic loans), respectively, and net income of $5.8 million and $20.8
million, or $0.56 per share and $1.70 per share, respectively. The Company
originated and purchased an aggregate of $227.9 million and $558.9 million of
strategic loans (including bulk purchases) of loans in the fiscal year ended
September 30, 1995 and the nine months ended June 30, 1996, respectively.
The Conventional Loans originated by the Company in fiscal 1995 and the
nine months ended June 30, 1996 had an average principal amount of approximately
$17,426 and $26,929, respectively, and had interest rates primarily ranging from
10.8% to 18.5% per annum. Conventional Loans originated by the Company in fiscal
1995 and the nine months ended June 30, 1996 had a weighted average maturity of
14.6 years and 17.8 years, respectively, an average FICO score (as defined
below) of 629 and 658, respectively, and a weighted average loan-to-value ratio
("LTV") (based on the principal amounts outstanding at June 30, 1996) of 91.7%
and 109.2%, respectively. Title I Loans are insured, subject to certain
exceptions, for 90% of the principal balance and certain interest costs under
the Title I Program administered by the Federal Housing Administration (the
"FHA"). The Title I Loans originated by the Company in fiscal 1995 and the nine
months ended June 30, 1996 had an average principal amount of approximately
$15,160 and $16,620, respectively, and had interest rates primarily ranging from
11.0% to 17.5% per annum. Title I Loans originated by the Company in fiscal 1995
and the nine months ended June 30, 1996 had a weighted average maturity of 15.2
years and 16.2 years, respectively, an average FICO score of 613 and 630,
respectively, and a weighted average LTV (based on the principal amounts
outstanding at June 30, 1996) of 89.2% and 102.4%, respectively.
The Company relies principally on the creditworthiness of the borrower, and
to a lesser extent on the underlying collateral, for repayment of Conventional
Loans and on the FHA co-insurance with respect to Title I Loans. The Company
uses its own credit evaluation criteria to classify its borrowers as "A" through
"D" credits. These criteria include, as a significant component, the credit
evaluation scoring methodology developed by Fair, Isaac and Company ("FICO"), a
consulting firm specializing in creating default-predictive models through
scoring mechanisms. The Company's borrowers typically have limited access to
consumer financing for a variety of reasons, primarily insufficient home equity
values and high levels of debt service to income. For fiscal 1995 and the nine
months ended June 30, 1996, 76.7% and 95.5%, respectively, of the Company's
Conventional Loan originations were classified by the Company as "B" borrowers
or better and 62.7% and 56.7%, respectively, of the Company's Title I Loans were
so classified.
The Company's principal origination channel is its network of regional
independent correspondent lenders. Correspondent lenders tend to be commercial
banks, thrifts or finance companies that do not have the infrastructure to hold
and service portfolios of Conventional and Title I Loans. The Company's
correspondent lenders originate loans using the Company's underwriting criteria
and sell these loans to the Company. During fiscal 1995 and the nine months
ended
<PAGE>
June 30, 1996, the Company originated loans through correspondent lenders
("Correspondent Loans") of $81.9 million and $488.4 million, respectively,
representing 68.5% and 93.5%, respectively, of the Company's originations of
strategic loans (excluding bulk purchases) during such periods.
To a lesser extent, the Company originates loans directly to qualified
homeowners ("Direct Loans"). The Company originates Direct Loans through direct
mail and advertising campaigns and referrals from its nationwide network of
independent home improvement contractors. The Company is pursuing a strategy to
increase its Direct Loan originations because the Company believes that Direct
Loans should prove to be more profitable and allow the Company to have better
control over the quality and size of the Company's production. To achieve this
goal, the Company is attempting to develop national recognition of the FIRSTPLUS
brand name through increased advertising and the use of celebrity spokespersons,
such as Dan Marino, a professional football player with the Miami Dolphins. The
Company is expanding its direct mail and telemarketing campaigns, hiring
direct-to-consumer marketing professionals and increasing its local-market
presence by acquiring or opening additional branches. The Company originated
$906,000 and $14.3 million in Direct Loans in fiscal 1995 and the nine months
ended June 30, 1996, respectively, representing 0.8% and 2.7%, respectively, of
the Company's originations of strategic loans (excluding bulk purchases) during
such periods.
Historically, the Company also originated strategic loans through purchases
from its nationwide network of independent home improvement contractors
("Indirect Loans"). For fiscal 1995 and the nine months ended June 30, 1996, the
Company purchased $36.8 million and $19.8 million of Indirect Loans,
respectively. The Company has reduced its purchases of Indirect Loans and
increased its originations of Direct Loans through referrals from certain of its
independent home improvement contractors. In addition, the Company has from time
to time made selected bulk purchases of loans ("Bulk Loans") as another means of
increasing the amount of strategic loan originations. For fiscal 1995 and the
nine months ended June 30, 1996, the Company made bulk purchases of $108.4
million and $36.3 million, respectively.
As a result of the Company's recent acquisitions of Mortgage Plus
Incorporated, renamed FIRSTPLUS Financial West, Inc. ("FIRSTPLUS West"), and
First Security Mortgage Corp., which the Company operates as its FIRSTPLUS East
division ("FIRSTPLUS East"), the Company acquired certain loan origination
programs that do not directly adhere to the Company's securitization parameters.
Consequently, loans originated through such programs ("non-strategic loans") are
sold to other lenders on a whole-loan basis with all servicing rights released.
The Company originated $83.4 million of non-strategic loans during fiscal 1995
and $320.9 million during the nine months ended June 30, 1996. The Company plans
to convert the non-strategic loan operations to operations that will originate
strategic loans that meet the Company's current securitization parameters.
The Company sells substantially all of the Conventional Loans and Title I
Loans it originates and purchases through its securitization program and
generally retains rights to service such loans. The Company sold through eight
securitization transactions approximately $234.8 million and $427.2 million of
strategic loans during fiscal 1995 and the nine months ended June 30, 1996,
respectively. The Company earns servicing fees on a monthly basis ranging from
0.75% to 1.25% on the loans it services in the various securitization pools. At
June 30, 1996, the principal amount of strategic loans serviced by the Company
(the "Serviced Loan Portfolio") was $750.5 million. The Serviced Loan Portfolio
includes strategic loans held for sale and securitized loans serviced by the
Company (including $72.7 million of loans subserviced by a third party), and
excludes non-strategic loans held for sale and loans that FIRSTPLUS West
services for others.
The Company is a Nevada corporation that was formed in October 1994 to
combine the operations of SFA: State Financial Acceptance Corporation ("SFAC"),
a home improvement lender formed in January 1990, and FIRSTPLUS Financial, Inc.
("FIRSTPLUS Financial"), formerly Remodelers National Funding Corporation, an
approved Title I home improvement lender formed in April 1986 (the
"Combination"). The Company's principal offices are located at 1250 West
Mockingbird Lane, Dallas, Texas 75247, and its telephone number is (214)
630-6006.
RECENT ACQUISITION
On October 1, 1996, FIRSTPLUS Consumer Finance, Inc., a wholly owned
subsidiary of the Company, acquired National Loans, Inc. ("National") through an
exchange of stock. The Company issued 250,998 shares of its Common Stock to the
former shareholders of National and the transaction was treated as a pooling of
interests. National is an originator of small, personal consumer loans and has
a net loan portfolio of approximately $17 million. National is based
2
<PAGE>
in Holly Springs, Mississippi, and has a network of 27 consumer finance offices
throughout Mississippi and Tennessee.
RISK FACTORS
Prospective investors should carefully consider the information set forth
under the caption "Risk Factors" and all other information set forth in this
Prospectus before making any investment in the Securities.
3
<PAGE>
THE OFFERING
Issuer..................... RAC Financial Group, Inc. (the Company)
Securities Offered......... $100,000,000 aggregate principal amount of 7.25%
Convertible Subordinated Notes Due 2003 issued
under an indenture (the Indenture) between the
Company and Bank One, Columbus, N.A., as trustee
(the Trustee), and up to 3,067,485 shares of
Common Stock issuable upon conversion of the Notes.
Interest Payment Dates..... February 15 and August 15 of each year, commencing
February 15, 1997.
Maturity................... August 15, 2003
Conversion................. Convertible into Common Stock at $32.60 per share,
subject to adjustment as set forth herein, at any
time after 60 days from the latest date of original
issuance of the Notes. See Description of the
Notes -- Conversion of Notes.
Redemption................. The Notes are redeemable, in whole or in part, at
the option of the Company, at any time after August
16, 1999, at the declining redemption prices set
forth herein plus accrued interest. See Description
of the Notes -- Optional Redemption by the Company.
Change of Control.......... In the event of a Change of Control (as defined
herein), Holders of the Notes will have the right
to require that the Company repurchase the Notes
in whole or in part at a redemption price of 101%
of the principal amount thereof plus accrued
interest. See Description of the Notes -- Change of
Control.
Ranking.................... The Notes constitute general unsecured obligations
of the Company and are subordinated in right of
payment to all existing and future Senior
Indebtedness (as defined herein) of the Company.
As of September 30, 1996, the Company had
approximately $341.0 million of Senior Indebtedness
outstanding. In addition, because the Company's
operations are conducted primarily through its
operating subsidiaries, claims of holders of
indebtedness of such subsidiaries, as well as
claims of regulators and creditors of such
subsidiaries, will have priority with respect to
the assets and earnings of such subsidiaries over
the claims of creditors of the Company, including
Holders of the Notes. As of September 30, 1996, the
aggregate liabilities of such subsidiaries were
approximately $178.9 million. The Indenture does
not limit the amount of additional indebtedness
that the Company can create, incur, assume or
guarantee, nor does the Indenture limit the amount
of indebtedness that any subsidiary can create,
incur, assume or guarantee. See Description of the
Notes -- Subordination.
Use of Proceeds............ The Company will not receive any of the proceeds
from the sale of any of the Notes or the Common
Stock issuable upon conversion thereof. See Use
of Proceeds.
Trading.................... The Notes have been designated for trading in the
PORTAL market. The Common Stock is quoted on the
Nasdaq National Market under the Symbol RACF.
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth historical summary financial information of
the Company as of the dates and for the periods indicated. In May 1996, the
Company acquired FIRSTPLUS West in a transaction accounted for as a pooling of
interests. As a result of the pooling, the historical financial information of
the Company has been restated to include the financial information of FIRSTPLUS
West. The financial information for FIRSTPLUS West included in the three years
ended September 30, 1995, reflects information for FIRSTPLUS West's three fiscal
years ended April 30, 1995. The financial information for the nine months ended
June 30, 1995 and 1996 has been recast to conform to the Company's fiscal year
end. See Note 1 to the consolidated financial statements of the Company.
<TABLE>
NINE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED JUNE 30,
---------------------------- ------------------
1993 1994 1995 (1) 1995 1996
------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Gain on sale of loans,
before sharing....................... $17,115 $27,671 $ 40,112 $25,385 $ 90,351
Sharing arrangements (2).............. - - (10,999) (7,201) (536)
------- ------- -------- ------- --------
Gain on sale of loans, net (3)(4)... 17,115 27,671 29,113 18,184 89,815
Interest income....................... 145 1,845 2,860 1,673 10,761
Servicing income...................... - 72 1,049 698 2,674
Other income.......................... 54 252 873 923 5,392
------- ------- -------- ------- --------
Total revenues...................... 17,314 29,840 33,895 21,478 108,642
Total expenses.......................... 9,925 24,685 24,153 14,688 75,033
------- ------- -------- ------- --------
Income before income taxes.............. 7,389 5,155 9,742 6,790 33,609
Provision for income taxes.............. - - (3,903) (2,660) (12,771)
------- ------- -------- ------- --------
Net income (4).......................... $ 7,389 $ 5,155 $ 5,839 $ 4,130 $ 20,838
------- ------- -------- ------- --------
------- ------- -------- ------- --------
PER SHARE DATA:
Net income per common share (4)(5)...... $0.94 $0.62 $0.56 $0.39 $1.70
Weighted average common and common
equivalent shares outstanding.......... 7,798 8,138 10,148 10,148 12,206
</TABLE>
JUNE 30, 1996
------------------------
ACTUAL AS ADJUSTED(6)
-------- --------------
BALANCE SHEET DATA:
Excess servicing receivable............. $116,753 $116,753
Total assets............................ 322,853 351,200
Warehouse financing facilities.......... 142,830 71,177
Term line............................... 37,069 37,069
Subordinated notes payable
to affiliates.......................... 7,003 7,003
7.25% Convertible Subordinated
Notes (7).............................. - 100,000
Total liabilities....................... 241,659 270,006
Stockholders' equity.................... 81,194 81,194
5
<PAGE>
NINE MONTHS
YEAR ENDED ENDED
------------------ -------------
SEPTEMBER 30, 1995 JUNE 30, 1996
------------------ -------------
OPERATING DATA:
Strategic loans originated or purchased:
Conventional Loans....................... $ 76,643 $464,965
Title I Loans............................ 151,292 93,889
-------- --------
Total.................................. $227,935 $558,854
-------- --------
-------- --------
Non-strategic loans originated............. $ 83,423 $320,878
-------- --------
-------- --------
Strategic loans sold through
securitization:
Conventional Loans....................... $ 59,662 $348,891
Title I Loans............................ 175,088 78,295
-------- --------
Total.................................. $234,750 $427,186
-------- --------
-------- --------
Serviced Loan Portfolio (at period
end) (8).................................. $238,584 $750,529
-------- --------
-------- --------
Delinquent loans as a percentage of the
Serviced Loan Portfolio (at period end):
31-60 days............................... 1.8% 1.1%
61-90 days............................... 0.7 0.5
91 days and over......................... 2.2 1.9
-------- --------
Total.................................. 4.7% 3.5%
-------- --------
-------- --------
YEAR ENDED DECEMBER 31, NINE MONTHS
--------------------------- ENDED
1993 (9) 1994 (9) 1995 JUNE 30, 1996
-------- -------- ---- -------------
LOSS AND DEFAULT DATA:
Net losses as a percentage of
the average Serviced Loan
Portfolio (10)................. 0.39% 0.44% 0.04% 0.06%
Defaults as a percentage of
the average Serviced Loan
Portfolio (10)................. 2.04% 2.64% 0.69% 0.90%
___________
(1) In November 1995, the Company acquired FIRSTPLUS East in a transaction
accounted for as a purchase. Giving effect to the acquisition, the income
statement data for the year ended September 30, 1995 would reflect total
revenues of approximately $37.2 million and total expenses of approximately
$27.4 million. See Note 16 to the consolidated financial statements of the
Company.
(2) The Company contractually agreed to share in gain on sale of loans, net,
with Residential Funding Corporation (the "Warehouse Lender"), as a condition of
obtaining certain financing facilities and also with Farm Bureau Life Insurance
Company ("Farm Bureau"). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and Capital Resources" and
"Certain Relationships and Related Party Transactions -- Relationship with Farm
Bureau."
(3) Gain on sale of loans, net, is net of sharing arrangements and the premiums
related to and costs of securitizations but not net of the Company's related
provision for possible credit losses.
(4) Excluding the effect of the pooling of interests with FIRSTPLUS West, gain
on sale of loans, net, was $439,000, $2.1 million, $25.1 million and
$79.2 million for fiscal 1993, 1994, 1995 and the nine months ended June 30,
1996, respectively. Excluding the effect of the pooling of interests with
FIRSTPLUS West, the Company experienced a loss of $180,000 and $647,000 for
fiscal 1993 and 1994, respectively, and earned $6.9 million and $20.8 million,
or $0.71
6
<PAGE>
and $1.70 per share, for fiscal 1995 and the nine months ended June 30, 1996,
respectively. See Notes 1 and 9 to the consolidated financial statements of
the Company.
(5) Net income per common share is computed by dividing net income, less
accrued and unpaid dividends on preferred stock (the balance of which was
redeemed in connection with the Company's initial public offering in February
1996), by the weighted average common and common equivalent shares outstanding.
Common and common equivalent shares issued at prices below the initial public
offering price during the 12 months ended September 30, 1995 have been included
in the calculation of common and common equivalent shares, using the treasury
stock method, as if they were outstanding for all periods presented.
(6) As adjusted to give effect to the sale of the Notes by the Company and the
application of the net proceeds therefrom. See "Capitalization."
(7) The Notes are before discounts and commissions.
(8) As of June 30, 1996, $72.7 million in Title I Loans in the Serviced Loan
Portfolio was subserviced by a third party.
(9) Data presented is for FIRSTPLUS Financial because prior to October 4, 1994
the Company did not have servicing operations and because the servicing
operations of FIRSTPLUS West for such periods related primarily to non-strategic
loans.
(10) The average Serviced Loan Portfolio is calculated by adding the beginning
and ending balances for the periods presented and dividing the sum by two.
7
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SECURITIES INVOLVES CERTAIN RISKS. PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, IN ADDITION TO
THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, IN EVALUATING AN INVESTMENT
IN THE SECURITIES OFFERED HEREBY.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. As a result of the Company's increasing volume of loan
originations and purchases, and its expanding securitization activities, the
Company has operated, and expects to continue to operate, on a negative
operating cash flow basis, which is expected to increase as the volume of the
Company's loan purchases and originations increases and its securitization
program grows. The Company's primary operating cash requirements include the
funding of (i) loan originations and loan purchases, (ii) reserve accounts,
overcollateralization requirements, fees and expenses incurred in connection
with its securitization program, (iii) tax payments due on the Company's
reported net income (which is computed on the Company's "Gain on Sale," which
with respect to securitizations is equal to the present value of the
Company's portion of the expected future excess cash flow to be received on
the loans sold through securitization transactions, in excess of
securitization costs and net premiums paid, and is taxable, in part, during
the year the related securitization transaction closes) and (iv)
administrative, marketing and other operating expenses.
The Company's operations provided $5.0 million and $3.7 million of cash
in fiscal 1993 and fiscal 1994, respectively, and used $25.7 million and
$177.1 million of cash in fiscal 1995 and the nine months ended June 30,
1996, respectively. In fiscal 1995 and the nine months ended June 30, 1996,
the Company funded its cash requirements from borrowings under its warehouse
facilities, $39.8 million of long-term borrowings under its $70 million term
line (the "Term Line") with the Warehouse Lender (which permits the Company
to borrow up to 65% of the value of the Excess Servicing Receivable as
determined by the lender and which expires in March 1997), the issuance of
$7.0 million of 12% subordinated notes due March 31, 2000 (the "Subordinated
Notes"), $5.5 million of short-term borrowings from Farm Bureau and $51.2
million of net proceeds from the Company's initial public offering. The
Company's financing facilities consist of (i) a $130 million warehouse line
with the Warehouse Lender, which matures in March 1997, (ii) a $60 million
warehouse facility (the "Bank One Warehouse Facility") with Bank One, Texas,
N.A. ("Bank One"), which matures in March 1997, and (iii) a $300 million
master repurchase facility with Bear Stearns Home Equity Trust 1996-1 (the
"Bear Stearns Facility"), which matures in May 1997. There can be no
assurance that as the Company's existing lending arrangements mature, the
Company will have access to the financing necessary for its operations and
its growth plans or that such financing will be available to the Company on
favorable terms. To the extent the Company is unable to renew existing
warehouse facilities or arrange additional or new warehouse lines of credit,
the Company may have to curtail loan origination and purchasing activities,
which could have a material adverse effect on the Company's results of
operations and financial condition. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources."
NEED FOR ADDITIONAL FINANCING. The Company requires substantial capital
to fund its operations. Consequently, the Company's operations and its
ability to grow are affected by the availability of financing and the terms
thereof. Currently, the Company funds substantially all of its originations
and operations through the Bank One Warehouse Line, the Bear Stearns
Facility, the Warehouse Facility and the Term Line. At September 30, 1996,
$311.9 million was outstanding under the Company's warehouse facilities and
$62.5 million was outstanding under the Term Line. Accordingly, at such date,
$178.5 million was available for borrowing under the warehouse facilities, a
substantial portion of which has subsequently been drawn. Based on the rate
of growth of the Company's originations in the recent past, the Company
anticipates that it will need to arrange additional warehouse lines of credit
or other financing sources within the next 90 days in order to maintain its
historical growth rates. The Company is currently negotiating for increased
and/or new warehouse facilities; however, the Company has no commitments for
such increased and/or additional financings, and there can be no assurance
that the Company will be successful in consummating such financing
transactions in the future or on terms the Company would consider to be
favorable. If the Company is unable to arrange new warehouse lines of credit
or other financing sources, the Company may have to curtail its loan
origination and purchasing activities, which could have a material adverse
effect on the Company's results of operations and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
DEPENDENCE ON SECURITIZATION TRANSACTIONS. Since the beginning of
fiscal 1995, the Company has utilized a securitization program that involves
the periodic pooling and sale of its strategic loans. The securitization
proceeds have historically
8
<PAGE>
been used to repay borrowings under warehouse facilities, thereby making such
warehouse facilities available to finance the origination and purchase of
additional strategic loans. There can be no assurance that, as the Company's
volume of loans originated or purchased increases and other new products
available for securitization increases, the Company will be able to
securitize its loan production efficiently. In addition, the securitization
market for many types of assets is relatively undeveloped and may be more
susceptible to market fluctuations or other adverse changes than more
developed capital markets. Securitization transactions may be affected by a
number of factors, some of which are beyond the Company's control, including,
among other things, conditions in the securities markets in general,
conditions in the asset-backed securitization market and the conformity of
loan pools to rating agency requirements and to the extent that monoline
insurance is used, the requirements of such insurers. Adverse changes in the
secondary market could impair the Company's ability to originate, purchase
and sell loans on a favorable or timely basis. In addition, the Company's
securitizations typically utilize credit enhancements in the form of
financial guaranty insurance policies in order to achieve better credit
ratings. Failure to obtain acceptable rating agency ratings or insurance
company credit enhancements could decrease the efficiency or affect the
timing of future securitizations. The Company intends to continue public or
private securitizations of its loan pools on a quarterly basis. Any delay in
the sale of a loan pool beyond a quarter-end may eliminate the Gain on Sale
in the given quarter and would likely result in losses for such quarter being
reported by the Company. If the Company were unable to securitize loans due
to changes in the secondary market or the unavailability of credit
enhancements, the Company's growth would be materially impaired and the
Company's results of operations and financial condition would be materially
adversely affected. See "Business - Securitization."
SENSITIVITY TO INTEREST RATES
The Company's profitability may be directly affected by fluctuations in
interest rates. While the Company monitors interest rates and may, from time
to time, employ a strategy designed to hedge some of the risks associated
with changes in interest rates, no assurance can be given that the Company's
results of operations and financial condition will not be adversely affected
during periods of fluctuations in interest rates. The Company employs an
interest rate hedging strategy, which currently includes purchasing put
contracts on treasury securities, selling short treasury securities and
maintaining a pre-funding strategy with respect to its securitizations. Since
the interest rates on the Company's indebtedness used to fund and acquire
loans are variable and the rates charged on loans the Company originates and
purchases are fixed, increases in the interest rates after loans are
originated and prior to their sale could have a material adverse effect on
the Company's results of operations and financial condition. In addition,
increases in interest rates prior to sale of the loans may reduce the Gain on
Sale earned by the Company. The ultimate sale of the Company's loans will fix
the spread between the interest rates paid by borrowers and the interest
rates paid to investors in securitization transactions (the "Excess Servicing
Spread") with respect to such loans, although increases in interest rates may
narrow the potential spread that existed at the time the loans were
originated or purchased by the Company. A significant, sustained rise in
interest rates could curtail the Company's growth opportunities by decreasing
the demand for loans at such rates and increasing market pressure to reduce
origination fees or servicing spreads. The Company has been originating
strategic loans at a greater rate than the Company securitizes such loans,
thus increasing the length of time loans are held for sale, which could
increase its interest rate risk.
The Company's investment in the Excess Servicing Receivable is also
sensitive to interest rates. A decrease in interest rates could cause an
increase in the rate at which outstanding loans are prepaid, thereby reducing
the period of time during which the Company receives the Excess Servicing
Spread and other servicing income with respect to such prepaid loans, thereby
possibly resulting in accelerated amortization of the Excess Servicing
Receivable. Although an increase in interest rates may decrease prepayments,
such increase may not offset the higher interest costs of financing the
Excess Servicing Receivable. See "- Excess Servicing Receivable Risks" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Certain Accounting Considerations."
CREDIT RISK ASSOCIATED WITH BORROWERS
Many of the Company's borrowers are consumers who have limited access to
consumer financing for a variety of reasons, primarily insufficient home equity
value and unfavorable past credit experience. The Company is subject to various
risks associated with these borrowers, including, but not limited to, the risk
that borrowers will not satisfy their debt service payments, including payments
of interest and principal, and that the realizable value of the property
securing such loans will not be sufficient to repay the borrower's obligation to
the Company. The risks associated with the Company's business increase during an
economic downturn or recession. Such periods may be accompanied by decreased
demand for consumer credit and declining real estate values. Any material
decline in real estate values reduces the ability
9
<PAGE>
of borrowers to use home equity to support borrowings and increases the
loan-to-value ratios of the Company's existing loans, thereby weakening
collateral values and increasing the possibility of a loss in the event of
default. Furthermore, the rates of delinquencies and foreclosures and the
frequency and severity of losses generally increase during economic downturns
or recessions. Because the Company lends to borrowers who may be
credit-impaired, the actual rates of delinquencies, foreclosures and losses
on such loans could be higher under adverse economic conditions than those
currently experienced in the consumer finance industry in general. While the
Company is experiencing declining delinquency rates on its Serviced Loan
Portfolio as a whole, delinquency rates have followed historical trends on a
pool-by-pool basis, which trends assume increased rates of delinquencies over
time. Although such levels have, to date, been within the parameters
anticipated by the Company at the time of each securitization, there can be
no assurance that delinquency rates will not increase. In addition, in an
economic downturn or recession, the Company's servicing costs will increase.
Any sustained period of such increased losses could have a material adverse
effect on the Company's results of operations and financial condition.
CREDIT RISK ASSOCIATED WITH HIGH LTV LOANS
Although the Company's strategic loans are typically secured by real
estate, because of the relatively high LTVs of most of the Company's loans,
in most cases the collateral of such loans will not be sufficient to cover
the principal amount of the loans in the event of default. The Company relies
principally on the creditworthiness of the borrower and to a lesser extent on
the underlying collateral for repayment of the Company's Conventional Loans,
and FHA co-insurance with respect to Title I Loans. Consequently, many of the
Company's loans equal or exceed the value of the mortgaged properties, in
some instances involving LTVs of up to 125%. For fiscal 1995 and the nine
months ended June 30, 1996, the weighted average LTVs for Conventional Loans
increased from 91.7% to 109.2% and for Title I Loans increased from 89.2% to
102.4% (based on the principal amounts outstanding at June 30, 1996),
respectively. With respect to many of the Company's loans, LTV determinations
are based upon the borrowers' representations as to the value of the
underlying property; accordingly, there can be no assurance that such
represented values accurately reflect prevailing market prices. With respect
to any default, the Company currently evaluates the cost effectiveness of
foreclosing on the collateral. To the extent that borrowers with high LTVs
default on their loan obligations, the Company is less likely to use
foreclosing as a means to mitigate its losses. Under these circumstances, to
the extent not covered by Title I Program insurance, losses would be applied
to the Company's allowance for possible credit losses on loans sold. Such
absorption, if in excess of the Company's allowance for such losses, could
have a material adverse effect on the Company's financial condition and
results of operations, if such losses required the Company to record
additional provisions for losses on loans sold. See "Business Servicing
Operations - Delinquencies and Foreclosures."
EXCESS SERVICING RECEIVABLE RISKS
ILLIQUIDITY OF THE EXCESS SERVICING RECEIVABLE. When the Company's
loans are pooled and sold in securitization transactions, the Company
recognizes Gain on Sale, which constitutes a substantial majority of the
Company's revenues. The Company records an asset corresponding to its Gain on
Sale (the "Excess Servicing Receivable") on its balance sheet in an initial
amount equal to the present value of the Excess Servicing Spread it expects
to collect over the life of the securitized loans sold. At June 30, 1996, the
Company's balance sheet reflected an Excess Servicing Receivable of
approximately $116.8 million. The Company is not aware of an active market
for this kind of receivable, and no assurance can be given that the
receivable could in fact be sold at its stated value on the balance sheet, if
at all.
In addition, the Gain on Sale is recognized in the period during which
loans are sold, while cash payments are received by the Company pursuant to
its pooling and servicing agreements and servicing fees are paid to the
Company by the securitization trustees over the lives of the securitized
loans. This difference in the timing of cash flows could cause a cash
shortfall, which may have a material adverse effect on the Company's
financial condition and results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
EXCESS SERVICING RECEIVABLE MAY BE OVERSTATED; PROVISION FOR CREDIT
LOSSES MAY BE UNDERSTATED. The calculation of Gain on Sale and the valuation
of the Excess Servicing Receivable are based on certain management estimates
relating to the appropriate discount rate and anticipated average lives of
the loans sold. The discount rate utilized to determine the present value of
the expected stream of payments is currently 11%. The Company records a
corresponding reserve equal to the present value of the expected losses
attributable to the loans being securitized; the discount rate utilized for
this calculation is currently 6.5%. Although the Company records the Excess
Servicing Receivable and the related reserve
10
<PAGE>
on a gross basis, for purposes of evaluation and comparison, the Company
calculates an average net discount rate for the net Excess Servicing
Receivable. This is calculated by subtracting the present value of the
anticipated losses attributable to loans being securitized and sold from the
present value of the expected stream of payments to derive the present value
of the net Excess Servicing Receivable. The Company then determines the
average discount rate that equates the expected payments, net of expected
losses, to the value of the Excess Servicing Receivable, which, with respect
to its most recent securitization, is approximately 12.5%. To estimate the
anticipated average lives of the loans sold in securitization transactions,
management estimates prepayment, default and interest rates on a pool-by-pool
basis. If actual experience varies from management estimates at the time
loans are sold, the Company may be required to write down the remaining
Excess Servicing Receivable through a charge to earnings in the period of
adjustment.
Prepayment rates and default rates may be affected by a variety of
economic and other factors, including prevailing interest rates and the
availability of alternative financing, most of which are not within the
Company's control. A decrease in prevailing interest rates could cause
prepayments to increase, thereby requiring a writedown of the Excess
Servicing Receivable. Even if actual prepayment rates occur more slowly and
default rates are lower than management's original estimates, the Excess
Servicing Receivable would not increase.
Furthermore, management's estimates of prepayment rates and default
rates are based, in part, on the historical performance of the Company's
Title I Loans. A significant portion of the Company's securitized loans sold
were acquired in bulk purchases or were very recently originated. In
addition, the Company is originating an increasing proportion of Conventional
Loans, including debt consolidation loans, while historical performance data
is based primarily on Title I Loans. No assurance can be given that these
loans, as with any new loan, will perform in the future in accordance with
the Company's historical experience. In addition, when the Company introduces
new loan products it may have little or no historical experience on which it
can base its estimates, and thus its estimates may be less reliable. During
the nine months ended June 30, 1996, the Company increased its provision for
credit losses, $2.5 million of which was taken because the default rate for a
pool of Bulk Loans included in the 1995-2 securitization exceeded the
estimates made at the time of the securitization and the adjustment was in
conformity with the Company's current estimation methodology. There can be no
assurance that the Company will not be required in the future to write down
its Excess Servicing Receivable in excess of its provision for credit losses.
Any such writedown could have a material adverse effect on the Company's
financial condition and results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Certain
Accounting Considerations."
FINANCING OF THE EXCESS SERVICING RECEIVABLE. The Company retains
significant amounts of Excess Servicing Receivable on its balance sheet. The
Company currently does not hedge this asset. The Company finances its Excess
Servicing Receivable with term-line borrowings under the Term Line. These
borrowings bear interest at a floating rate. The Company, however, cannot
reprice its Excess Servicing Receivable on its balance sheet, which has an
expected average life of four to six years. Therefore, the Company remains at
risk that its financing sources may increase the interest rates they charge
the Company. At June 30, 1996, the Company's balance sheet reflected $116.8
of Excess Servicing Receivable.
ABILITY OF THE COMPANY TO CONTINUE GROWTH STRATEGY; POSSIBLE ADVERSE
CONSEQUENCES FROM RECENT GROWTH
The Company's total revenues and net income increased 13.6% and 13.2%,
respectively, from fiscal 1994 to fiscal 1995 and 405.8% and 404.6%,
respectively, from the nine months ended June 30, 1995 to the nine months
ended June 30, 1996. Excluding the effects of the pooling of interests with
FIRSTPLUS West, total revenues increased 1,083.6% from fiscal 1994 to fiscal
1995 and 431.1% from the nine months ended June 30, 1995 to the nine months
ended June 30, 1996. Further, excluding the effects of the pooling of
interest with FIRSTPLUS West, net income increased from a loss of $647,000 in
fiscal 1994 to net income of $6.9 million in fiscal 1995 and increased by
330.9% from the nine months ended June 30, 1995 to nine months ended June 30,
1996. The Company does not expect to sustain these growth rates.
The Company's ability to continue its growth strategy depends on its
ability to increase the volume of loans it originates and purchases while
successfully managing its growth. This volume increase is, in part, dependent
on the Company's ability to procure, maintain and manage its increasingly
larger lines of credit. In addition to the Company's financing needs, its
ability to increase its volume of loans will depend on, among other factors,
its ability to (i) offer attractive products to prospective borrowers, (ii)
attract and retain qualified underwriting, servicing and other personnel,
(iii) market its products successfully, especially its new Direct Loan
products, (iv) establish and maintain relationships
11
<PAGE>
with independent correspondent lenders and independent home improvement
contractors in states where the Company is currently active and in additional
states and (v) build national brand name recognition.
In light of the Company's rapid growth, the historical performance of
the Company's operations, including its underwriting and servicing
operations, which were principally related to origination of Title I Loans,
may be of limited relevance in predicting future performance with respect to
Conventional Loans, especially debt consolidation loans. Any credit or other
problems associated with the large number of loans originated in the recent
past may not become apparent until sometime in the future. Consequently, the
Company's historical results of operations may be of limited relevance to an
investor seeking to predict the Company's future performance. In addition,
purchases of Bulk Loans require the Company to rely to a certain extent on
the underwriting practices of the seller of the Bulk Loans. Although the
Company has its own review process when purchasing Bulk Loans, the Company
occasionally must rely upon the underwriting standards of the originator,
which standards may not be as rigorous as the Company's. See "Business - Loan
Production Operations - Bulk Purchases."
The Company's ability to successfully manage its growth as it pursues
its growth strategy will be dependent upon, among other things, its ability
to (i) maintain appropriate procedures, policies and systems to ensure that
the Company's loans have an acceptable level of credit risk and loss, (ii)
satisfy its need for additional financing, (iii) manage the costs associated
with expanding its infrastructure, including systems, personnel and
facilities, and (iv) continue operating in competitive, economic, regulatory
and judicial environments that are conducive to the Company's business
activities. In order to support the growth of its business, the Company has
moved its headquarters in Dallas, Texas to a significantly larger location.
The Company's requirement for additional operating procedures, personnel and
facilities is expected to continue over the near term. The Company is
absorbing the effects of the implementation of new computer hardware and
software to manage its business operations, and it plans to continue to
procure hardware and software that require additional corresponding
investments in training and education. The Company's significant growth has
placed substantial new and increased pressures on the Company's personnel.
There can be no assurance that the addition of new operating procedures,
personnel and facilities together with the Company's enhanced information
systems, will be sufficient to enable it to meet its current operating needs.
Changes in the Company's ability to obtain or maintain any or all of these
factors or to successfully manage its growth strategy could have a material
adverse effect on the Company's operations, profitability and growth. See
"Business - Business Strategy" and "Business - Loan Production Operations."
SUBORDINATION OF NOTES
The indebtedness evidenced by the Notes is subordinate to the prior
payment in full of all Senior Indebtedness (as defined herein). As of June
30, 1996, the Company had approximately $161.3 million of Senior Indebtedness
outstanding. In addition, because substantially all of the Company's
operations and financing activities are conducted through subsidiaries,
claims of holders of indebtedness and of other creditors of such subsidiaries
will have priority with respect to the assets and earnings of such
subsidiaries over the claims of creditors of the Company, including Holders
of the Notes. As of June 30, 1996, the aggregate liabilities of such
subsidiaries (which were not also Senior Indebtedness) were approximately
$26.7 million. The Indenture will not limit the amount of additional
indebtedness, including, Senior Indebtedness or PARI PASSU indebtedness, that
the Company or any of its subsidiaries can create, incur, assume or
guarantee. During the continuance of any default (beyond any applicable grace
period) in the payment of principal, premium, interest or any other payment
due on the Senior Indebtedness, no payment of principal or interest on the
Notes may be made by the Company. In addition, upon any distribution of
assets of the Company upon any dissolution, winding up, liquidation or
reorganization, the payment of the principal and interest on the Notes is
subordinated to the extent provided in the Indenture to the prior payment in
full of all Senior Indebtedness and is structurally subordinated to claims of
creditors of each subsidiary of the Company. By reason of this subordination,
in the event of the Company's dissolution, holders of Senior Indebtedness may
receive more, ratably, and Holders of the Notes may receive less, ratably,
than the other creditors of the Company. The Company's cash flow and ability
to service debt, including the Notes, are substantially dependent upon the
earnings of its subsidiaries and the distribution of those earnings to, or
upon payments by those subsidiaries to, the Company. The ability of the
Company's subsidiaries to make such distributions or payments may be subject
to contractual or statutory restrictions. See "Description of the Notes _
Subordination."
REPURCHASE OF NOTES AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL;
AVAILABILITY OF FUNDS
In the event of a Change of Control (as defined herein), each Holder of
Notes will have the right to require that the Company repurchase the Notes in
whole or in part at a redemption price of 101% of the principal amount thereof,
12
<PAGE>
plus accrued interest to the date of purchase. If a Change of Control were to
occur, there can be no assurance that the Company would have sufficient funds
to pay such redemption price for all Notes tendered by the Holders thereof.
See "Subordination of Notes" above. The Company's ability to pay such
redemption price is, and may in the future be, limited by the terms of its
warehouse facilities or other agreements relating to indebtedness that
constitute Senior Indebtedness.
CONSOLIDATION OF OPERATIONS OF ACQUISITIONS
The Company has, to date, acquired FIRSTPLUS West, FIRSTPLUS East and
National and intends to acquire additional companies in the consumer finance
industry. The Company must successfully integrate the management, marketing,
products and systems associated with its acquisitions if the Company is to
make current or prospective acquisitions financially successful. Acquisitions
may produce excess costs and may become significant distractions to
management if they are not timely integrated. There can be no assurance that
future acquisition opportunities will become available, that such future
acquisitions can be accomplished on favorable terms or that such
acquisitions, if any, will result in profitable operations in the future or
can be integrated successfully with the Company's existing business.
CONCENTRATION OF OPERATIONS IN CALIFORNIA
Approximately 60.3% of the loans in the Serviced Loan Portfolio at June
30, 1996 were secured by subordinate liens on residential properties located
in California. Consequently, the Company's results of operations and
financial condition are dependent upon general trends in the California
economy and its residential real estate market. California has experienced an
economic slowdown or recession over the last several years, which has been
accompanied by a sustained decline in the California real estate market. Such
a decline may adversely affect the values of properties securing the
Company's loans, such that the principal balances of such loans, together
with any primary financing on the mortgaged properties, may equal or exceed
the value of the mortgaged properties, making the Company's ability to recoup
losses in the event of a borrower's default extremely unlikely. In addition,
California historically has been vulnerable to certain risks of natural
disasters, such as earthquakes and erosion-caused mudslides, which are not
typically covered by the standard hazard insurance policies maintained by
borrowers. Uninsured disasters may adversely impact borrowers' ability to
repay loans made by the Company, which could have a material adverse effect
on the Company's results of operations and financial condition.
COMPETITION
The consumer finance market is highly competitive and fragmented. The
Company competes with a number of finance companies that provide financing to
individuals who may not qualify for traditional financing. To a lesser
extent, the Company competes, or will compete, with commercial banks, savings
and loan associations, credit unions, insurance companies and captive finance
arms of major manufacturing companies that currently tend to apply more
traditional lending criteria. Many of these competitors or potential
competitors are substantially larger and have significantly greater capital
and other resources than the Company. In fiscal 1995 and the nine months
ended June 30, 1996, approximately 68.5% and 93.5%, respectively, of the
Company's loans originated were Correspondent Loans, which are expected to
remain a significant part of the Company's loan production program. As a
purchaser of Correspondent Loans, the Company is exposed to fluctuations in
the volume and price of Correspondent Loans resulting from competition from
other purchasers of such loans, market conditions and other factors. In
addition, the Federal National Mortgage Association ("Fannie Mae") has
purchased and is expected to continue to purchase significant volumes of
Title I Loans on a whole-loan basis. Purchases by Fannie Mae could be made
from sources from which the Company also purchases loans. To the extent that
purchasers of loans, such as Fannie Mae, enter or increase their purchasing
activities in the markets in which the Company purchases loans, competitive
pressures may decrease the availability of loans or increase the price the
Company would have to pay for such loans, a phenomenon that has occurred with
respect to Title I Loans. In addition, increases in the number of companies
seeking to originate loans tends to lower the rates of interest the Company
can charge borrowers, thereby reducing the potential value of subsequently
earned Gains on Sales of loans. To the extent that any of these lenders or
Fannie Mae significantly expand their activities in the Company's market or
to the extent that new competitors enter the market, the Company's results of
operations and financial condition could be materially adversely affected.
See "Business - Competition."
13
<PAGE>
DEPENDENCE ON TITLE I PROGRAM
A portion of the Company's business is dependent on the continuation of
the Title I Program, which is federally funded. The Title I Program provides
that qualifying loans are eligible for FHA insurance, although such insurance
is limited. See "Business - Loan Products - Title I Loans." In August 1995,
legislation was introduced in both houses of the United States Congress that
would, among other things, abolish the Department of Housing and Urban
Development ("HUD"), reduce federal spending for housing and community
development activities and eliminate the Title I Program. Other changes to
HUD have been proposed, which, if adopted, could affect the operation of the
Title I Program. As a result of the proposed legislation that would abolish
HUD, if enacted, and the budget legislation impasse between Congress and the
President that occurred during November 1995 and continued into January 1996,
no assurance can be given that the Title I Program will continue in existence
or that HUD will continue to receive sufficient funding for the operation of
the Title I Program. Of the loans originated (excluding bulk purchases) by
the Company in fiscal 1994, fiscal 1995 and the nine months ended June 30,
1996, 43.8%, 49.3% and 18.0%, respectively, by principal amount, were Title I
Loans. In addition, 63.8% of the Bulk Loans purchased by the Company during
fiscal 1995 and the nine months ended June 30, 1996 were Title I Loans.
Discontinuation of or a significant reduction in the Title I Program or the
Company's authority to originate or purchase loans under the Title I Program
could have a material adverse effect on the Company's results of operations
and financial condition.
CONCENTRATION OF CORRESPONDENT LENDERS
Approximately 79.8% and 59.8% of the loans purchased from correspondent
lenders by the Company during fiscal 1995 and the nine months ended June 30,
1996, respectively, were originated through the Company's 10 largest
independent correspondent lenders. The Company believes that it is possible
for its dependence on a small number of independent correspondent lenders to
increase in the near future as the Company focuses extensively on originating
Direct Loans. To the extent that the Company is no longer able to purchase or
originate loans from these significant independent correspondent lenders,
this could have a material adverse effect on the Company's results of
operations and financial condition.
LIMITED OPERATING HISTORY
The Company was formed in 1994 to combine the operations of FIRSTPLUS
Financial and SFAC. The Combination involved the integration of the
operations of two companies that previously operated independently.
Consequently, the Company has a limited operating history under its new
corporate structure upon which prospective investors may base an evaluation
of its performance. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business - Combination."
RIGHT TO TERMINATE SERVICING
On June 30, 1996, approximately 80% (by dollar volume) of the Serviced
Loan Portfolio consisted of loans securitized by the Company and sold to
grantor trusts. The Company's form of pooling and servicing agreement with
each of these trusts provides that the trustee of the related trust may
terminate the Company's servicing rights if certain delinquency or loss
standards are not met. On June 30, 1996, none of the pools of securitized
loans exceeded the foregoing delinquency standards and no servicing rights
have been terminated. However, there can be no assurance that delinquency
rates with respect to Company-sponsored securitized loan pools will not
exceed this rate in the future and, if exceeded, that servicing rights will
not be terminated, which would have a material adverse effect on the
Company's results of operations and financial condition.
IMPACT OF REGULATION AND LITIGATION
The Company's business is subject to regulation and licensing under
various federal, state and local statutes and regulations requiring, among
other things, the licensing of lenders, adequate disclosure of loan terms and
limitations on the terms and interest rates of consumer loans, collection
policies and creditor remedies. An adverse change in these laws or
regulations could have an adverse effect on the Company by, among other
things, limiting the interest and fee income the Company may generate on
existing and additional loans, limiting the states in which the Company may
operate or restricting the Company's ability to realize on the collateral
securing its loans. See "Business - Regulation."
14
<PAGE>
In addition, the elimination of or a substantial reduction in the
current home mortgage interest tax deduction could curtail the amount of home
improvement loan originations, which could have a material adverse effect on
the Company's results of operations and financial condition.
Industry participants are frequently named as defendants in litigation
involving alleged violations of federal and state consumer lending laws and
regulations, or other similar laws and regulations, as a result of the
consumer-oriented nature of the industry in which the Company operates and
uncertainties with respect to the application of various laws and regulations
in certain circumstances. If a significant judgment were rendered against the
Company in connection with any litigation, it could have a material adverse
effect on the Company's financial condition and results of operations. See
"Business - Regulation" and "Business - Legal Proceedings."
The Company's loans under the Title I Program are eligible for FHA
insurance. The FHA insures 90% of such loans and certain interest costs,
provided that the Company has not depleted its loss reserve account
established with the FHA and the loans were properly originated according to
FHA regulations. The amount of insurance coverage in a lender's FHA loss
reserve account is equal to 10% of the original principal amount of all Title
I Loans originated and the amount of the reserves for purchased loans
reported for insurance coverage by the lender, less the amount of all
insurance claims approved for payment in connection with losses on such loans
and other adjustments. If at any time claims exceed the loss reserve balance,
the remaining Title I Loans will be uninsured. In addition, the Title I
Program sets loan origination guidelines that must be satisfied by the lender
in connection with the origination of Title I Loans in order for FHA to
insure those loans. The Company's failure to comply with such requirements
could result in denial of payment by FHA. There can be no assurance that
losses will not exceed the Company's loss reserve account or that the Company
will not be adversely affected by such defaults. The Company's Conventional
Loans are not insured. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Results of Operations" and "Business -
Loan Products."
CONCENTRATION OF VOTING CONTROL IN MANAGEMENT
Daniel T. Phillips, the Company's President, Chief Executive Officer and
Director, and Ronald M. Mankoff, the Company's Chairman of the Board and
General Counsel, beneficially own or otherwise control an aggregate of
approximately 16.7% and 16.8%, respectively, of the outstanding voting Common
Stock. Therefore, Messrs. Phillips and Mankoff are able to exercise
significant influence with respect to the election of the entire Board of
Directors of the Company and all matters submitted to stockholders. Messrs.
Phillips and Mankoff are also able to significantly influence the direction
and future operations of the Company, including decisions regarding the
issuance of additional shares of Common Stock and other securities. In
addition, as long as Messrs. Phillips and Mankoff beneficially own or
otherwise control the largest blocks of issued and outstanding Common Stock
of the Company, it will be difficult for third parties to obtain control of
the Company through purchases of Common Stock not beneficially owned or
otherwise controlled by Messrs. Phillips and Mankoff. See "Principal
Stockholders."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the continued services of Daniel T.
Phillips and Eric C. Green and the Company's other executive officers. While
the Company believes that it could find replacements for its executive
officers, the loss of their services could have an adverse effect on the
Company's operations. Each of the Company's executive officers has entered
into an employment agreement with the Company. See "Management - Employment
Agreements."
EVENTS OF DEFAULT UNDER CERTAIN FINANCING FACILITIES
The loss of the services of Daniel T. Phillips as Chief Executive
Officer of the Company and FIRSTPLUS Financial would constitute an event of
default under the Warehouse Facility, which in turn would result in defaults
under other indebtedness. Mr. Phillips has entered into an employment
agreement with the Company. See "Management - Employment Agreements; Key-Man
Life Insurance."
EFFECT OF CERTAIN CHARTER, BYLAW AND STATUTORY PROVISIONS
Certain provisions of the Company's Amended and Restated Articles of
Incorporation (the "Articles of Incorporation") and Amended and Restated
Bylaws (the "Bylaws") and the Nevada General Corporation Law could delay
15
<PAGE>
or frustrate the removal of incumbent directors and could make difficult a
merger, tender offer or proxy contest involving the Company, even if such
events could be viewed as beneficial by the Company's stockholders. For
example, the Articles of Incorporation deny the right of stockholders to
amend the Bylaws and require advance notice of stockholder proposals and
nominations of directors. The Company is also subject to provisions of the
Nevada General Corporation Law that prohibit a publicly held Nevada
corporation from engaging in a broad range of business combinations with a
person who, together with affiliates and associates, owns 10% or more of the
corporation's outstanding voting shares (an "interested stockholder") for
three years after the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. See "Description of
Capital Stock - Certain Charter, Bylaws and Statutory Provisions."
SHARES ELIGIBLE FOR FUTURE SALE
As of September 30, 1996, the Company has a total of 13,469,908 shares
of Common Stock outstanding. Of these shares, 3,795,000 shares of Common
Stock are freely tradeable by persons other than "affiliates" of the Company,
as that term is defined in Rule 144 under the Securities Act, without
restriction under the Securities Act. The remaining shares are "restricted
securities" and may not be sold unless they are registered under the
Securities Act or sold pursuant to an applicable exemption from registration,
including an exemption under Rule 144. Of these restricted securities,
6,976,844 shares will become eligible for sale in the open market under Rule
144 commencing in October 1996. Sales of substantial numbers of such shares
in public market could adversely affect the market price of the Common Stock.
The Company's executive officers, directors and certain stockholders owning
an aggregate of approximately 7.4 million shares of Common Stock have agreed
that they will not, without the prior written consent of Bear, Stearns & Co.
Inc., directly or indirectly offer to sell, sell or otherwise dispose of any
shares of Common Stock owned by them for a period of 90 days after August 14,
1996. In addition, one stockholder has agreed that it will not, without the
prior written consent of Bear, Stearns & Co. Inc., directly or indirectly,
offer to sell, sell or otherwise dispose of approximately 1.2 million of the
shares of Common Stock owned by such stockholder for a period of one year
after August 14, 1996. In addition, certain shareholders of the Company have
registration rights with respect to the shares of Common Stock owned by them.
Pursuant to such rights, the Company anticipates filing a shelf registration
statement with the Commission registering resales of at least 1,000,000
shares of Common Stock by certain shareholders in November 1996. See
"Description of Capital Stock - Registration Rights."
SECURITIES TRADING; POSSIBLE VOLATILITY OF PRICES
The Notes have been designated for trading in the PORTAL market, and the
Common Stock is quoted on the Nasdaq National Market. There can be no
assurance that an active trading market for the Notes will develop or be
sustained. There can be no assurance as to the liquidity of investments in
the Notes or as to the price Holders of the Notes may realize upon the sale
of the Notes. These prices are determined in the marketplace and may be
influenced by many factors, include the liquidity of the market for the Notes
and Common Stock, the market price of the Common Stock, interest rates,
investor perception of the Company and general economic and market conditions.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Notes, or
the Common Stock issuable upon conversion thereof, by the Selling Holders.
16
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
NINE MONTHS ENDED JUNE 30, YEAR ENDED
-------------------------- SEPTEMBER 30,
1995 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Consolidated pretax income from
continuing operations.................. $6,790,160 $33,608,930 $ 9,742,814
Amortization of capitalized interest.... -- -- --
Interest................................ 1,461,840 8,609,778 2,660,407
Less: interest capitalized during
the period............................. -- -- --
Net amortization of debt discount and
premium and issuance expense........... -- -- --
Interest portion of rental expense...... 137,985 489,081 238,363
---------- ----------- -----------
Earnings.............................. $8,389,985 $42,707,789 $12,641,584
---------- ----------- -----------
---------- ----------- -----------
Interest................................ 1,461,840 8,609,778 2,660,407
Net amortization of debt discount
and premium and issuance expense....... -- -- --
Interest portion of rental expense...... 137,985 489,081 238,363
Preferred stock dividend requirements
of majority-owned subsidiaries
(non-intercompany)..................... -- -- --
---------- ----------- -----------
Fixed Charges......................... $1,599,825 $ 9,098,859 $ 2,898,770
---------- ----------- -----------
---------- ----------- -----------
RATIO OF EARNINGS TO FIXED CHARGES...... 5.2 4.7 4.4
</TABLE>
17
<PAGE>
CAPITALIZATION
The following table sets forth, as of June 30, 1996 (i) the actual
capitalization of the Company and (ii) the capitalization of the Company as
adjusted to give effect to the original sale of the Notes and the application
of the net proceeds therefrom.
JUNE 30, 1996
-------------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
DEBT:
Warehouse financing facilities.................. $142,830 $ 71,177
Term line....................................... 37,069 37,069
Notes payable................................... 1,120 1,120
Subordinated notes payable to related parties... 7,003 7,003
7.25% convertible subordinated notes (1)........ - 100,000
-------- --------
Total debt............................. 188,022 216,369
STOCKHOLDERS' EQUITY:
Preferred Stock, $1.00 par value; 27,600,000
shares authorized; no shares outstanding;
no shares outstanding as adjusted ............ - -
Common Stock, $0.01 par value; 100,000,000
shares authorized; 11,249,570 shares
outstanding (2)................................ 112 112
Non-Voting Common Stock, $0.01 par value;
25,000,000 shares authorized; 2,220,338
shares outstanding............................. 22 22
Additional capital.............................. 54,830 54,830
Retained earnings............................... 26,229 26,229
-------- --------
Total stockholders' equity............. 81,193 81,193
-------- --------
Total capitalization................ $269,215 $297,562
-------- --------
-------- --------
- -------------
(1) The 7.25% convertible subordinated notes are before discounts and
commissions.
(2) Excludes an aggregate of 835,570 shares of Common Stock subject to
outstanding options and warrants. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources," "Management -- Stock Option Plan," "Nonemployee Director Stock
Option Plan" and "Certain Relationships and Related Party Transactions --
Relationship with Farm Bureau."
18
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock has been quoted on the Nasdaq National Market under the
symbol "RACF" since the Company's initial public offering in February 1996 at
$17.00 per share. The following table sets forth the high and low sales prices
of the Common Stock for the periods indicated, as reported by the Nasdaq
National Market.
1996 HIGH LOW
---- ---- ---
Second Quarter (beginning February 1, 1996)................ $23.75 $17.50
Third Quarter.............................................. $32.50 $22.00
Fourth Quarter (through September 30, 1996)................ $45.75 $44.50
As of June 30, 1996, the Company had 11,249,570 outstanding shares of
Voting Common Stock held by 33 stockholders of record. As of June 30, 1996,
the Company had 2,220,338 outstanding shares of Non-Voting Common Stock held
by three stockholders of record.
The Company has never paid, and has no present intention of paying, cash
dividends on its Common Stock. The Company currently intends to retain its
earnings to finance the growth and development of its business. Any
determination in the future to pay dividends will depend on the Company's
financial condition, capital requirements, results of operations, contractual
limitations and any other factors deemed relevant by the Board of Directors.
Under the terms of the Company's warehouse facilities and Subordinated Notes,
the Company's ability to pay cash dividends to its stockholders is limited.
SELECTED FINANCIAL DATA
The following table sets forth historical selected financial information
of the Company as of the dates and for the periods indicated. The Company was
formed by the shareholders and management of SFAC and the parent of FIRSTPLUS
Financial to acquire FIRSTPLUS Financial in the Combination, which was
accounted for as a purchase of FIRSTPLUS Financial and was consummated on
October 4, 1994. In May 1996, the Company acquired FIRSTPLUS West in a
transaction accounted for as a pooling of interests. As a result of the
pooling, the historical financial information of the Company has been
restated to include the financial information of FIRSTPLUS West. The
financial information for FIRSTPLUS West included in the three years ended
September 30, 1995, reflects information for FIRSTPLUS West's three fiscal
years ended April 30, 1995. The financial information for the nine months
ended June 30, 1995 and 1996 has been recast to conform to the Company's
fiscal year end. See Note 1 to the consolidated financial statements of the
Company. The results of operations for the nine months ended June 30, 1996
are not necessarily indicative of the operating results to be expected for a
full year.
The income statement and balance sheet data is derived from the
consolidated audited financial statements of the Company. The information set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and all of the
financial statements and the notes thereto and other financial information
included elsewhere in this Prospectus.
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30 -------------------
----------------------- JUNE 30, JUNE 30,
1993 1994 1995(1) 1995 1996
----- ---- ------- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA (2):
Revenues:
Gain on sale of loans, before
sharing........................$17,115 $27,671 $ 40,112 $25,385 $90,351
Sharing arrangements (3)........ - - (10,999) (7,201) (536)
------- ------- -------- ------- -------
Gain on sale of loans,
net (4)(5)................... 17,115 27,671 29,113 18,184 89,815
Interest........................ 145 1,845 2,860 1,673 10,761
Servicing income................ - 72 1,049 698 2,674
Other income.................... 54 252 873 923 5,392
------- ------- -------- ------- -------
Total revenue 17,314 29,840 33,895 21,478 108,642
Expenses:
Salaries and employee benefits.. 7,265 17,054 10,110 5,984 22,542
19
<PAGE>
Interest........................ 28 1,041 2,660 1,462 8,610
Other operating expense......... 2,632 6,465 6,963 4,986 17,320
Provision for possible credit
losses......................... - 125 4,420 2,256 26,561
------- ------- -------- ------- -------
Total expenses................ 9,925 24,685 24,153 14,688 75,033
Income before income taxes...... 7,389 5,155 9,742 6,790 33,609
Provision for income taxes...... - - (3,903) (2,660 )(12,771)
------- ------- -------- ------- -------
Net income (5)................$ 7,389 $ 5,155 $ 5,839 $ 4,130 $20,838
------- ------- -------- ------- -------
------- ------- -------- ------- -------
PER SHARE DATA:
Net income per common
share (5)(6)................... $0.94 $0.62 $0.56 $0.39 $1.70
Weighted average common and
common equivalent shares
outstanding.................... 7,798 8,138 10,148 10,148 12,206
SEPTEMBER 30, JUNE 30,
----------------- ---------
1994 1995 1996
---- ---- ----
BALANCE SHEET DATA (2):
Excess servicing receivable, net............... $ - $29,744 $116,753
Loans held for sale............................ 6,105 19,435 165,740
Total assets................................... 12,141 61,341 322,853
Warehouse financing facilities................. 4,995 18,530 142,830
Term line...................................... - 9,249 37,069
Subordinated notes............................. - 8,002 7,003
Total liabilities.............................. 7,821 49,607 241,659
Stockholders' equity........................... 4,321 11,734 81,194
- -------------
(1) In November 1995, the Company acquired FIRSTPLUS East in a transaction
accounted for as a purchase. Giving effect to the acquisition, the income
statement data for the year ended September 30, 1995 would reflect total
revenues of approximately $37.2 million and total expenses of approximately
$27.4 million. See Note 16 to the consolidated financial statements of the
Company.
(2) Prior to October 1, 1992, the Company had no significant operations. See
Note 1 to the consolidated financial statements of the Company.
(3) The Company contractually agreed to share its gain on sale of loans,
net, with the Warehouse Lender as a condition of obtaining certain financing
facilities and also with Farm Bureau. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Certain Relationships and Related Party Transactions
- -- Relationship with Farm Bureau."
(4) Gain on sale of loans, net, is net of sharing arrangements and the
premiums related to and costs of securitizations but not net of the Company's
related provisions for possible credit losses.
(5) Excluding the effect of the pooling of interests with FIRSTPLUS West,
gain on sale of loans, net, was $439,000, $2.1 million, $25.1 million and
$79.2 million for fiscal 1993, 1994 and 1995 and the nine months ended June 30,
1996, respectively. Excluding the effect of the pooling of interests with
FIRSTPLUS West, the Company experienced a loss of $180,000 and $647,000 for
fiscal 1993 and 1994, respectively, and earned $6.9 million and $20.8
million, or $0.71 and $1.70 per share, for fiscal 1995 and the nine months
ended June 30, 1996, respectively. See Notes 1 and 9 to the consolidated
financial statements of the Company.
(6) Net income per common share is computed by dividing net income, less
accrued and unpaid dividends on preferred stock (the balance of which was
redeemed in connection with the Company's initial public offering in February
1996), by the weighted average common and common equivalent shares
outstanding. Common and common equivalent shares issued at prices below the
initial public offering price during the 12 months ended September 30, 1995
have been
20
<PAGE>
included in the calculation of common and common equivalent shares,
using the treasury stock method, as if they were outstanding for all periods
presented.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of
operations of the Company should be read in conjunction with the preceding
"Selected Financial Data." Additionally, the Company's Consolidated Financial
Statements and the notes thereto, and the separate financial statements of
FIRSTPLUS Financial and the notes thereto, as well as other data included in
this Prospectus, should be read and analyzed in combination with the analysis
below.
GENERAL
The Company is a specialized consumer finance company that originates,
purchases, services and sells consumer finance receivables, substantially all
of which are home improvement or debt consolidation loans secured by liens on
real property. The Company offers Conventional Loans and Title I Loans to
certain qualified borrowers and sells substantially all of such strategic
loans primarily through its securitization program, retaining rights to
service these loans. The Company originated and purchased an aggregate of
$227.9 million and $558.9 million of strategic loans (including bulk
purchases of loans) in the fiscal year ended September 30, 1995 and the nine
months ended June 30, 1996, respectively. The Company securitized an
aggregate of $234.8 million and $427.2 million of loans in fiscal 1995 and
the nine months ended June 30, 1996, respectively. The Company also
originated $83.4 million and $320.9 million of non-strategic loans in fiscal
1995 and the nine months ended June 30, 1996, respectively, which it sold to
third-party lenders on a whole-loan basis, with servicing rights released. As
of June 30, 1996, the principal amount of loans in the Serviced Loan
Portfolio was $750.5 million.
CERTAIN ACCOUNTING CONSIDERATIONS
As a fundamental part of its business and financing strategy, the
Company sells substantially all of its strategic loans to third-party
investors in securitization transactions. In a securitization transaction,
loans originated and purchased by the Company are sold to an independent
entity, generally a grantor trust, which holds the loans as trustee for
third-party investors. The Company retains the right to service the
securitized loans or appoint an approved subservicer. In addition, the
Company is entitled to receive excess cash flows generated by the securitized
loans calculated as the difference between (a) interest at the stated rate
paid by borrowers and (b) the sum of (i) pass-through interest paid to third
party investors, (ii) trustee fees, (iii) FHA insurance fees, (iv)
third-party credit enhancement fees, (v) normal servicing fees and (vi) loan
portfolio losses. The Company's right to receive this excess cash flow stream
begins after certain reserve requirements have been met, which are specific
to each securitization and are used as a means of credit enhancement. The
Company determines the present value of this anticipated revenue stream at
the time each securitization transaction closes utilizing valuation
assumptions appropriate for each particular grantor trust and records this
asset as an Excess Servicing Receivable at that time. The significant
assumptions are generally related to the anticipated average lives of the
loans sold and the anticipated credit losses related thereto. The Company
currently utilizes a constant prepayment assumption rate of 13% to 15.5%
after the first year (a lower average rate is used in the first year) and
currently utilizes a constant annual gross loan charge-off rate of
approximately 1.5% to 2.5%, with certain adjustments, depending upon the
credit quality and seasoning of the loans. In order to determine the present
value of this excess cash flow, the Company currently applies an estimated
market discount rate of 11% to the expected pro forma gross cash flow
calculated utilizing the weighted average maturity of the securitized loans,
and currently applies a risk free discount rate of 6.5% to the anticipated
losses attendant to this pro forma cash flow stream (the "Allowance for
Possible Credit Losses on Loans Sold"). Accordingly, the effective current
average net discount rate utilized on the cash flows, net of expected credit
losses is approximately 12.5%. As of June 30, 1996, the Company's Excess
Servicing Receivable was recorded at $116.8 million, and its Allowance for
Possible Credit Losses on Loans Sold was recorded at $27.4 million or
approximately 20% of the Company's Excess Servicing Receivable. The present
value of the Company's portion of the expected future excess cash flow to be
received on loans sold through securitization transactions, in excess of
securitization costs and net premiums paid, is recorded as Gain on Sale of
loans revenue, and the discounted value of the anticipated losses is recorded
as provision for possible credit losses, in the period during which the
securitization occurs. "Gain on Sale of loans, net" refers to Gain on Sale of
loans less any sharing arrangements, but before any provision for possible
credit losses.
21
<PAGE>
With respect to the calculation of the constant annual gross charge-off
rate for a particular securitization pool, the Company, in part, utilizes the
weighted average FICO score of that securitization pool to measure the
creditworthiness of the borrowers whose loans are included in the pool. The
Company's securitization pool score distribution typically falls between 590
to 729 with a weighted average pool score of between 650 and 680. A FICO
score of 590 or below will generally constitute a borrower that the Company
classifies as a "D" credit with an estimated annual default rate of 2.9% or
more, and a FICO score of approximately 680 or better will generally
constitute a borrower that the Company classifies as an "A" credit with an
estimated annual default rate of 1.2% or less. The Company estimates default
rates for FICO scores based on historical loan performance and other data
available to the Company.
The Company assumes that its securitization pools will produce constant
annual default rates that correspond to the historical default rates for the
FICO scores associated with the individual pools, adjusted for accelerated
levels of defaults for loan pools with FICO scores lower than 620 and for
seasoned loans that have little or no increase in the frequency of defaults,
when valuing the Excess Servicing Receivable attributable to these
securitizations. Based on the Company's average life estimates, these rates
result in cumulative defaults of approximately between 6% and 12% over the
life of each respective securitization. The Company also estimates total
delinquencies (i.e., loans more than 30 days past due) to average 6% to 9%
over the life of each securitization.
The Company records its loans at the lower of cost or market. The
Company typically originates Direct Loans and Indirect Loans at or below par
and Correspondent Loans at or above par. Any originations below par are
recorded as loan origination discounts, thereby reducing the Company's cost
basis in such loans. Any purchases above par are recorded as loan purchase
premiums, thereby increasing the Company's cost basis in its loans. If the
Company's accounts reflect net discounts in excess of premiums at the time it
securitizes such loans, the Company recognizes such net discount as a
reduction to its cost of loans sold expense at that point in time.
Conversely, if the Company's accounts reflect net premiums in excess of
discounts at the time it securitizes its loans, the Company recognizes such
net premium as an addition to its cost of loans sold expense at that point in
time.
As of June 30, 1996 the reserve on the loans held for sale equaled
$1.6 million, or 1.0% of the Company's $165.7 million portfolio of loans held
for sale. The Company nets this reserve against its loans held for sale on
the Company's balance sheet. The Company believes this reserve is adequate,
although there can be no assurance that it is.
The estimated weighted average life of the Company's loan pools
determines the structure and duration of the securities issued as well as the
U.S. Treasury instruments upon which the prices of the loan tranches are
based. In addition, this estimate is one of the assumptions used in
calculating the Gain on Sale of loans. Weighted average lives are based on
the remaining maturities and estimated prepayment rates of the loans to be
securitized. The terms of the Company's loan originations range from six
months to 300 months; however, the majority of the Company's originations
carry contractual terms to maturity from 180 to 300 months.
The prepayment rate of the securitized loans is a function of full and
partial prepayments and defaults. As an aggregate, these prepayment
components are expressed through a market convention known as a constant or
conditional prepayment rate ("CPR"). Based on prior performance, industry
analysis, and management's experience, the Company expects the CPR on the
loans it securitizes to range from 12% to 16%. The Company currently utilizes
a 13% to 15.5% CPR, adjusted downward in the first 12 months to reflect a
lack of seasoning, to value its loan portfolio. Using the weighted average
maturities and prepayment ranges described above, the Company expects its
securitized pools to have average lives of four to six years.
The Gain on Sale and the related Excess Servicing Receivable is
recognized in the period during which loans are sold, although subsequently
earned servicing fees paid to the Company by the securitization trustee are
recognized as received over the lives of the securitized loans. The Company
records the Excess Servicing Receivable as an asset on its balance sheet in
an initial amount equal to the present value of the pro forma cash flow
utilizing the constant prepayment and charge-off rates described above, as
applied to the weighted average maturity of the securitized loans. The
receivable is subsequently reduced as cash attributable to the Excess
Servicing Receivable is collected by the Company. The Company also reports
any origination discounts (net of origination premiums) as additional income
at the time the securitization transaction closes. The Company earns
additional income from its Excess Servicing Receivable, which it records as
interest income on an interest accrual method, and servicing revenues and
fees (ranging from 0.75% to 1.25%) as they are earned and collected.
22
<PAGE>
There can be no assurance that the Company's estimates used to determine
the Gain on Sale and Excess Servicing Receivable valuations will remain
appropriate for the life of each securitization. If actual loan prepayments
or defaults exceed the Company's estimates, the carrying value of the
Company's Excess Servicing Receivable may have to be written down or the
Company may increase its Allowance for Possible Credit Losses on Loans Sold
through a charge against earnings during the period within which management
recognizes the disparity. The Company will not write up its Excess Servicing
Receivable to reflect slower than expected prepayments, although slow
prepayments may ultimately result in subsequent additional earnings for the
Company if cash flows in excess of the amortization of the Excess Servicing
Receivable are ultimately received by the Company. Other factors may also
result in a writedown of the Company's Excess Servicing Receivable in
subsequent periods. See Note 5 to the consolidated financial statements of
the Company.
The Company also originates non-strategic loans, which it sells to
third-party lenders, on a servicing-released basis. These loans are either
first liens or subordinate liens that do not meet the Company's
securitization criteria. The Company also records these loans at cost, net of
premium or discount, and records a Gain on Sale, net of costs. The Company
plans to convert the non-strategic loan operations to operations that will
originate strategic loans that meet the Company's current securitization
parameters.
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1996
VERSUS NINE MONTHS ENDED JUNE 30, 1995
The Company's total revenues increased to $108.6 million for the nine
months ended June 30, 1996 from $21.5 million for the nine months ended June
30, 1995, an $87.2 million increase or 405.8%. Excluding the effect of the
pooling of interests with FIRSTPLUS West, the Company's total revenues
increased to $94.9 million for the nine months ended June 30, 1996 from
$17.9 million for the nine months ended June 30, 1995, an increase of $77.0
million or 431.1%. This increase was primarily the result of increases in the
Company's Gain on Sale of loans, net, although the Company also experienced
significant increases in its servicing related income, interest income and
other income during this time period.
The following table sets forth information regarding the components of the
Company's revenue for the nine months ended June 30, 1995 and 1996:
NINE MONTHS ENDED JUNE 30,
--------------------------
1995 1996
---- ----
(IN THOUSANDS)
Gain on sale of loans, before sharing.............. $25,385 $ 90,351
Sharing arrangements............................... (7,201) (536)
------- --------
Gain on sale of loans, net (1).................. 18,184 89,815
Interest income.................................... 1,673 10,761
Servicing income................................... 698 2,674
Other income....................................... 923 5,392
------- --------
Total........................................... $21,478 $108,642
------- --------
------- --------
- -------------
(1) Gain on sale of loans, net, is net of sharing arrangements and the
premiums related to and costs of securitizations but not net of the Company's
related provision for possible credit losses.
Gain on Sale of loans, net, increased to $89.8 million for the nine
months ended June 30, 1996 from $18.2 million for the nine months ended June
30, 1995, an increase of $71.6 million or 393.9%. The Company securitized and
sold $427.2 million of strategic loans during the nine months ended June 30,
1996 (resulting in Gain on Sale of loans, net, of $78.5 million) and $169.0
million of loans during the nine months ended June 30, 1995, a $258.2 million
increase or 153% (resulting in Gain on Sale of loans, net, of $15.4 million).
The Company sold $213.1 million of non-strategic loans in whole-loan sales
during the nine months ended June 30, 1996 (resulting in Gain on Sale of
loans, net, of $8.5 million) and $92.6 million of non-strategic loans in
whole-loan sales during the nine months ended June 30, 1995 (resulting in
Gain on Sale of loans, net, of $2.8 million). Additionally, the Company
earned a weighted average 12.88% profit margin (the ratio of its Gain on Sale
of loans, net, as a percentage of loans securitized and sold) on the loans it
23
<PAGE>
securitized and sold during the nine months ended June 30, 1996, compared to
a 8.97% weighted average profit margin on the loans securitized and sold
during the nine months ended June 30, 1995.
The following table sets forth certain data with respect to each of the
four securitizations the Company closed during the nine months ended June 30,
1996 (funding for 1996-2 was not completed until July 1996):
1995-4 1996-1 1996-2 1996-A (1)
------ ------ ------ ----------
(DOLLARS IN THOUSANDS)
Loans sold............................. $77,599 $115,559 $241,625(2) $8,516
Overcollateralization.................. 2,400 4,440 8,375 -
------- -------- -------- ------
Total loans securitized................ $79,999 $119,999 $250,000 $8,516
------- -------- -------- ------
------- -------- -------- ------
Gain on sale of loans, net............. $16,049 $ 24,190 $ 43,131 $ 691
Provision for possible credit losses... 3,505 5,751 12,547 203
------- -------- -------- ------
Gain on sale of loans, after provision
for possible credit losses............ $12,544 $18,439 $ 30,585 $ 488
------- -------- -------- ------
------- -------- -------- ------
Net gain as a percentage of total loans
securitized ("profit margin")......... 16.2% 16.0% 12.7% 5.7%
Weighted average maturity of
certificates sold (yrs.).............. 4.2 4.4 4.8 2.9
Weighted average FICO score............ 645 656 662 651
Title I Loans as a percentage of total
loans securitized..................... 37.5% 19.7% 11.8% 100.0%
- -------------
(1) Primarily consisted of unsecured Title I Loans.
(2) Only $209.4 million of the $250.0 million securitization was funded
during the nine months ended June 30, 1996.
The Company's increased securitization activity is related to the
increased origination of strategic loans for the nine months ended June 30,
1996, as adjusted for increased loan inventory levels. The Company was able
to increase its production of strategic loans during the nine months ended
June 30, 1996, compared to the same period ended June 30, 1995, due to the
following reasons:
1. The Company increased the size of its correspondent network during
this time period, both in number (71 versus 278 for the respective nine-month
periods), and geographically (21 states versus 27 states during the
respective nine-month periods).
2. The Company increased its production of Direct Loans from $470,000
to $14.4 million during the respective nine-month periods;
3. The Company decreased its production of Indirect Loans, which are
generally of lower quality, from $26.0 million to $19.8 million during the
respective nine-month periods; and
4. The Company acquired FIRSTPLUS East in December 1995 in a purchase
transaction and FIRSTPLUS West in May 1996 in a pooling transaction. During
the nine months ended June 30, 1996, FIRSTPLUS East and FIRSTPLUS West
originated a total of $92.0 million of strategic loans.
During the nine months ended June 30, 1996, the Company originated and
securitized a greater percentage of Conventional Loans, when compared to the
nine months ended June 30, 1995. This continued increase in Conventional Loan
emphasis is a result of the relatively small size of the Title I Loan market
(the Company estimates this market at under $2 billion in originations
annually) and the Company's desire to meet the needs of its customers, who
generally request higher loan amounts and more flexible loan proceeds
utilization than the Title I program offers. Although Conventional Loans
require the Company to reserve greater amounts for anticipated losses than do
Title I Loans, Title I Loans generally produce lower gross revenues, due to
the increased premiums paid in acquiring Title I Loans.
24
<PAGE>
The Company's profit margin on securitized loans increased from a
weighted average of 8.97% for the nine months ended June 30, 1995 to 12.88%
for the nine months ended June 30, 1996, an increase of 3.91%. A portion of
this increase was due to the fact that the Company was required to share its
securitization gains in its 1994-1 and 1995-2 securitizations, which closed
in December 1994 and June 1995, respectively. The Company was not required to
share any securitization gain for any securitizations closed during the
nine-month period ended June 30, 1996; however, $9.2 million of loans
delivered in October 1995, which were attributable to the 1995-3
securitization, were subject to sharing with the Warehouse Lender. Profit
margin increases also resulted from the favorable interest rate environment
during the period from October 1995 to January 1996, and from increases in
interest paid over the life of the loan.
The Company's Gain on Sale profit ratio decreased from 16.0% in the
Company's March 1996 securitization (1996-1) to 12.7% in the Company's June
1996 securitization (1996-2). This reduction in the Company's Gain on Sale
profit ratio was primarily due to the sharp increases in general interest
rates during the period from February 1996 to June 1996.
The Company paid net loan premiums of $16.8 million for the nine months
ended June 30, 1996, compared to $194,700 of net loan discounts received for
the nine months ended June 30, 1995. This represented an average loan
purchase price of 103.2% of par for the nine months ended June 30, 1996, and
99.6% of par for the same period ended June 30, 1995. This increase resulted
from the Company purchasing loans with relatively higher FICO scores and
increased competition for Title I Loans. Loan purchase prices are directly
related to the quality of the loans purchased, the face interest rate of the
acquired loans, the quantity of loans the seller commits to sell, the nature
and longevity of the relationship the Company maintains with the seller and
competitive pressures.
Interest income increased from $1.7 million for the nine months ended
June 30, 1995, to $10.8 million for the nine-month period ended June 30,
1996, an increase of $9.1 million or 535%. This increase was primarily the
result of the Company's significant increase in the Company's average balance
of Loans Held for Sale and an increased balance in its Excess Servicing
Receivable. The Company securitizes its loans on a regular basis; however, it
earns interest income on the loans it originates prior to such
securitizations. During the nine-month periods ended June 30, 1995, and June
30, 1996, the Company's average monthly balance of Loans Held for Sale,
including non-strategic loans, was $5.4 million and $122.2 million at par,
respectively, an increase of $116.9 million or 2,182.4%.
Servicing fee income increased from $698,000 for the nine months ended
June 30, 1995 to $2.7 million for the similar period ended June 30, 1996 or a
283.0% increase. This increase was primarily the result of a significant
increase in average Serviced Loan Portfolio for the respective time periods:
$71.9 million for the nine months ended June 1995 to $494.6 for the nine
months ended June 1996, a $422.6 million or a 587.5% increase. This increase
in the Company's Serviced Loan Portfolio was the result of the Company's
increases in loan originations and securitizations during the respective time
period.
Other income increased from $923,000 for the nine months ended June 30,
1995 to $5.4 million for the nine months ended June 1996, an increase of
$4.5 million or 484.1%. Other income is proportional to the Company's loan
origination volume from selected dealers. It consists primarily of loan
application fees that are funded by borrowers at closing.
The following table sets forth information regarding the components of
the Company's expenses for the nine months ended June 30, 1996 and 1995:
FOR THE NINE MONTHS ENDED JUNE 30,
----------------------------------
1995 1996
---- ----
(IN THOUSANDS)
Salaries and employee benefits............. $ 5,984 $22,542
Interest expense........................... 1,462 8,611
Other expenses............................. 4,986 17,319
Provision for possible credit losses....... 2,256 26,561
------- -------
Total $14,688 $75,033
------- -------
------- -------
25
<PAGE>
Salaries and employee benefits increased from $6.0 million for
the nine months ended June 30, 1995 to $22.5 million for the period ended
June 30, 1996, an increase of $16.6 million or 276.7%. The Company employed
313 persons as of June 30, 1995 and 754 persons as of June 30, 1996, an
increase of 141%. However, during the same time, total revenues increased
from $21.5 million to $108.6 million, an increase of $87.1 million or 405.1%.
Therefore, although the number of employees increased, the Company's
employees were able to originate, securitize and service a disproportionately
larger amount of loan volume, thereby generating disproportionately larger
revenues per employee. The Company earned $68,620 of revenue per employee for
the nine months ended June 30, 1995 compared to $144,087 of revenue per
employee for the nine months ended June 30, 1996.
Interest expense increased from $1.5 million for the nine months ended
June 30, 1995 to $8.6 million for the nine months ended June 30, 1996, an
increase of $7.1 million or 473.3%. Interest expense increased primarily
because of the significant increases in borrowings under the Company's
warehouse facilities incurred during the nine-month period ended June 30,
1996 when compared to the 1995 period, partially offset by more favorable
interest rates. As of June 30, 1996, the Company's warehouse debt totaled
$142.8 million and bore interest at a weighted average rate of approximately
6.6%. As of June 1995, the Company's warehouse debt totaled $17.5 million and
bore interest at a weighted average interest rate of approximately 10.0%.
Other operating expenses increased to accommodate the significantly
expanded loan origination, loan servicing and loan securitization volumes
during the respective nine-month periods. Other operating expenses consist
primarily of Title I Program insurance premiums paid upon the origination of
Title I Loans, professional fees, rents and the costs associated with
marketing, underwriting, administration and servicing. The Company expects to
incur significantly greater marketing expenses subsequent to June 30, 1996
due to its strategy of increasing its brand name recognition, and its goal of
generating significantly larger amounts of Direct Loans.
The provision for possible credit losses increased from $2.3 million for
the nine months ended June 30, 1995 to $26.6 million for the nine months
ended June 30, 1996, an increase of $24.3 million or 1,057%. The increase was
primarily attributable to the 170.2% increase in volume of loans securitized
in the 1996 period ($427.2 million) compared to the 1995 period ($169.0
million) and to the fact that a greater amount of securitized loans in the
1996 period were Conventional Loans, which require the Company to provide for
a higher level of losses as compared to insured Title I Loans. To a lesser
extent, the increase is the result of (i) an increase of $2.5 million because
the default rate for a pool of Bulk Loans included in the 1995-2
securitization exceeded the estimates made at the time of the securitization,
which adjustment was determined in conformity with the Company's current
estimation methodology and (ii) an increase of $1.7 million taken for the
increased amount of loans held for sale on the Company's balance sheet.
Income tax expense increased from $2.7 million for the nine-month period
ended June 30, 1995, to $12.8 million for the nine-month period ended June
30, 1996, an increase of $10.1 million or 374.1%. The income tax expense was
recorded at statutory rates.
FISCAL YEAR ENDED SEPTEMBER 30, 1995
VERSUS FISCAL YEAR ENDED SEPTEMBER 30, 1994
The Company's total revenues increased to $33.9 million in fiscal 1995
from $29.8 million in fiscal 1994, an increase of $4.1 million or 13.7%.
Excluding the effect of the pooling of interests with FIRSTPLUS West, the
Company's total revenues increased to $29.0 million in fiscal 1995 from
$2.4 million in fiscal 1994, an increase of $26.5 million or 1,084%.
FIRSTPLUS West's revenues for such periods decreased to $5.0 million from
$27.4 million, as a result of increased interest rates, which adversely
affected its originations of first mortgages, which were primarily
refinancings of existing mortgages. The increase in the volume of strategic
loans originated and purchased by the Company and the commencement of the
Company's securitization program in fiscal 1995 was primarily responsible for
this increase in revenues, although interest, servicing and other income also
increased substantially during the 1995 fiscal year when compared to the 1994
fiscal year. The Company's securitization transactions resulted in Gain on
Sale, which is treated as a revenue item. Gain on Sale increased because the
Company was able to sell a larger volume of loans more efficiently through
securitization transactions, than through whole-loan sales.
Total expenses decreased from $24.7 million in fiscal 1994 to $24.2
million in fiscal 1995, a decrease of $500,000 or 2.2%. Excluding the effect
of the pooling of interests with FIRSTPLUS West, total expenses increased
from $3.1 million to $18.2 million, an increase of $15.1 million or 488%;
however, as a percentage of total revenues, total
26
<PAGE>
expenses decreased from 126.5% in fiscal 1994 to 62.8% in fiscal 1995. The
Company incurred an income tax expense of $3.9 million in fiscal 1995. As a
result of the improved revenues, net income increased from $5.2 million for
fiscal 1994 to net income of $5.8 million for fiscal 1995.
The following table sets forth information regarding the components of
the Company's revenues for the years ended September 30, 1994 and 1995:
YEAR ENDED SEPTEMBER 30,
------------------------
1994 1995
---- ----
(IN THOUSANDS)
Gain on sale of loans, before sharing........... $27,671 $ 40,113
Sharing arrangements............................ - (10,999)
------- --------
Gain on sale of loans, net (1)............... 27,671 29,114
Interest income................................. 1,845 2,860
Servicing income................................ 72 1,049
Other income.................................... 252 873
------- --------
Total $29,840 $33,896
------- --------
------- --------
- -------------
(1) Gain on sale of loans, net, is net of sharing arrangements and the
premiums related to and costs of securitizations but not net of the Company's
related provision for possible credit losses.
Gain on Sale of loans, net, increased to $29.1 million in fiscal 1995
from $27.7 million in fiscal 1994, an increase of $1.4 million or 5.2%.
Excluding the effect of the pooling of interests with FIRSTPLUS West, Gain on
Sale of loans, net, increased to $25.1 million from $2.1 million, an increase
of $23.0 million or 1,110%. The increase was the result of the Company
beginning its securitization program in fiscal 1995 following the acquisition
of FIRSTPLUS Financial. The Company completed four securitizations in fiscal
1995 as compared to none in fiscal 1994.
The acquisition of FIRSTPLUS Financial allowed the Company to enter the
securitization market for Conventional Loans and Title I Loans by providing
the Company with a Title I Loan portfolio, which the Company could continue
to expand, and a servicing platform, which was necessary for the Company to
pursue a successful securitization strategy. Each of the Company's four
securitizations in fiscal 1995 included a majority of Title I Loans. The FHA
insurance associated with these loans was passed through to the
securitization investors. The following table sets forth certain data with
respect to each of the four securitizations completed in fiscal 1995:
1994-1 1995-1 1995-2 1995-3
------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Loans sold.............................. $46,768 $17,331 $104,935 $75,000
Overcollateralization................... - - - 1,750
------- ------- -------- -------
Total loans securitized................. $46,768 $17,331 $104,935 $73,250
------- ------- -------- -------
------- ------- -------- -------
Gain on sale of loans, net.............. $1,973 $2,623 $10,767 $11,214
Provision for possible credit losses.... 704 800 1,485 2,181
------- ------- -------- -------
Gain on sale of loans, after provision
for possible credit losses............. $1,269 $1,823 $9,282 $9,033
------- ------- -------- -------
------- ------- -------- -------
Net gain as a percentage of total loans
securitized profit margin.............. 2.7% 10.5% 8.8% 12.3%
Weighted average maturity of
certificates sold (yrs.)............... 7.5 12.3 13.3 17.1
Weighted average FICO score............. 636 620 667 634
27
<PAGE>
Title I Loans as a percentage of total
loans securitized...................... 90% 66.4% 92.1% 37.8%
The 1995-2 securitization included $8.3 million of Conventional Loans
originated by the Company and $10.0 million of Title I Loans originated by
the Company and $86.7 million of Title I Loans purchased by the Company in a
bulk purchase from Citizens Thrift & Loan ("Citizens"). These loans
represented 82.6% of the 1995-2 securitization. Conventional Loans originated
by the Company therefore totaled 45% of the total loans originated by the
Company and sold in the 1995-2 securitization (i.e., excluding Bulk Loans).
The 1995-3 securitization included $40.9 million of Conventional Loans and
$24.8 million of Title I Loans, or 62.2% and 37.8%, respectively, of the
loans securitized in the fourth quarter of fiscal year 1995. The Company
originated increasingly larger percentages of Conventional Loans with each
succeeding fiscal 1995 quarter.
In June 1995, the Company entered into the Warehouse Facility and the
Term Line. In exchange for entering into these facilities, the Warehouse
Lender was entitled to purchase from the Company, at its cost, a percentage
of the Excess Servicing Receivable earned from loan securitizations.
Additionally, the Excess Servicing Receivable generated from the 1994-1
securitization was shared with Farm Bureau, as it was the owner of a portion
of the loans that were securitized in the transaction.
For various reasons, including the existence of higher quality loan
pools with longer average lives and higher coupon rates, as well as a
declining interest rate environment, the Company's Gain on Sale before
sharing arrangements as a percentage of loans securitized increased from 7.9%
in the 1994-1 securitization to 17.3% in the 1995-3 securitization.
Due to the Company's ability to access the securitization markets,
whole-loan sales decreased during fiscal 1995. Whole-loan sale gains
decreased to $478,000 in fiscal 1995 from $777,000 in fiscal 1994, a decrease
of $300,000 or 39%.
The Company earned net discounts of $1.3 million in fiscal 1994, as
compared with net loan premiums of $826,082 in fiscal 1995. This represented
an average loan purchase price of 90% of par in fiscal 1994 and an average
loan purchase price of 100.4% of par in fiscal 1995. During fiscal 1995, the
Company significantly reduced its origination and purchases of loans to
borrowers it classifies as "D" credits in order to furnish securitization
investors with a higher grade investment. Additionally, in fiscal 1995, the
Company expanded its longer term relationships with larger independent
contractors and correspondents in order to increase its loan volume. Also,
the Company experienced greater competitive pressures during fiscal 1995, as
competitors became more familiar with the Title I product. The combination of
these three factors required the Company to buy its loans at greater prices
during fiscal 1995 as compared with fiscal 1994. The effect of this increase
in prices has been reduced by the increased volume of loans purchased by the
Company.
Interest income increased from $1.8 million during fiscal 1994 to
$2.9 million in fiscal 1995, an increase of $1.0 million or 55%. Excluding
the effect of the pooling of interests with FIRSTPLUS West, interest income
increased from $143,000 in fiscal 1994 to $2.3 million in fiscal 1995, an
increase of $2.2 million or 1,543%; this increase was a result of the
Combination and the Company's securitization program. Interest income is
earned primarily from loans owned and accumulated by the Company for future
securitizations. During fiscal 1994, the Company's average monthly loan
portfolio was $19.2 million at par. During fiscal 1995, the Company's average
monthly loan portfolio was $21.5 million at par. The significant increase in
interest income is primarily due to the Company's increases in the average
monthly loan portfolio.
Servicing fee income increased from $72,000 in fiscal 1994 to $1.0
million in fiscal 1995. Servicing fees are approximately 1% of the
unamortized loan balance and are paid monthly. The Company's Serviced Loan
Portfolio at September 30, 1995 was $238.6 million; however, $83.1 million of
this amount is subserviced for the Company by Citizens as the Company elected
not to replace Citizens as the servicer when it acquired such loans from
Citizens in June 1995. The servicing fees earned by the Company for the loans
subserviced by Citizens are minimal. See "Business -- Servicing Operations --
General."
Other income increased from $252,000 in fiscal 1994 to $873,077 in
fiscal 1995, an increase of $621,311 or 246.8%. Other income is proportional
to the Company's loan origination volume from selected dealers. It consists
primarily of loan application fees, which are funded by borrowers at closing.
28
<PAGE>
The following table sets forth information regarding the components of
the Company's expenses for the years ended September 30, 1994 and 1995:
YEAR ENDED SEPTEMBER 30,
------------------------
1994 1995
------- -------
(IN THOUSANDS)
Salaries and employee benefits.......... $17,054 $10,110
Interest expense........................ 1,041 2,660
Other expenses.......................... 6,465 6,963
Provision for possible credit losses.... 125 4,420
------- -------
Total................................ $24,685 $24,153
------- -------
------- -------
Salaries and employee benefits decreased from $17.0 million in fiscal
1994 to $10.1 million in fiscal 1995, a decrease of $6.9 million or 40.7%.
Excluding the effect of the pooling of interests with FIRSTPLUS West,
salaries and employee benefits increased from $1.6 million in fiscal 1994 to
$6.2 million in fiscal 1995, an increase of $4.6 million or 295%. The
increase was attributable to the Company hiring additional personnel in order
to generate increased levels of loan originations and to manage the increased
servicing activity.
Interest expense increased from $1.0 million in fiscal 1994 to $2.7
million in fiscal 1995, an increase of $1.6 million or 155.7%. Excluding the
effect of the pooling of interests with FIRSTPLUS West, interest expense
increased from $198,000 in fiscal 1994 to $2.4 million in fiscal 1995, an
increase of $2.2 million or 1,120%; interest expense increased because of the
significant increases in warehouse debt and other debts incurred by the
Company during fiscal 1995 as a result of higher levels of loan originations
and purchases and the incurrence of securitization costs and increased
infrastructure costs. Total debt outstanding at September 30, 1994 was $5.6
million as compared with $36.6 million at September 30, 1995. As a percentage
of total revenues, interest expense increased from 3.5% in fiscal 1994
compared to 7.8% in fiscal 1995.
Other operating expenses increased from $6.5 million in fiscal 1994 to
$7.0 million in fiscal 1995, or 7.7%. Excluding the effect of the pooling of
interests with FIRSTPLUS West, other operating expenses increased from $1.2
million in fiscal 1994 to $5.1 million in fiscal 1995, an increase of $3.9
million or 328%. Other operating expenses increased in order to accommodate
the significantly expanded loan origination, loan servicing and loan
securitization volumes experienced by the Company during fiscal 1995. Other
operating expenses consist primarily of Title I Program insurance premiums
paid upon the origination of Title I Loans, professional fees, rents, and the
costs associated with marketing, underwriting, administration and servicing.
The provision for possible credit losses increased from $125,000 for
fiscal 1994 to $4.4 million for fiscal 1995, an increase of $4.3 million. The
provision increased primarily because no loans were securitized in fiscal
1994, and the Company securitized and sold $234.8 million of loans during
fiscal 1995. This provision for fiscal 1995 represented 1.9% of the loans
securitized and sold during the period.
Income tax expense was $3.9 million during fiscal year 1995. The income
tax expense was recorded at statutory rates, but was reduced by net operating
loss carryovers.
FISCAL YEAR ENDED SEPTEMBER 30, 1994
VERSUS FISCAL YEAR ENDED SEPTEMBER 30, 1993
The financial information below is comprised primarily of the financial
results of FIRSTPLUS West.
The following table sets forth information regarding the components of the
Company's revenues for the years ended September 30, 1993 and 1994:
29
<PAGE>
YEAR ENDED SEPTEMBER 30,
------------------------
1993 1994
------- -------
(IN THOUSANDS)
Gain on sale of loans, net (1).............. $17,115 $27,671
Interest income............................. 145 1,845
Servicing income............................ - 72
Other income................................ 54 252
------- -------
Total revenues........................... $17,314 $29,840
------- -------
------- -------
- --------------
(1) Gain on sale of loans, net, is net of sharing arrangements and the
premiums related to and costs of securitizations but not net of the Company's
related provision for possible credit losses.
Total revenues increased from $17.3 million in fiscal 1993 to $29.8
million in fiscal 1994, an increase of $12.5 million or 72%. Excluding the
effect of the pooling of interests with FIRSTPLUS West, total revenues
increased from $533,000 to $2.4 million, an increase of $1.9 million or 359%;
the increase was primarily the result of a 62% increase in Gain on Sale of
loans, net, during fiscal 1994, from $17.1 million to $27.7 million for
fiscal 1993 and 1994, respectively. All loan sales were made on a whole-loan
basis; there were no securitization transactions during fiscal 1993 or 1994.
The following table sets forth information regarding the components of
the Company's expenses for the years ended September 30, 1993 and 1994:
YEAR ENDED SEPTEMBER 30,
------------------------
1993 1994
------- -------
(IN THOUSANDS)
Salaries and employee benefits............. $7,265 $17,054
Interest expense........................... 28 1,041
Other operating expenses................... 2,632 6,465
Other expenses............................. - 125
------ -------
Total expenses........................... $9,925 $24,685
------ -------
------ -------
Total expenses increased from $9.9 million in fiscal 1993 to $24.7
million in fiscal 1994, an increase of $14.7 million or 149%. Excluding the
effect of the pooling of interests with FIRSTPLUS West, total expenses
increased from $714,000 to $3.1 million, an increase of $2.4 million or 333%;
this increase was primarily a result of increased employment and increased
operating costs, which accompanied the Company's increased loan origination
volume.
THREE MONTHS ENDED JUNE 30, 1996
VERSUS THREE MONTHS ENDED MARCH 31, 1996
VERSUS THREE MONTHS ENDED DECEMBER 31, 1995
The Company's total revenues increased to $51.4 million for the third
fiscal quarter ended June 30, 1996 from $33.8 million for the second fiscal
quarter ended March 31, 1996, a $17.6 million increase or 52.0%, and from
$23.5 million for the first fiscal quarter ended December 31, 1995, a $27.9
million increase or 118.9%. This increase is primarily due to increases in
the Company's Gain on Sale of loans, net, although the Company also
experienced significant increases in its interest income and its
origination-related income during these period. The increases in the
Company's total revenues and associated components thereof were due to the
Company's increase in originations of loans with FICO scores above 650, which
were sold primarily in securitization transactions. The increases in
originations not only resulted in significantly higher Gain on Sale
transactions but also contributed to higher levels of interest, servicing and
origination-related income prior to securitization and higher levels of
servicing income subsequent to securitization.
The following table sets forth information regarding the components of
the Company's revenue for the quarters ended December 31, 1995, March 31,
1996, and June 30, 1996:
30
<PAGE>
QUARTER ENDED
-----------------------------------
DECEMBER 31, MARCH 31, JUNE 30,
1995 1996 1996
------------ --------- --------
(IN THOUSANDS)
Gain on sale of loans, net (1)...... $20,273 $28,220 $41,322
Interest income..................... 1,767 2,290 6,704
Servicing income.................... 694 940 1,040
Other income........................ 734 2,348 2,310
------- ------- -------
Total............................ $23,468 $33,798 $51,376
------- ------- -------
------- ------- -------
- -------------
(1) Gain on sale of loans, net, is net of sharing arrangements and the
premiums related to and costs of securitizations but not net of the Company's
related provision for possible credit losses.
Gain on Sale of loans, net, increased to $41.3 million for the quarter
ended June 30, 1996 from $28.2 million for the quarter ended March 31, 1996,
an increase of $13.1 million or 46.4%, and from $20.3 million for the quarter
ended December 31, 1995, an increase of $21.0 million or 103.8%. The Company
securitized and sold $217.9 million of loans during the quarter ended June
30, 1996, $124.7 million during the quarter ended March 31, 1996 and $84.5
million during the quarter ended December 31, 1995. This represented an
increase in the amount securitized and sold of $93.2 million and $40.2
million for the quarter ended June 30, 1996, as compared to the quarters
ended March 31, 1996 and December 31, 1995, or 74.7% and 47.5%, respectively.
The Company earned a weighted average 10.4% profit margin (the ratio of
its Gain on Sale of loans, net, as a percentage of loans securitized and
sold) on the loans it securitized and sold during the quarter ended June 30,
1996, compared to a 15.9% weighted average profit margin on the loans
securitized and sold during the quarter ended March 31, 1996, and compared to
a 15.9% weighted average profit margin on the loans securitized and sold
during the quarter ended December 31, 1995. These profit margin decreases
were the result of the Company's strategy of originating relatively high
quality loans, which are more costly to acquire than lower quality loans, and
increases in interest rates during the succeeding quarters.
The Company's increased securitization activity by quarter is directly
related to the increased originations of loans for each of the quarters ended
December 31, 1995, March 31, 1996, and June 30, 1996, respectively, as
adjusted for increased loan inventory levels. The Company was able to
increase its production of loans during each of the three quarters in the
nine-month period ended June 30, 1996, primarily because the Company was able
to substantially increase the size of its correspondent network. The Company
increased its Direct Loan originations from $684,000 to $5.1 million, to $8.5
million for the successive quarters.
Interest income increased to $6.7 million during the quarter ended June
30, 1996 from $2.3 million during the quarter ended March 31, 1996, and from
$1.8 million during the quarter ended December 31, 1995. The Company
securitizes its loans on a regular basis; however, it earns interest income
on the loans it originates prior to securitization. These increases of $4.4
million or 192.8% and $4.9 million or 279.4%, respectively, are a result of
the Company's significant increase in loan originations.
Servicing fee income increased to $1.0 million for the quarter ended
June 30, 1996 from $940,000 during the quarter ended March 31, 1996, and from
$694,000 during the quarter ended December 31, 1995. These increases of
$100,000 or 10.6% and $346,000 or 49.9%, are a result of a significant
increase in average loans serviced by the Company for the respective periods.
These increases in the Company's Serviced Loan Portfolio were the result of
the Company's increases in loan originations and securitizations during the
respective time periods.
Other income remained relatively stable at $2.3 million for the quarters
ended June 30, 1996 and March 31, 1996, and increased from $734,000 during
the quarter ended December 31, 1995. The increase of $1.6 million or 214.7%
is proportional to the Company's loan origination volume from selected
dealers. It consists primarily of loan application fees that are funded by
borrowers at closing.
The following table sets forth information regarding the components of
the Company's expenses for the three quarters in the period ended June 30,
1996:
31
<PAGE>
QUARTER ENDED
-----------------------------------
DECEMBER 31, MARCH 31, JUNE 30,
1995 1996 1996
------------ --------- --------
(IN THOUSANDS)
Salaries and employee benefits...... $ 5,459 $7,699 $ 9,383
Interest expense...................... 2,043 2,816 3,751
Other expenses........................ 3,761 5,100 8,458
Provision for possible credit losses.. 4,649 7,855 14,058
------- ------- -------
Total.............................. $15,912 $23,470 $35,650
------- ------- -------
------- ------- -------
Salaries and employee benefits increased to $9.4 million for the quarter
ended June 30, 1996 from $7.7 million for the quarter ended March 31, 1996,
an increase of $1.7 million or 21.9%, and from $5.5 million for the quarter
ended December 31, 1995, an increase of $4.0 million or 71.9%. The Company
employed 754 persons as of June 30, 1996, 632 persons as of March 31, 1996, a
19.3% increase, and 544 persons as of December 31, 1995, a 16.2% increase.
Although the number of employees increased during the three quarters in the
period ended June 30, 1996, the Company's employees were able to originate,
securitize and service a disproportionately larger amount of loan volume,
thereby generating disproportionately larger revenues per employee. The
Company earned $74,100 of revenue per average employee for the quarter ended
June 30, 1996, $57,500 of revenue per average employee for the quarter ended
March 31, 1996, and $49,300 of revenue per average employee for the quarter
ended December 31, 1995.
Interest expense increased to $3.8 million for the quarter ended June
30, 1996 from $2.8 million for the quarter ended March 31, 1996, an increase
of $935,000 or 33.2%, and from $2.0 million for the quarter ended December
31, 1995, an increase of $1.7 million or 83.6%. Interest expense increased
primarily due to the increase in the average outstanding balance of the
Company's warehouse debt during each of the three quarters in the period
ended June 30, 1996.
The Company's provision for possible credit losses increased from $4.6
million to $7.9 million and $14.1 million from the quarter ended December 31,
1995, to the quarter ended March 31, 1996, and the quarter ended June 30,
1996, respectively. The Company's provision for possible credit losses
increased proportionally to the Company's securitization volume.
Other operating expenses increased to accommodate the significantly
expanded loan origination, loan servicing and loan securitization volumes
during each of the quarters in the three-month period ended June 30, 1996.
Other operating expenses consist primarily of Title I program insurance
premiums paid upon the origination of Title I Loans, professional fees, rents
and the cost associated with marketing, underwriting, administration and
servicing.
Income tax expense increased to $6.0 million for the quarter ended June
30, 1996 from $3.9 million for the quarter ended March 31, 1996, an increase
of $2.0 million or 52.1%, and from $2.9 million for the quarter ended
December 31, 1995, an increase of $3.1 million or 108.2%. The income tax
expense was recorded at statutory rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations require continued access to financing sources.
The Company's primary operating cash requirements include the funding of (i)
loan originations and purchases, (ii) reserve accounts, over
collateralization requirements, fees and expenses incurred in connection with
its securitization transactions, (iii) tax payments due on the Company's
reported net income, which is based in large part on the Company's
recognition of Gain on Sale and (v) ongoing administrative, marketing and
other operating expenses.
Adequate credit facilities and other sources of funding, which permit
the Company to fund its operating cash requirements and to securitize or sell
loans in the secondary market, are essential to the continuation of the
Company's ability to originate and purchase loans. After utilizing available
working capital, the Company borrows money to fund its loan originations and
purchases, and repays these borrowings as the loans are repaid or sold. Upon
the securitization or sale of loans and the subsequent repayment of the
borrowings, the Company's working capital and warehouse lines of credit then
become available to fund additional loan originations and purchases.
The Warehouse Facility is secured by loans originated or purchased by
the Company and bears interest payable monthly at the rate of 1.25% over the
commercial paper rate of the Warehouse Lender's parent (6.6% per annum as of
32
<PAGE>
September 30, 1996). The net interest advances under the Warehouse Facility
were and will continue to be incurred to originate and purchase loans. In
February 1996, the Company increased the Warehouse Facility from $100 million
to $130 million, extended its expiration to March 1997 and eliminated all
sharing arrangements.
The Company also has the Term Line with the Warehouse Lender, which is
secured by the Company's servicing rights and Excess Servicing Receivable. This
line of credit bears interest at the rate of 2.5% over the commercial paper rate
of the Warehouse Lender's parent (7.8% per annum as of September 30, 1996) with
advances of principal amortized over 60 months. The Term Line may be utilized
for any working capital need; to date, however, the Company has used the Term
Line primarily to finance the Company's share of premium costs, cost of issuance
and initial reserve deposits for credit enhancement. The Company may only borrow
up to 65% of the value of the Company's Excess Servicing Receivable (as
calculated by the lender) under this facility. A portion of the Excess Servicing
Receivable earned upon the successful execution of the 1995-2 and 1995-3
securitization was shared between the Company and the Warehouse Lender as
specified in the Term Line agreement. At September 30, 1996, the Company had
borrowed $62.5 million under this facility and $7.5 million remained available
for borrowing, subject to the Company completing future securitizations. In
January 1996, the Warehouse Lender increased the Term Line from $20 million to
$70 million, eliminated the Term Line excess servicing arrangements effective
with respect to the 1995-4 securitization (which was funded primarily in
November and December 1995) and extended the expiration of the Term Line to
March 1997. In order to facilitate the increased size of the line, and to secure
other modifications favorable to the Company, Farm Bureau, BOCP II, Limited
Liability Company ("BOCP II"), formerly Banc One Capital Partners II, Limited
Partnership, Banc One Capital Partners V, Ltd. ("BOCP V"), Ronald M. Mankoff and
the Phillips Partnership sold to the Warehouse Lender an aggregate of 125,000
shares of Common Stock owned by them for $7.00 per share and the Company issued
to Warehouse Lender warrants to purchase 250,000 shares of Common Stock at an
exercise price of $14.00 per share. See "Description of Capital Stock -
Registration Rights."
The Company has the $60 million Bank One Warehouse Facility, which is
secured by loans originated or purchased by the Company and expires on March 31,
1997. Interest is payable monthly and accrues at 1.25% over the thirty-day
federal funds rate. This warehouse facility has a loan advance rate generally
equal to the lesser of 97% of loan cost or market value of the loan as
determined by Bank One. At September 30, 1996, approximately $50.9 million was
outstanding under this line of credit. Upon the repayment of underlying loan
principal payments or the sale or refinancing of the underlying loans, this
facility is paid down. In January 1996, the Company increased the Bank One
Warehouse Facility from $20 million to $40 million, increased the advance rate
from 95% to 97% of the value of its loans and decreased the interest rate on the
facility from prime plus 1% to federal funds rate plus 1.25%. In June 1996, the
Company increased the Bank One Warehouse Facility from $40 million to $60
million.
In May 1996, the Company entered into the Bear Stearns Facility. The term
of the financing matures and is renewed on a daily basis. The interest rate on
the amount financed is computed on a daily basis and is paid monthly in arrears.
The agreement is not a committed facility; therefore, the Company could incur a
significant repurchase obligation in the event the lender is unable or unwilling
to continue with the repurchase agreement. In August 1996, the Company increased
the Bear Stearns Facility from $200 million to $300 million.
As of September 30, 1996, the Company owed an aggregate of $7.0 million
principal amount of Subordinated Notes to BOCP II, BOCPV and Farm Bureau. The
Subordinated Notes are secured by certain assets of the Company, but are
subordinated to the rights of the warehouse lenders. Interest is payable
quarterly, and the Subordinated Notes may be prepaid with written consent of the
warehouse lenders without penalty.
At September 30, 1996, the Company also had certain other notes payable
totaling approximately $2.0 million with maturities in June 1998. In addition,
at September 30, 1996, FIRSTPLUS East had $9.2 million outstanding under its
$22.5 million warehouse facilities, primarily with Leader Federal Bank of
Bartlet, Tennessee, and FIRSTPLUS West had $33.9 million outstanding under its
$40 million warehouse facilities, primarily with Bank United of Texas.
As indicated above, the Company's ability to continue to originate and
purchase loans is dependent, in large part, upon its ability to securitize or
sell the loans in the secondary market in order to generate cash proceeds for
new originations and purchases. The value of and market for the Company's loans
are dependent upon a number of factors, including general economic conditions,
interest rates and governmental regulations. Adverse changes in such factors may
affect the Company's ability to purchase, securitize or sell loans for
acceptable prices within a reasonable period of time. A prolonged, substantial
reduction in the size of the secondary market for loans of the type originated
or purchased by
33
<PAGE>
the Company may adversely affect the Company's ability to securitize or sell
loans in the secondary market, with a consequent adverse impact on the
Company's profitability and ability to fund future originations and
purchases.
As a result of the Company's increasing volume of loan originations and
purchases, and its expanding securitization activities, the Company has
operated, and expects to continue to operate, on a negative operating cash flow
basis, which is expected to increase as the volume of the Company's loan
purchases and originations increase and its securitization program grows. The
Company's operations provided $5.0 million and $3.7 million of cash in fiscal
1993 and fiscal 1994, respectively, and used $25.7 million and $177.1 million of
cash in fiscal 1995 and the nine months ended June 30, 1996, respectively. The
increase in the use of cash in operations is primarily related to the cost of an
enlarged infrastructure, employee base, and the costs that accompany the
Company's securitization strategy (which increases the Gain on Sale of loans but
reduces the amount of cash received on the sale of loans as compared to
whole-loan sales). In June 1996, the Commission declared effective the Company's
shelf registration statement covering up to $1 billion dollars of asset-backed
securities. The Company's first drawdown under this registration statement was
the 1996-2 securitization. The Company completed total securitizations in the
amount of $234.8 million and $427.2 million for fiscal 1995 and the nine months
ended June 30, 1996, respectively. In connection with securitizations, the
Company is required to provide credit enhancements in the form of reserve
accounts and/or overcollateralizations. The accumulated amounts of such cash
reserves are reflected on the Company's balance sheet as "receivable from
trusts" and equaled $28.4 million as of September 30, 1996. These accounts
cannot be used by the Company for operating purposes. The Company's financings
and investing activities used cash in the amount of $4.0 million and $2.7
million in fiscal 1993 and fiscal 1994, respectively and generated cash in the
amount $25.9 million and $176.5 million in fiscal 1995 and the nine months ended
June 30, 1996, respectively. Cash from financing and investing activities
increased primarily due to additional borrowings related to the Subordinated
Notes and the various warehouse and term line facilities which have been used to
fund loan originations, working capital and securitization costs.
The increased use of securitization transactions as a funding source by the
Company has resulted in a significant increase in the amount of Gain on Sale
(from securitizations) recognized by the Company. During the nine months ended
June 30, 1996, the Company recognized Gain on Sale (from securitizations) in the
amount of approximately $78.6 million compared to $25.6 for fiscal 1995. This
Gain on Sale has a negative impact on the cash flow of the Company since the
Company may be required to pay state and federal income taxes and must currently
pay securitization costs, including overcollateralization costs, in the period
the income is recognized, although the Company does not receive the cash
representing the gain until later periods as the related loans are repaid or
otherwise collected. The Company has funded these cash requirements primarily
through its Term Line. The Company had cash of approximately $23.2 million at
September 30, 1996.
Based on the Company's anticipated rate of growth, the Company believes
that it will need to arrange additional warehouse lines of credit or other
financing sources within the next 90 days. The Company is currently negotiating
for increased and/or additional warehouse facilities. The Company's existing
warehouse lines of credit restrict its ability to incur other indebtedness. The
Company has no commitments for such increased and/or additional financings, and
there can be no assurance that the Company will be successful in consummating
any such financing transactions in the future or on terms the Company would
consider to be favorable. In such event, the Company's growth and operations
could be curtailed, which could have a material adverse effect on the Company's
results of operations and financial condition. See "Risk Factors - Liquidity and
Capital Resources."
IMPACT OF INFLATION
Increases in the inflation rate generally result in increased interest
rates. Since the Company borrows funds at a variable rate, increased interest
rates will increase the borrowing costs of the Company. Inflation will also
increase the operating costs of the Company. The Company may not be able to pass
on the effects of inflation and accompanying higher interest rates to its
borrowers due to usury or other regulatory restrictions or competitive
pressures.
SEASONALITY
The Company is affected by consumer demand for home improvements, which is
partially influenced by regional trends, economic conditions and personal
preferences. The Company's business is generally subject to seasonal trends,
with home improvements generally peaking during the spring and summer seasons
and declining to lower levels in the
34
<PAGE>
fall and winter months. Delinquencies on loan payments typically increase in
November and December of each calendar year.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," which
will primarily be applicable to the Company's securitization of receivables
as well as its repurchase agreements. SFAS No. 125 will require entities that
acquire or originate loans and subsequently sell or securitize those loans
with retained servicing rights to allocate the total cost of the loans to the
mortgage servicing rights and the mortgage loans. The Company will be
required to assess the servicing rights for impairment based upon the fair
value of those rights. SFAS No. 125 is effective only for transactions after
January 1, 1997. At this time, the Company has not determined what effect, if
any, that the adoption of SFAS No. 125 may have on the Company's results of
operations or financial condition for fiscal 1997.
35
<PAGE>
BUSINESS
The Company is a specialized consumer finance company that operates under
the trade name FIRSTPLUS. The Company originates, purchases, services and sells
consumer finance receivables, substantially all of which are home improvement or
debt consolidation loans secured by liens on real property. The Company offers
Conventional Loans and Title I Loans. The Company sells substantially all of its
Conventional Loans and Title I Loans primarily through its securitization
program and retains rights to service these loans. For fiscal 1995 and the nine
months ended June 30, 1996, the Company had total revenues of $33.9 million and
$108.6 million, respectively, Gain on Sale of loans, net, of $29.1 million (of
which $4.1 million is related to non-strategic loans) and $89.8 million (of
which $8.5 million is related to non-strategic loans), respectively, and net
income of $5.8 million and $20.8 million, or $0.56 per share and $1.70 per
share, respectively. The Company originated and purchased an aggregate of $227.9
million and $558.9 million of strategic loans (including Bulk Loan purchases) in
the fiscal year ended September 30, 1995 and the nine months ended June 30,
1996, respectively.
The Conventional Loans originated by the Company in fiscal 1995 and the
nine months ended June 30, 1996 had an average principal amount of approximately
$17,426 and $26,929, respectively, and had interest rates primarily ranging from
10.8% to 18.5% per annum. Conventional Loans originated by the Company in fiscal
1995 and the nine months ended June 30, 1996 had a weighted average maturity of
14.6 years and 17.8 years, respectively, an average FICO score of 629 and 658,
respectively, and a weighted average LTV (based on the principal amounts
outstanding at June 30, 1996) of 91.7% and 109.2%, respectively. Title I Loans
are insured, subject to certain exceptions, for 90% of the principal balance and
certain interest costs. The Title I Loans originated by the Company in fiscal
1995 and the nine months ended June 30, 1996 had an average principal amount of
approximately $15,160 and $16,620, respectively, and had interest rates
primarily ranging from 11.0% to 17.5% per annum. Title I Loans originated by the
Company in fiscal 1995 and the nine months ended June 30, 1996 had a weighted
average maturity of 15.2 years and 16.2 years, respectively, an average FICO
score of 613 and 630, respectively, and a weighted average LTV (based on the
principal amounts outstanding at June 30, 1996) of 89.2% and 102.4%,
respectively.
The Company relies principally on the creditworthiness of the borrower, and
to a lesser extent on the underlying collateral, for repayment of Conventional
Loans and on the FHA co-insurance with respect to Title I Loans. The Company
uses its own credit evaluation criteria to classify its borrowers as "A" through
"D" credits. These criteria include, as a significant component, the FICO score.
The Company's borrowers typically have limited access to consumer financing for
a variety of reasons, primarily insufficient home equity values and high levels
of debt service to income. For fiscal 1995 and the nine months ended June 30,
1996, 76.7% and 95.5%, respectively, of the Company's Conventional Loan
originations were classified by the Company as "B" borrowers or better and 62.7%
and 56.7%, respectively, of the Company's Title I Loans were so classified.
The Company's principal origination channel is its network of regional
independent correspondent lenders. Correspondent lenders tend to be commercial
banks, thrifts or finance companies that do not have the infrastructure to hold
and service portfolios of Conventional and Title I Loans. The Company's
correspondent lenders originate loans using the Company's underwriting criteria
and sell these loans to the Company. During fiscal 1995 and the nine months
ended June 30, 1996, the Company originated Correspondent Loans of $81.9 million
and $488.4 million, respectively, representing 68.5% and 93.5%, respectively, of
the Company's originations of strategic loans during such periods.
To a lesser extent, the Company originates Direct Loans. The Company
originates Direct Loans through direct mail and advertising campaigns and
referrals from its nationwide network of independent home improvement
contractors. The Company is pursuing a strategy to increase its Direct Loan
originations because the Company believes that Direct Loans should prove to be
more profitable and allow the Company to have better control over the quality
and size of the Company's production. To achieve this goal, the Company is
attempting to develop national recognition of the FIRSTPLUS brand name through
increased advertising and the use of celebrity spokespersons, such as Dan
Marino, a professional football player with the Miami Dolphins. The Company is
expanding its direct mail and telemarketing campaigns, hiring direct-to-consumer
marketing professionals and increasing its local-market presence by acquiring or
opening additional branches. The Company originated $906,000 and $14.3 million
in Direct Loans in fiscal 1995 and the nine months ended June 30, 1996,
respectively, representing 0.8% and 2.7%, respectively, of the Company's
originations of strategic loans during such periods.
36
<PAGE>
Historically, the Company also originated Indirect Loans through purchases
from its nationwide network of independent home improvement contractors. For
fiscal 1995 and the nine months ended June 30, 1996, the Company purchased $36.8
million and $19.8 million of Indirect Loans, respectively. The Company has
reduced its purchases of Indirect Loans and increased its originations of Direct
Loans through referrals from certain of its independent home improvement
contractors. In addition, the Company has from time to time made selected
purchases of Bulk Loans as another means of increasing the amount of strategic
loan originations. For fiscal 1995 and the nine months ended June 30, 1996, the
Company made bulk purchases of $108.4 million and $36.3 million, respectively.
As a result of the Company's recent acquisitions of FIRSTPLUS West and
FIRSTPLUS East, the Company acquired certain loan origination programs that do
not directly adhere to the Company's securitization parameters. Consequently,
these non-strategic loans originated through such programs are sold to other
lenders on a whole-loan basis with all servicing rights released. The Company
originated $83.4 million of non-strategic loans during fiscal 1995 and $320.9
million during the nine months ended June 30, 1996. The Company plans to convert
the non-strategic loan operations to operations that will originate strategic
loans that meet the Company's current securitization parameters.
The Company sells substantially all of the Conventional Loans and Title I
Loans it originates and purchases through its securitization program and
generally retains rights to service such loans. The Company sold through eight
securitization transactions approximately $234.8 million and $427.2 million of
strategic loans during fiscal 1995 and the nine months ended June 30, 1996,
respectively. The Company earns servicing fees on a monthly basis ranging from
0.75% to 1.25% on the loans it services in the various securitization pools. At
June 30, 1996, the principal amount of strategic loans in the Serviced Loan
Portfolio was $750.5 million. The Serviced Loan Portfolio includes strategic
loans held for sale and securitized loans serviced by the Company (including
$72.7 million of loans subserviced by a third party), and excludes non-strategic
loans held for sale and loans that FIRSTPLUS West services for others.
BUSINESS STRATEGY
The Company's goal is to become a leading consumer finance company. The
Company believes that it can increase its Serviced Loan Portfolio and the volume
of strategic loans available to be sold through securitization transactions by
increasing the volume of loans it originates, while maintaining loan
underwriting quality and customer service. To achieve this goal, the Company has
developed the following strategies:
RISK MANAGEMENT. The Company intends to maintain loan underwriting quality
by continuing to refine and employ its proprietary scoring technology (which
includes, as a significant component, the credit evaluation scoring methodology
developed by FICO). The Company expects to add personnel to its loan processing
staff and to utilize advancements in computer technology to provide prompt
turnaround, efficient underwriting procedures and accurate credit verification.
The Company will continue to refine its credit information in order to improve
its underwriting and its risk-based pricing models. In addition, by focusing
primarily on higher LTV home improvement loans and debt consolidation loans, and
reliance on the creditworthiness of borrowers rather than the collateral, the
Company believes that it will be able to differentiate itself from other
participants in the market.
PRODUCT ORIGINATION. The elements of this strategy include:
BUILDING A NATIONAL FRANCHISE. The Company intends to develop
consumer recognition of the FIRSTPLUS brand name through increased national
television and radio advertising, the use of celebrity spokespersons, such as
star quarterback Dan Marino, and through direct mailings and telemarketing. In
addition, through the acquisition of small loan consumer finance companies, the
Company will seek to obtain a platform of retail branch locations from which it
can distribute its products and develop brand name recognition. It is
anticipated that over the next 12 months the Company will significantly increase
its budget for advertising and marketing.
EXPANDING DIRECT LOAN ORIGINATION CHANNEL. The Company believes that
Direct Loans will become a larger percentage of its originations. Moreover,
based upon pricing, cost and quality, the Company believes Direct Loans could
become the Company's most profitable origination channel and could decrease the
Company's exposure to the competitive pricing pressures in the Correspondent
Loan market. In pursuit of that strategy, in November 1995 the Company acquired
FIRSTPLUS East and in May 1996 the Company acquired FIRSTPLUS West, each of
which has certain direct-to-consumer lending capabilities. The Company also
intends to continue its hiring of direct-to-consumer marketing professionals.
37
<PAGE>
INCREASING THE CORRESPONDENT LENDER NETWORK. The Company intends to
further develop its Correspondent Loan business by increasing the number of its
network of regional independent correspondent lenders, and will seek to provide
those lenders with computer "on-line" access to the Company's loan approval
process.
INCREASING INDEPENDENT HOME IMPROVEMENT CONTRACTOR REFERRALS. The
Company will continue to reduce its purchases of Indirect Loans and will use
certain of its independent home improvement contractors for more profitable
Direct Loan referrals.
HIRING EXPERIENCED MANAGEMENT. In order to effectively manage its
growth, the Company intends to continue to pursue the hiring of experienced
personnel to expand its marketing, underwriting and servicing capabilities.
LOAN PRODUCTS
The Company originates Conventional and Title I Loans. Each of those
products is typically secured by a mortgage lien, although the Company
occasionally originates unsecured Title I Loans. The loans funded by the Company
are used for debt consolidation and a wide variety of home improvement projects,
such as exterior/interior finishing, structural additions, roofing, plumbing,
heating and insulation. The Company lends to borrowers in various credit
categories. See "- Underwriting."
The table below presents for strategic and non-strategic loans the loan
production and the weighted average coupon ("WAC") for each quarter since the
beginning of fiscal 1995, subdivided into Conventional and Title I Loans:
38
<PAGE>
LOAN PRODUCTION AND WAC
<TABLE>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------------------
DECEMBER 31, 1994 MARCH 31, 1995 JUNE 30, 1995 SEPTEMBER 30, 1995
------------------------ ------------------------ ---------------------- -------------------------
DOLLARS #UNITS WAC DOLLARS #UNITS WAC DOLLARS #UNITS WAC DOLLARS #UNITS WAC
------- ------ ----- ------- ------ ----- ------- ------ ----- -------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STRATEGIC LOANS
Correspondent Loans:
Conventional........ $ - - -% $ 2,114 146 15.48% $ 682 75 14.94% $ 33,698 1,407 14.74%
Title I............. - - - 4,950 232 13.61 13,571 665 13.52 26,851 1,774 13.74
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
Total............. $ - - -% $ 7,064 378 13.64% $ 14,253 740 13.66% $ 60,549 3,181 14.22%
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
Indirect Loans:
Conventional........ $ 4,248 390 15.80% $ 5,303 442 16.25% $ 7,022 497 15.77% $ 7,249 509 15.12%
Title I............. 2,719 256 15.56 2,968 278 15.56 3,690 333 14.97 3,612 311 14.24
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
Total............. $ 6,967 646 15.76% $ 8,271 720 16.02% $ 10,712 830 15.48% $ 10,861 820 14.79%
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
Direct Loans:
Conventional........ $ - - -% $ - - -% $ - - -% $ 310 13 15.54%
Title I............. - - - 16 2 15.26 454 30 15.07 126 8 15.14
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
Total............. $ - - -% $ 16 2 15.26% $ 454 30 15.07% $ 436 21 15.42%
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
Bulk Loans:
Conventional........ $ 108 25 -% $ 2,063 142 -% $ 12,392 1,036 -% $ 1,454 108 -%
Title I............. - - - 4,606 336 - 86,695 5,907 - 1,034 289 -
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
Total............. $ 108 25 -% $ 6,669 478 -% $ 99,087 6,943 -% $ 2,488 397 -%
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
Total Strategic
Loan Production:
Conventional........ $ 4,356 415 15.80% $ 9,480 730 16.03% $ 20,096 1,608 15.70% $ 42,711 2,037 14.81%
Title I............. 2,719 256 15.56 12,540 848 14.34 104,410 6,935 13.86 31,623 2,382 13.80
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
Total............. $ 7,075 671 15.76% $22,020 1,578 14.92% $124,506 8,543 14.45% $ 74,334 4,419 14.31%
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
NON-STRATEGIC LOANS
Total Non-strategic
Loan Production...... $14,308 289 9.43% $11,809 465 12.06% $ 18,784 683 11.94% $ 38,522 1,023 9.84%
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
Total Loan Production: $21,383 960 10.11% $33,829 2,043 13.54% $143,290 9,226 13.31% $112,856 5,442 12.68%
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
------- --- ----- ------- ----- ----- -------- ----- ----- -------- ----- -----
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------
DECEMBER 31, 1995 MARCH 31, 1996 JUNE 30, 1996
------------------------- ------------------------ ----------------------
DOLLARS #UNITS WAC DOLLARS #UNITS WAC DOLLARS #UNITS WAC
-------- ------ ----- ------- ------ ----- ------- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STRATEGIC LOANS
Correspondent Loans:
Conventional........ $ 73,165 2,871 14.77% $100,021 3,817 14.45% $233,343 8,141 14.63%
Title I............. 44,098 2,930 13.72 19,118 924 13.63 18,672 917 13.951.95
-------- ----- ----- -------- ----- ----- -------- ------ -----
Total............. $117,263 5,801 14.39% $119,139 4,741 14.32% $252,015 9,058 14.58%
-------- ----- ----- -------- ----- ----- -------- ------ -----
-------- ----- ----- -------- ----- ----- -------- ------ -----
Indirect Loans:
Conventional........ $ 4,290 312 14.90% $ 2,590 161 14.60% $ 1,525 85 13.53%
Title I............. 5,023 370 14.74 3,245 249 14.73 3,108 226 14.05
-------- ----- ----- -------- ----- ----- -------- ------ -----
Total............. $ 9,313 682 14.80% $ 5,835 410 14.68% $ 4,633 311 13.87%
-------- ----- ----- -------- ----- ----- -------- ------ -----
-------- ----- ----- -------- ----- ----- -------- ------ -----
Direct Loans:
Conventional........ $ 573 25 16.78% $ 4,893 174 15.77% $ 8,256 332 16.19%
Title I............. 111 4 15.71 237 12 15.97 277 17 15.62
-------- ----- ----- -------- ----- ----- -------- ------ -----
Total............. $ 684 29 16.60% $ 5,130 186 15.78% $ 8,533 349 16.16%
-------- ----- ----- -------- ----- ----- -------- ------ -----
-------- ----- ----- -------- ----- ----- -------- ------ -----
Bulk Loans:
Conventional........ $ 36,309 1,303 -% $ - - -% $ - - -%
Title I............. - - - - - - - - -
-------- ----- ----- -------- ----- ----- -------- ------ -----
Total............. $ 36,309 1,303 -% $ - - -% $ - - -%
-------- ----- ----- -------- ----- ----- -------- ------ -----
-------- ----- ----- -------- ----- ----- -------- ------ -----
Total Strategic
Loan Production:
Conventional........ $114,337 4,511 14.79% $107,504 4,152 14.51% $243,124 8,558 14.68%
Title I............. 49,232 3,304 13.83 22,600 1,185 13.81 22,057 1,160 13.99
-------- ----- ----- -------- ----- ----- -------- ------ -----
Total............. $163,569 7,815 14.43% $130,104 5,337 14.39% $265,181 9,718 14.62%
-------- ----- ----- -------- ----- ----- -------- ------ -----
-------- ----- ----- -------- ----- ----- -------- ------ -----
NON-STRATEGIC LOANS
Total Non-strategic
Loan Production...... $ 61,424 1,153 9.38% $141,129 1,948 8.33% $118,325 1,760 9.15%
-------- ----- ----- -------- ----- ----- -------- ------ -----
-------- ----- ----- -------- ----- ----- -------- ------ -----
Total Loan Production: $224,993 8,968 13.07% $271,233 7,285 11.82% $383,506 11,478 13.43%
-------- ----- ----- -------- ----- ----- -------- ------ -----
-------- ----- ----- -------- ----- ----- -------- ------ -----
</TABLE>
39
<PAGE>
CONVENTIONAL LOANS. A Conventional Loan is a non-insured consumer loan
specifically undertaken for debt consolidation and/or to pay for home
improvement projects. Substantially all of the Conventional Loans originated
by the Company are secured by second mortgage liens. The Company relies
principally on the creditworthiness of the borrower, and to a lesser extent
on the underlying collateral, for repayment of Conventional Loans. The
average size of a Conventional Loan made by the Company during fiscal 1995
and the nine months ended June 30, 1996 was approximately $17,426 and
$26,929, respectively.
The following table sets forth the outstanding balance and lien position
of Conventional Loans in the Serviced Loan Portfolio, excluding loans
subserviced by others, as of June 30, 1996:
LIEN POSITION
AT JUNE 30, 1996
OUTSTANDING PERCENTAGE
BALANCE OF TOTAL
----------- ----------
(IN THOUSANDS)
First lien.......................... $ 9,726 1.7%
Second lien......................... 537,988 95.6
Third lien or greater............... 13,465 2.4
Unsecured........................... 1,634 0.3
-------- -----
Total............................ $562,813 100.0%
-------- -----
-------- -----
TITLE I LOANS. The National Housing Act of 1934 (the "NHA") authorized
the creation of the FHA and the Title I Program. Under the NHA, the FHA is
authorized and empowered to insure qualified lending institutions, such as
the Company, against losses on eligible loans. Several types of loans may be
made under the Title I Program, including property improvement loans to
finance the alteration, repair or improvement of existing single family,
multifamily and non-residential structures.
Under the Title I Program, loan processing and credit determination
procedures are carried out by the lending institution. Each lender is
required to use prudent lending standards in underwriting individual loans.
Under the Title I Program, the FHA does not review individual loans at the
time of approval, except when the amount of a Title I Program loan would
result in any borrower having a total unpaid principal obligation on all
Title I Loans in excess of $25,000, in which case approval must be obtained
from HUD. The interest rate and any discount points for Title I Loans are
negotiated and agreed to by the customer and the lender, and must be fixed
for the entire term of the loan. No equity is required in the property
subject to improvement for loans of $25,000 or less. Title I Loans are fully
amortizing with maximum terms to maturity of 20 years. All borrowers are
required to possess one-half vested interest or more in the property subject
to improvement and are qualified based upon their ability to make monthly
payments rather than on the loan-to-value ratio on the underlying real estate
collateral.
The Title I Program is an insurance program. A loan owner under the
Title I Program assumes the risk of losing up to 10% of the principal balance
on every loan, plus certain expenses submitted to the FHA for an insurance
claim, plus a portion of the interest on such loans. The FHA insures the
remaining 90% of the principal balance of each loan and certain interest
costs, provided that the owner has not depleted its loss reserve account
established with HUD and the loan was originated within HUD guidelines. The
HUD loss reserve account balance is adjusted by HUD as claims are paid and
new Title I Loans are acquired. If at any time claims exceed the loss reserve
balance, the remaining Title I Loans will be uninsured until the reserve
account balance is increased by new loan originations or purchases. When
Title I Loans are securitized, all loss reserves related to the securitized
loans are transferred to the securitization trust. As a result, the Company's
loss reserve account is significantly reduced after each of the Company's
securitization transactions until new originations or purchases replenish the
Company's HUD loss reserve account.
The loan owner generally pays to HUD an insurance charge equal to 0.5%
of the loan amount, multiplied by the number of years of the loan term. For
any loan having a maturity of 25 months or less, payment of the entire
insurance charge is due on the 25th calendar day after the date HUD
acknowledges the loan report. Loans with terms in excess of 25 months are to
be paid to HUD annually. In the case of a default or a loan deemed to be
uncollectible, a claim for reimbursement of loss is prepared and submitted to
HUD. The claim must be filed no later than 270 days after the
40
<PAGE>
date of default. The loan owner is reimbursed in an amount not to exceed 90%
of the loss computed upon the unpaid amount of the obligation including
uncollected interest earned through the date of default and interest on the
unpaid amount of the loan obligation from the date of default to the date the
claim is accepted by HUD plus 15 days calculated at the rate of 7% per annum.
Claims are typically reimbursed by HUD within 90 days of receipt of the
claim. At June 30, 1996, Title I Program claims in process totaled $2.1
million.
The average size of a Title I Loan originated by the Company for fiscal
1995 and during the nine months ended June 30, 1996 was approximately $15,160
and $16,620 respectively. During fiscal 1994, fiscal 1995 and the nine months
ended June 30, 1996, originations of Title I Loans accounted for
approximately 43.8%, 48.1% and 18.0%, respectively, of the Company's total
strategic loans originated.
LOAN ORIGINATION CHANNELS
The Company originates Correspondent Loans through its network of
regional correspondent lenders, and Direct Loans through (i) referrals from
independent home improvement contractors and (ii) direct marketing efforts.
Direct Loans are originated by the Company through traditional direct mail,
telemarketing techniques and advertising, although this origination process
is new for the Company. Historically, the Company originated Indirect Loans
through the Company's network of independent home improvement contractors.
Recently, however, the Company discontinued its purchases of Indirect Loans
and began using certain of its larger independent home improvement
contractors for Direct Loan referrals. From time to time the Company makes
selected purchases of Bulk Loans as another means of increasing the Serviced
Loan Portfolio. As a result of its recent acquisitions, the Company makes
certain non-strategic loans, which the Company intends to discontinue.
The following table sets forth the dollar amount and average loan amount
of Correspondent Loans, Indirect Loans, Direct Loans and Bulk Loans, each as
subdivided into Conventional Loans and Title I Loans, included in the
Serviced Loan Portfolio as of June 30, 1996, excluding loans subserviced by a
third party:
SERVICED LOAN PORTFOLIO
AS OF JUNE 30, 1996
CONVENTIONAL LOANS TITLE I LOANS TOTAL
------------------ ------------- ------------
Correspondent Loans:
Total dollar amount... $395,339,165 $90,118,152 $485,457,314
Average loan amount... 26,662 18,376 24,603
Indirect Loans:
Total dollar amount... 24,434,283 57,652,196 82,086,479
Average loan amount... 12,887 6,641 7,761
Direct Loans:
Total dollar amount... 680,855 664,788 1,345,643
Average loan amount... 20,632 11,871 15,120
Bulk Loans:
Total dollar amount... 91,794,239 17,200,979 108,995,218
Average loan amount... 24,803 13,827 22,042
Total:
Total dollar amount... 512,248,542 165,636,115 677,884,654
Average loan amount... 25,039 11,128 19,180
CORRESPONDENT LOANS. Correspondent Loans are originated and closed by
independent correspondent lenders in accordance with the Company's own
underwriting standards and are subsequently purchased by the Company.
Commencing in the second quarter of fiscal 1995, the Company implemented a
Correspondent Loan program. During fiscal 1995 and the nine months ended June
30, 1996, the Company purchased approximately $81.9 million and $488.4
million of Correspondent Loans, respectively. The Company typically purchases
Correspondent Loans at or above the par value of such loans. The average
principal amount of Correspondent Loans originated during fiscal 1995 and the
nine months ended June 30, 1996 was $19,043 and $24,919, respectively. The
Company anticipates that its correspondent operations will continue to expand
and represent the majority of its overall business in the short-to-mid-term.
41
<PAGE>
The Company's Correspondent Loan program involves the purchase of both
Conventional Loans and Title I Loans from independent correspondent lenders
with whom the Company maintains ongoing relationships. These lenders are
usually situated in local markets where they are able to contact borrowers
and independent home improvement contractors directly. Correspondent lenders
tend to be commercial banks or finance companies that lack the infrastructure
to hold and service portfolios of Conventional or Title I Loans. Instead,
these entities concentrate on originating loans and then selling that
production at a premium.
The Correspondent Loan program benefits the Company by providing a
cost-effective means for the Company to market to borrowers who are not
easily accessible by the Company. Furthermore, the correspondent agreements
require that the selling institution warrant the validity and enforceability
of the loan, thereby reducing the risk of fraud or improper documentation. In
the event such warranty is breached, the Company may require the
correspondent lender to repurchase such loan. The Correspondent Loan market
is very competitive, and loans sold by correspondent lenders are generally
priced at a premium of between 2% to 7% over par value, as compared to
purchase prices at par or slightly below par for loans originated by the
Company through indirect and direct channels.
The Company currently purchases Correspondent Loans in 27 states from
278 independent correspondent lenders. During fiscal 1995 and the nine months
ended June 30, 1996, approximately 79.8% and 59.8%, respectively (by dollar
volume), of the Company's Correspondent Loans were originated from 10
independent correspondent lenders. The Company allows independent
correspondent lenders to participate in the Company's correspondent
operations only after a review of their reputation, consumer finance lending
experience and financial condition, including a review of references, credit
history and financial statements. The development of new independent
correspondent lender relationships is directed by marketing managers.
Generally, the independent correspondent lender prepares the loan
application, assembles the supporting documentation and processes the loan.
Once the loan package is complete, it is submitted to the Company's
Correspondent Loan underwriting personnel, who review each loan package and,
in some cases, perform independent employment and credit verification and
arrange for a review of the appraisal, if any, submitted with the loan
package. Each Correspondent Loan is separately underwritten by the Company in
accordance with the Company's own underwriting standards. See "- Underwriting."
If the loan package meets the Company's underwriting criteria, the Correspondent
Loan is closed by the originating lender and then purchased by the Company. The
Company typically approves the loan within two business days of a complete loan
package being submitted by the correspondent lender.
DIRECT LOANS. The Company originated approximately $906,000 and $14.3
million principal amount of Direct Loans in fiscal 1995 and the nine months
ended June 30, 1996, respectively. Recently, the Company began using certain
of its larger independent home improvement contractors for Direct Loan
referrals. Direct Loans are typically originated through direct mailings,
telemarketing and advertising. The Direct Loan origination channel is the
Company's newest marketing strategy and is designed to decrease the costs and
increase the volume, size and quality of its loan originations. The Company
will target its marketing efforts at creditworthy homeowners who qualify as
candidates for home improvement projects or have debt consolidation needs,
but have little equity in their homes. Direct Loan borrowers typically pay
fees that range between 3% to 7% of the loan amount at closing. Management
believes that this program will distinguish the Company from other major home
lenders as its FIRSTPLUS name recognition increases.
Direct Loan applications are processed and underwritten by Company
personnel and are funded directly by the Company. Of all Direct Loans funded
in fiscal 1995 and the nine months ended June 30, 1996, 75.2% and 90.5%,
respectively, were made to borrowers who the Company classified as "B"
credits or better. For Direct Loans originated during fiscal 1995 and the
nine months ended June 30, 1996, the average principal amount was $17,094 and
$25,438, respectively, the weighted average term to maturity was 182 months
and 194 months, respectively, for Title I Loans and 175 months and 213
months, respectively, for Conventional Loans, the weighted average interest
rate was 14.9% and 14.5%, respectively, for Title I Loans and 15.4% and
16.2%, respectively, for Conventional Loans.
BULK PURCHASES. The Company occasionally makes bulk purchases of pools
of home improvement and debt consolidation loans. Bulk Loans are originated
and closed by various lenders that package the loans and then sell them in
pools to financing companies such as the Company. Although the Company has
significantly reduced its Bulk Loan purchases and instead has focused on
Direct and Correspondent Loans, the Company may choose to compete in this
loan origination channel again in subsequent quarters. The Company generally
has purchased Bulk Loans from finance companies and savings and loan
associations through a competitive bidding process. For example, in June
1995, the
42
<PAGE>
Company purchased a portfolio of $86.7 million in Title I Loans from
Citizens, and in December 1995, the Company purchased $36.3 million in
Conventional Loans from GE Capital Corp. The pools were included in the
Company's 1995-2, 1996-1 and 1996-2 securitizations. The Company typically
purchases such loans at between 1% and 5% above the par value of such loans.
The Company reviews the Bulk Loan portfolio to ensure that it
substantially complies with the Company's underwriting criteria. For larger
Bulk Purchases, the Company generally hires a third party to undertake the
review process, which consists of reviewing either all loans in the portfolio
or a sample of loans, depending on the size of the portfolio. Since the
Company usually must purchase the entire portfolio being offered, some
individual loans may not meet the Company's underwriting standards.
INDIRECT LOANS. Recently, the Company began reducing its purchases of
Indirect Loans and began using certain of its larger independent home
improvement contractors for Direct Loan referrals. The Company does not
anticipate continuing its Indirect Loan Program after fiscal 1996. Under the
Indirect Loan program, the Company provides financing through independent
home improvement contractors. Over the past several years, the Company has
established a network of over 1,000 independent home improvement contractors
in approximately 44 states, through which it originates a significant portion
of its Conventional and Title I Loans. No independent home improvement
contractor accounted for more than 5% of the Company's originations in fiscal
1995 or the nine months ended June 30, 1996. The Company's Indirect Loans are
typically funded at 95% or more of par for Conventional Loans and at par for
Title I Loans. The average principal amount of Indirect Loans originated
during fiscal 1995 and the nine months ended June 30, 1996 was $12,205 and
$14,099, respectively.
Under the Contractor Agreement, a participating contractor represents
that it will only submit loans to the Company that satisfy criteria
established by the Company and will comply with applicable federal and state
laws. The Contractor Agreement may be terminated for any reason by either
party upon 10 days' prior written notice. In the event of a breach of the
representations and warranties of the Contractor Agreement, the independent
home improvement contractor is obligated to repurchase the loan for the
Company's remaining cost plus certain expenses incurred in connection with
the loan.
NON-STRATEGIC LOANS. The Company acquired FIRSTPLUS East primarily to
use its direct mail capabilities as a platform from which to expand the
Company's Direct Loan program. FIRSTPLUS East began developing its Direct
Loan program for marketing strategic loans during 1995 and has conducted
Direct Loan mailings in the markets it serves in North and South Carolina.
FIRSTPLUS East's historical operations consist of originating first lien home
mortgage loans, including residential construction loans. FIRSTPLUS East
originates these loans through its eight locations in North and South
Carolina. Prior to its acquisition by the Company, FIRSTPLUS East sold its
first mortgage production as a correspondent lender to various third-party
financial institutions. The Company intends to discontinue originating first
mortgage loans.
In addition, the Company acquired FIRSTPLUS West, a former correspondent
lender to the Company. FIRSTPLUS West is an originator of Conventional and
Title I Loans and originated approximately $211.2 million of non-strategic
(primarily subordinate lien) loans during the nine months ended June 30,
1996. These loans were sold through third-party financial institutions on a
whole-loan basis, servicing released. FIRSTPLUS West originates non-strategic
Loans through its retail offices in Seattle, Denver and Atlanta and through
an 80-person telemarketing division in Denver. Over time, the Company intends
to phase out the origination of FIRSTPLUS West's non-strategic loan products
and to emphasize FIRSTPLUS West's strategic Direct Loan products.
UNDERWRITING
The Company's underwriting group primarily operates out of the Company's
Dallas, Texas headquarters. The Company receives loan applications from its
network of independent correspondent lenders and independent home improvement
contractors via facsimile machines. In addition, individuals respond to the
Company's direct marketing program by United States mail or through direct
telephone contact with Company representatives. Loan applications are
monitored by the Company's tracking department to ensure prompt turnaround,
efficient underwriting procedures and accurate credit verification. The loan
processing staff prepares an application file by obtaining credit bureau
reports, highlighting any significant credit events and prioritizing
applications that need immediate attention before submitting the application
to the appropriate loan underwriter. The Company applies the same
underwriting criteria to Correspondent
43
<PAGE>
Loans. The Company's underwriters have an average of seven years of banking,
finance and consumer loan experience. The Company has put in place a credit
policy that provides a number of guidelines to assist underwriters in the
credit decision process.
Loans are classified by the Company into four gradations of quality,
from "A" to "D" credits. The Company's methodology for determining loan
quality considers primary credit characteristics, and a series of parameters
based on property types. Primary characteristics include the borrower's FICO
score, debt-to-income ratio, mortgage credit history, consumer credit
history, bankruptcies, foreclosures, notice of defaults, deed in liens and
repossessions. The Company believes that the most important credit
characteristics are the borrower's FICO score and debt-to-income ratio, the
latter of which, generally, may not exceed 45% of the applicant's gross
income. The Company is currently developing an algorithm based on the
consumer credit file, which, when coupled with the FICO score (a dominant
factor used in assessing the consumer credit file), provide a means to assess
the applicant's probability of default. The algorithm utilized by the Company
includes such edit checks as age, present delinquency review, minimum
satisfactory rated accounts and maximum derogatory counters. The Company's
algorithm, when developed, will act as a cutoff, segregating likely deficit
candidates from the entire pool of applicants in an automated fashion. The
primary factors operate based upon the lowest common denominator principle
and determine parameters to be followed for that loan. The parameters limit
the size of the loan and loan-to-value by grade and property type. Generally,
there are no loan-to-value restrictions for Title I Loans.
On Direct Loans, the Company may disburse the loan proceeds directly to
the borrower upon closing. On Indirect Loans, the proceeds are disbursed to
the independent home improvement contractor upon proof of completion of the
improvement. Indirect Loan qualification procedures require the borrower or
contractor to submit photos of the improvements and a certificate certifying
completion of the improvement for which the loan proceeds were disbursed,
signed by the borrower and contractor. In addition, the Company tape records
a telephone conversation, with the borrower's consent, in which the borrower
answers certain questions and confirms that the improvements have been
completed for all Direct Loans. HUD requires that an on-site inspection of
the improvements be made within six months of completion.
SERVICING OPERATIONS
GENERAL. The Company services all of the loans it originates or
purchases at its headquarters in Dallas, Texas, except for $72.7 million of
loans subserviced by Citizens and $97.9 million of loans, including $19.2
million of non-strategic loans, currently serviced at FIRSTPLUS West's Denver
location (which are expected to be transferred to Dallas by October 1, 1996).
Prior to the Combination and the acquisition of FIRSTPLUS Financial's loan
servicing operations, SFAC did not service any of its loans. See
"- Combination." The Company's servicing includes collecting and remitting
loan payments, accounting for principal and interest, contacting delinquent
borrowers, handling borrower defaults, recording mortgages and assignments,
investor and securitization reporting and management portfolio reporting. It
is the Company's strategy to grow and build its Serviced Loan Portfolio.
The Company receives a servicing fee based on a percentage of the
declining principal balance of each loan serviced. Servicing fees are
collected by the Company out of the borrower's monthly loan payments. In
addition, the Company, as servicer, receives most late and assumption charges
paid by the borrower, as well as other miscellaneous fees for performing
various loan servicing functions. In connection with the $86.7 million Bulk
Loan purchase from Citizens, the Company permitted Citizens to continue as
subservicer of the purchased portfolio for a fee equal to one percent of the
underlying loan balance (as collected). The Company made this decision in
exchange for paying a lower purchase price for the loan portfolio. Although
the Company intends to service substantially all Bulk Loans purchased in the
future, the Company may again choose to allow the prior servicer to continue
as servicer if the Company believes that it is economically beneficial for
the Company. In general, such a decision by the Company should have an
immaterial effect on the Company's results of operations and financial
condition.
The Serviced Loan Portfolio is subject to reduction by normal monthly
payments, by prepayments, foreclosures and chargeoffs. In general, revenues
from the Serviced Loan Portfolio may be adversely affected as interest rates
decline and loan prepayments increase. In some states in which the Company
currently operates, prepayment fees may be limited or prohibited by
applicable state law. In addition, the Company's ability to collect
prepayment fees under certain circumstances will be restricted in future
periods under recently enacted laws. Prepayment fees are prohibited on all
Title I Loans. See "- Regulation."
44
<PAGE>
The Company originates loans from 44 states. The following table summarizes
the loans in the Serviced Loan Portfolio by geographic location as of June 30,
1996:
GEOGRAPHIC CONCENTRATION OF STRATEGIC LOANS
AS OF JUNE 30, 1996
LOANS PERCENT
-------- -------
(DOLLARS IN THOUSANDS)
STATE:
California............................... $452,828 60.3%
Arizona.................................. 37,073 4.9
Nevada................................... 34,692 4.6
Texas.................................... 29,958 4.0
Colorado................................. 25,502 3.4
All others (39 states)................... 170,476 22.8
-------- -----
Total................................. $750,529 100.0%
-------- -----
-------- -----
DELINQUENCIES AND FORECLOSURES. The Company's collection operations
include customer complaint monitoring, resolution of inspection
discrepancies, daily delinquency maintenance, legal remedies and HUD claims.
Loans originated or purchased by the Company are generally secured by
mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice in the state in which the property securing the
loan is located. Depending on local law, foreclosure is effected by judicial
action or nonjudicial sale, and is subject to various notice and filing
requirements. In general, the borrower, or any person having a junior
encumbrance on the real estate, may cure a monetary default by paying the
entire amount in arrears plus other designated costs and expenses incurred in
enforcing the obligation during a statutorily prescribed reinstatement
period. Generally, state law controls the amount of foreclosure expenses and
costs, including attorneys' fees, that may be recovered by a lender. After
the reinstatement period has expired without the default having been cured,
the borrower or junior lienholder no longer has the right to reinstate the
loan and must pay the loan in full to prevent the scheduled foreclosure sale.
Typically, the Company has chosen not to pursue foreclosures due to the
costs involved. The Company may pursue foreclosure as an alternative in its
default management process. The Company evaluates loans and determines
whether foreclosure is economically and procedurally the most viable
alternative for collection of each loan that is in default. For loans that
reach the later states of delinquency (typically more than 91 days), a loan
work-up is initiated. This work-up outlines the type of loan (Title I or
Conventional Loan), lien position (first or junior) and other qualification
information. An appraisal is ordered from a select group of qualified
appraisers approved by the Company in order to assess property value and
calculate potential equity. If this initial assessment suggests that equity
exists above certain thresholds, the Company will order a title opinion from
a qualified source. The title opinion reveals lien position as well as any
potential tax delinquency issues or judgments. Upon completion of this
work-up, the recovery potential is assessed. For Title I Loans, if the
recovery potential approximates 100% of the principal balance plus a
pre-determined amount, the loan is considered for foreclosure. If this
potential recovery is not met, the loan will be referred to HUD as a claim.
For Conventional Loans, a determination is made on the partial or full
recovery of principal balance and associated expense. If the recovery
potential is sufficient from a cost/benefit/loss perspective, the Company may
initiate foreclosure proceedings. If the evaluations indicate that
foreclosure offers no economic advantage to the Company, it may be determined
to secure and file a judgment against the borrower instead of pursuing
further foreclosure efforts and incurring additional costs.
The Company's loans under the Title I Loan Program are eligible for HUD
insurance; this insurance insures 90% of Title I Loans, provided that the
Company has not depleted its loss reserve account established with HUD and
provided the loans were originated within applicable HUD guidelines. The
balance in the loss reserve account is adjusted by HUD as claims are paid and
new Title I Loans are originated or purchased. At June 30, 1996, claims in
process for all loans serviced by the Company were approximately $2.1
million. If at any time claims exceed the Company's or any securitization
trust's loss reserve balance, the remaining Title I Loans will be uninsured
until the respective reserve account balance is increased by new loan
originations or purchases. The Company's Conventional Loans are non-insured.
45
<PAGE>
The following tables set forth delinquency, loss and default information
with respect to the Serviced Loan Portfolio at the dates and for the periods
indicated:
DELINQUENCY CHARACTERISTICS
OF THE SERVICED LOAN PORTFOLIO
<TABLE>
COMPANY
FIRSTPLUS FINANCIAL (1) -----------------------------------------------------------
------------------------------ SEPTEMBER 30, 1995 JUNE 30, 1996
SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ----------------------------
1993 1994 CONVENTIONAL CONVENTIONAL
TITLE I LOANS TITLE I LOANS TITLE I LOANS LOANS TITLE I LOANS LOANS
------------- ------------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Delinquent loans as
a percentage of loans
serviced (period end):
31-60 days............ 3.1% 2.5% 2.1% 1.0% 2.4% 0.7%
61-90 days............ 0.8 0.8 0.7 0.8 1.2 0.3
91 days and over...... 2.9 3.6 1.9 2.8 4.2 0.9
--- --- --- --- --- ---
Total........... 6.8% 6.9% 4.7% 4.6% 7.8% 1.9%
--- --- --- --- --- ---
--- --- --- --- --- ---
</TABLE>
- -----------
(1) Data is presented for FIRSTPLUS Financial because prior to October 4, 1994
the Company did not have servicing operations and because the servicing
operations of FIRSTPLUS West for such periods related primarily to non-strategic
loans.
LOSS AND DEFAULT CHARACTERISTICS
OF THE SERVICED LOAN PORTFOLIO
FIRSTPLUS (1) COMPANY
--------------- -----------------------------
YEAR ENDED
SEPTEMBER 30, YEAR ENDED NINE MONTHS
--------------- DECEMBER 31, ENDED
1993 1994 1995 JUNE 30, 1996
---- ---- ------------ -------------
Net losses as a percentage
of the average Serviced
Loan Portfolio (2)........ 0.39% 0.44% 0.04% 0.06%
Defaults as a percentage
of the average Serviced
Loan Portfolio (2)........ 2.04% 2.64% 0.69% 0.90%
- -----------
(1) Data is presented for FIRSTPLUS Financial because prior to October 4, 1994
the Company did not have servicing operations and because the servicing
operations of FIRSTPLUS West for such periods related primarily to non-strategic
loans.
(2) The average Serviced Loan Portfolio is calculated by adding the beginning
and ending balances for the fiscal year and dividing the sum by two.
While the preceding tables generally indicate that the Company is
experiencing declining delinquency, loss and default rates on its Serviced Loan
Portfolio as a whole, such rates have followed the historical trends on a
pool-by-pool basis, which trends assume increased rates of delinquencies over
time. Although such increases to date have been within the parameters
anticipated by the Company at the time of each securitization, there can be no
assurance that such rates will not continue to increase. Loans selected by the
Company to contribute to the securitization trusts generally possess reduced
delinquency, default and loss rates due to certain requirements of the
securitization trusts and to the Company's own policy with regard to selecting
loans to contribute. As these loans age, the securitization trusts will tend to
experience gradual increases in delinquency, default and loss rates as the
securitized loans trend toward historically higher delinquency, default and loss
rates. The overall decline in such rates on the Serviced Loan Portfolio is
principally due
46
<PAGE>
to the increased volume of loans originated by the Company. The Company
calculates its delinquency and default rates by dividing the amount of
delinquent or defaulted loans in the Serviced Loan Portfolio by the total
Serviced Loan Portfolio. Since the Company is originating higher volumes of
new loans that, due to their lack of seasoning, tend to have lower
delinquency and default rates, the Company's overall delinquency and default
rates have decreased. See "- Securitization."
47
<PAGE>
DELINQUENCY AND DEFAULTS FOR THE COMPANY'S SECURITIZATIONS
<TABLE>
1994-1 1995-1 1995-2
------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
As of September 30,
1995
Current............. $34,868,000 91.3% $15,139,000 92.5% $96,420,000 96.0%
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
31-60 days.......... $ 1,387,000 3.6% $ 453,000 2.8% $ 1,800,000 1.8%
61-90 days.......... 473,000 1.3 250,000 1.5 793,000 0.8
91 days and over.... 1,444,000 3.8 526,000 3.2 1,433,000 1.4
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
Total............. $ 3,304,000 8.7% $ 1,229,000 7.5% $ 4,026,000 4.0%
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
Defaults/Defaults
as a percentage of
average monthly
balance............ $ 71,000 0.2% $ - 0.0% $ - 0.0%
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
As of December 31,
1995
Current............. $32,363,000 91.3% $14,259,000 93.0% $91,198,000 94.6%
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
31-60 days.......... $ 1,778,000 5.0% $ 444,000 2.9% $ 2,080,000 2.2%
61-90 days.......... 379,000 1.1 204,000 1.3 785,000 0.8
91 days and over.... 939,000 2.6 425,000 2.8 2,345,000 2.4
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
Total............. $ 3,096,000 8.7% $ 1,073,000 7.0% $ 5,210,000 5.4%
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
Defaults/Defaults
as a percentage of
average monthly
balance............ $ 987,000 2.4% $ 490,000 3.0% $ 558,000 0.6%
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
As of March 31, 1996
Current............. $30,713,649 94.2% $13,811,292 93.8% $86,622,634 93.9%
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
31-60 days.......... $ 905,179 2.8% $ 278,372 1.9% $ 1,491,122 1.6%
61-90 days.......... 239,990 0.7 125,908 0.9 838,610 0.9
91 days and over.... 793,467 2.4 508,113 3.4 3,330,116 3.6
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
Total............. $ 1,938,636 5.9% $ 912,393 6.2% $ 5,659,848 6.1%
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
Defaults/Defaults
as a percentage of
average monthly
balance............ $ 185,054 0.5% $ 105,556 0.7% $ 471,493 0.5%
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
As of June 30, 1996
Current............. $28,168,294 93.0% $13,019,667 92.9% $81,073,528 92.8%
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
31-60 days.......... $ 855,792 2.8% $ 398,922 2.8% $ 1,820,636 2.1%
61-90 days.......... 297,607 1.0 130,923 0.9 823,536 0.9
91 days and over.... 970,497 3.2 475,344 3.4 3,700,779 4.2
----------- ---- ----------- ---- ----------- ----
Total............. $ 2,123,896 7.0% $ 1,005,189 7.1% $ 6,344,951 7.2%
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
Defaults/Defaults
as a percentage of
average monthly
balance............ $ 199,381 0.6% $ 225,326 1.6% $ 1,110,712 1.2%
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
<CAPTION>
1995-3 1995-4 1996-1 1996-2
----------------- ------------------ -------------------- --------------------
<S> <C> <C> <C> <C>
As of September 30,
1995
Current............. $65,297,000 99.4%
----------- ----
----------- ----
31-60 days.......... $ 199,000 0.3%
61-90 days.......... 191,000 0.3
91 days and over.... 30,000 0.0
----------- ----
----------- ----
Total............. $ 420,000 0.6%
----------- ----
----------- ----
Defaults/Defaults
as a percentage of
average monthly
balance............ $ - 0.0%
----------- ----
----------- ----
As of December 31,
1995
Current............. $72,189,000 98.0% $74,663,000 99.7%
----------- ---- ----------- ----
----------- ---- ----------- ----
31-60 days.......... $ 947,000 1.3% $ 218,000 0.3%
61-90 days.......... 229,000 0.3 16,000 0.0
91 days and over.... 317,000 0.4 25,000 0.0
----------- ---- ----------- ----
----------- ---- ----------- ----
Total............. $ 1,493,000 2.0% $ 259,000 0.3%
----------- ---- ----------- ----
----------- ---- ----------- ----
Defaults/Defaults
as a percentage of
average monthly
balance............ $ - 0.0% $ - 0.0%
----------- ---- ----------- ----
----------- ---- ----------- ----
As of March 31, 1996
Current............. $69,665,579 96.1% $77,427,295 98.5% $117,918,981 99.3%
----------- ---- ----------- ---- ------------ ----
----------- ---- ----------- ---- ------------ ----
31-60 days.......... $ 1,295,274 1.8% $ 617,991 0.8% $ 326,276 0.3%
61-90 days.......... 549,267 0.8 225,096 0.3 361,219 0.3
91 days and over.... 970,070 1.3 275,033 0.4 74,722 0.1
----------- ---- ----------- ---- ------------ ----
----------- ---- ----------- ---- ------------ ----
Total............. $ 2,814,611 3.9% $ 1,118,120 1.5% $ 762,217 0.7%
----------- ---- ----------- ---- ------------ ----
----------- ---- ----------- ---- ------------ ----
Defaults/Defaults
as a percentage of
average monthly
balance............ $ 97,304 0.1% $ 40,000 0.1% $ - 0.0%
----------- ---- ----------- ---- ------------ ----
----------- ---- ----------- ---- ------------ ----
As of June 30, 1996
Current............. $66,219,920 93.8% $73,917,023 95.9% $113,928,024 97.4% $208,420,466 99.8%
----------- ---- ----------- ---- ------------ ---- ------------ ----
----------- ---- ----------- ---- ------------ ---- ------------ ----
31-60 days.......... $ 1,287,665 1.8% $ 1,283,481 1.7% $ 1,511,784 1.3% $ 427,930 0.2%
61-90 days.......... 732,604 1.0 782,049 1.0 638,324 0.6 - 0.0
91 days and over.... 2,429,046 3.4 1,08,581 1.4 860,779 0.7 28,385 .01
----------- ---- ----------- ---- ------------ ---- ------------ ----
Total............. $ 4,449,315 6.2% $ 3,149,111 4.1% $ 3,010,887 2.6% $ 456,315 .21%
----------- ---- ----------- ---- ------------ ---- ------------ ----
----------- ---- ----------- ---- ------------ ---- ------------ ----
Defaults/Defaults
as a percentage of
average monthly
balance............ $ 137,237 0.2% $ 100,109 0.1% $ - 0.0% $ - 0.0%
----------- ---- ----------- ---- ------------ ---- ------------ ----
----------- ---- ----------- ---- ------------ ---- ------------ ----
</TABLE>
48
<PAGE>
MANAGEMENT INFORMATION SYSTEMS
The Company's servicing operations are currently operated on an IBM
AS/400-based system. Management believes that the Company's existing computer
capacity will be sufficient through fiscal 1997 but has begun to implement a
program to upgrade and expand its current systems. Such plan includes
upgrading and enhancing the Company's current "front-end" origination and
servicing systems. In addition, the Company is evaluating certain document
imaging technologies and direct "on line" communications with correspondent
lenders. Management believes that such advances should increase the
efficiency of the Company's underwriting and servicing operations.
SECURITIZATION
In fiscal 1995 and the nine months ended June 30, 1996, substantially
all of the loans originated or purchased by the Company were sold through
securitization transactions. The Company intends to execute securitizations
regularly; however, there can be no assurance that it will be able to do so.
The Company sold through eight securitization transactions approximately
$234.8 million and $427.2 million of loans during fiscal 1995 and the nine
months ended June 30, 1996, respectively.
In a securitization transaction, investors purchase pass-through
certificates evidencing fractionalized but undivided beneficial ownership
interests in a pool of loans sold to a grantor trust. The principal and
interest payments on the pooled loans, less the servicing fee and certain
expenses, are distributed by the trust to the senior certificate holders and
to the Company as beneficial holder of the Excess Serving Receivable. In some
cases the Company retains an unrated subordinate certificate that provides
additional credit enhancement to the senior certificate.
The pooling and servicing agreements that govern the distribution of
cash flows from the loans included in the securitization trusts require
either (i) the establishment of a reserve account that may be funded with an
initial cash deposit by the Company or (ii) the overcollateralization of the
trust intended to result in receipts and collections on the loans that exceed
the amounts required to be distributed to holders of interests. The Company's
interest in each reserve account and overcollateralized amount is reflected
in the Company's Financial Statements as "Receivable from trusts." To the
extent that borrowers default on the payment of principal or interest on the
loans, losses will be paid out of the reserve account or will reduce the
overcollateralization to the extent that funds are available. The reserve
account or overcollateralization account will thereafter be replenished, to
the extent required by each securitization pooling and servicing agreement,
to the extent of the appropriate Excess Servicing Receivable related to each
securitization pool. If payment defaults exceed the amount in the reserve
account or the amount of overcollateralization, as applicable, the Company's
insurance policy, if applicable, will pay any further losses experienced by
holders of the senior interests in the related trust to the extent these
interests are insured; however, the Excess Servicing Receivable will not be
paid until the insurer and the trust are repaid for any losses. At June 30,
1996 the Company's reserve accounts in its securitizations totaled $7.8
million. Sharing agreements required third parties to maintain certain
reserve accounts in the trusts as of June 30, 1996 totaling $2.6 million. The
outstanding securitized loan balance was $614.0 million as of June 30, 1996.
The Company may be required either to repurchase or to replace loans
that do not conform to the representations and warranties made by the Company
in the pooling and servicing agreements entered into when the loans are
pooled and securitized. To the extent these nonconforming loans breach a
warranty made by a correspondent lender or the seller of such loan, the
Company may require the correspondent lender or seller to repurchase the
nonconforming loan; however, there is no assurance that the correspondent
lender will have the financial capability to purchase the loan.
HOME IMPROVEMENT INDUSTRY
Home improvement lending is a large, highly fragmented industry. In
recent years, a trend toward consolidation has developed. From the standpoint
of individual owners, the Company believes that this trend results from
family succession issues, a desire for liquidity and increasing tax estate
planning and regulatory complexities, as well as the increasing competitive
threat posed by larger lenders. From the standpoint of such larger lenders,
it appears that the consolidation trend is driven by the benefits derived
from economies of scale, improved managerial control and strategic planning.
Preliminary data from the U.S. Census Bureau indicates that 1994 home
improvement spending totaled $115.5 billion, representing a 6.7% increase
over total expenditures of $108.3 billion in 1993. Management believes that
the amount of home improvements financed in 1994 was a significant percentage
of the total home improvement market. Of
49
<PAGE>
the home improvements financed in 1994, $739 million were single family home
improvement loans under the Title I Program. Through August 1995, single
family Title I Loans totaling $799 million were originated, representing a
77% increase in the dollar amount of loans funded over the same period in the
prior year.
While there are many factors driving the home improvement market the
Company believes that appreciation of housing values is a key factor driving
the growth of the industry. Other factors that affect the growth of the
industry include aging and turnover rates of the housing stock, the length of
time the homeowner has lived in the home and real rental rates.
COMPETITION
The consumer finance market is highly competitive and fragmented. The
Company competes with a number of finance companies providing financing
programs to individuals who cannot qualify for traditional financing. To a
lesser extent the Company competes with commercial banks, savings and loan
associations, credit unions, insurance companies and captive finance arms of
major manufacturing companies that tend to currently apply more traditional
lending criteria. Many of these competitors or potential competitors are
substantially larger and have significantly greater capital and other
resources than the Company. In fiscal 1995 and the nine months ended June 30,
1996, approximately 68.5% and 93.5%, respectively, of the Company's loans
originated were Correspondent Loans (excluding bulk purchases), which are
expected to remain a significant part of the Company's loan production
program. As a purchaser of Correspondent Loans, the Company is exposed to
fluctuations in the volume and price of Correspondent Loans resulting from
competition from other purchasers of such loans, market conditions and other
factors. In addition, Fannie Mae has purchased and is expected to continue to
purchase significant volumes of Title I Loans on a whole-loan basis.
Purchases by Fannie Mae could be made from sources from which the Company
also purchases loans. To the extent that purchasers of loans, such as Fannie
Mae, enter, or increase their purchasing activities in, the markets in which
the Company purchases loans, competitive pressures may decrease the
availability of loans or increase the price the Company would have to pay for
loans, a phenomenon that has occurred with respect to Title I Loans. In
addition, increases in the number of companies seeking to originate loans
tends to lower the rates of interest the Company can charge borrowers,
thereby reducing the potential value of subsequently earned Gain on Sale of
loans. To the extent that any of these lenders or Fannie Mae significantly
expand their activities in the Company's market, or to the extent that new
competitors enter the market, the Company could be materially adversely
affected. However, by focusing primarily on higher LTV home improvement loans
and debt consolidation loans and reliance on the creditworthiness of the
borrower rather than the collateral, the Company believes it is able to
differentiate itself from other participants in the market.
Some of the Company's competitors include Green Tree Financial
Corporation, The Money Store Inc., American General Finance Corp. and USAA
Federal Savings Bank. From time to time in particular geographic areas local
competition may be able to offer more favorable rates; however, the Company
believes it can compete effectively by offering superior service, prompt
credit review and a variety of financing programs.
REGULATION
The operations of the Company are subject to extensive regulation,
supervision and licensing by federal, state and local governmental
authorities. Regulated matters include, without limitation, loan origination,
credit activities, maximum interest rates and finance and other charges,
disclosure to customers, the terms of secured transactions, the collection,
repossession and claims handling procedures utilized by the Company, multiple
qualification and licensing requirements for doing business in various
jurisdictions and other trade practices.
The Company's loan origination activities are subject to the laws and
regulations in each of the states in which those activities are conducted.
The Company's activities as a lender are also subject to various federal laws
including the Truth in Lending Act ("TILA"), the Real Estate Settlement
Procedures Act ("RESPA"), the Equal Credit Opportunity Act ("ECOA"), the Home
Mortgage Disclosure Act ("HMDA") and the Fair Credit Reporting Act ("FCRA").
TILA and Regulation Z promulgated thereunder contain disclosure
requirements designed to provide consumers with uniform, understandable
information with respect to the terms and conditions of loans and credit
transactions in order to give them the ability to compare credit terms. TILA
also guarantees consumers a three-day right to cancel certain credit
transactions, including loans of the type originated by the Company.
Management of the Company believes that it is in compliance with TILA in all
material respects. If the Company was found not to be in compliance with
TILA, aggrieved
50
<PAGE>
borrowers could have the right to rescind their loan transactions with the
Company and to demand the return of finance charges paid to the Company.
In September 1994, the Riegle Community Development and Regulatory
Improvement Act of 1994 (the "Riegle Act") was enacted. Among other things,
the Riegle Act makes certain amendments to TILA. The TILA amendments, which
became effective in October 1995, generally apply to mortgage loans ("covered
loans") with (i) total points and fees upon origination in excess of the
greater of eight percent of the loan amount or $400, or (ii) an annual
percentage rate of more than 10 percentage points higher than comparably
maturing United States Treasury securities. A substantial majority of the
loans originated or purchased by the Company are covered by the Riegle Act.
The TILA amendments impose additional disclosure requirements on lenders
originating covered loans and prohibit lenders from originating covered loans
that are underwritten solely on the basis of the borrower's home equity
without regard to the borrower's ability to repay the loan. The Company
believes that only a small portion of its loans originated since fiscal 1994
are of the type that, unless modified, are prohibited by the TILA amendments.
The Company applies to all covered loans underwriting criteria that take into
consideration the borrower's ability to repay.
The TILA amendments will also prohibit lenders from including prepayment
fee clauses in covered loans to borrowers with a debt-to-income ratio in
excess of 50% or covered loans used to refinance existing loans originated by
the same lender. The Company reported immaterial amounts of prepayment fee
revenues in fiscal 1993, 1994, 1995 and the nine months ended June 30, 1996.
The Company will continue to collect prepayment fees on loans originated
prior to effectiveness of the TILA amendments and on non-covered loans, as
well as on covered loans in permitted circumstances. Because the TILA
amendments did not become effective until October 1995, the level of
prepayment fee revenues were not affected in fiscal 1995, but the level of
prepayment fee revenues may decline in future years. The TILA amendments
impose other restrictions on covered loans, including restrictions on balloon
payments and negative amortization features, which the Company does not
believe will have a material effect on its operations.
The Company is also required to comply with ECOA, which prohibits
creditors from discriminating against applicants on the basis of race, color,
sex, age or marital status. Regulation B promulgated under ECOA restricts
creditors from obtaining certain types of information from loan applicants.
It also requires certain disclosures by the lender regarding consumer rights
and requires lenders to advise applicants of the reasons for any credit
denial. In instances where the applicant is denied credit or the rate or
charge for loans increases as a result of information obtained from a
consumer credit agency, another statute, the Fair Credit Reporting Act of
1970, as amended, requires lenders to supply the applicant with the name and
address of the reporting agency. The Company is also subject to RESPA and is
required to file an annual report with HUD pursuant to the HMDA.
In addition, the Company is subject to various other federal and state
laws, rules and regulations governing, among other things, the licensing of,
and procedures that must be followed by, mortgage lenders and servicers, and
disclosures that must be made to consumer borrowers. Failure to comply with
these laws may result in civil and criminal liability and may, in some cases,
give consumer borrowers the right to rescind their mortgage loan transactions
and to demand the return of finance charges paid to the Company.
In the course of its business, the Company may acquire properties
securing loans that are in default. See "-- Servicing Operations --
Delinquencies and Foreclosures." There is a risk that hazardous or toxic
waste could be found on such properties. In such event, the Company could be
held responsible for the cost of cleaning up or removing such waste, and such
cost could exceed the value of the underlying properties.
Because the Company's business is highly regulated, the laws, rules and
regulations applicable to the Company are subject to subsequent modification
and change. There are currently proposed various laws, rules and regulations
which, if adopted, could have an adverse effect on the Company. There can be
no assurance that these proposed laws, rules and regulations, or other such
laws, rules or regulations, will not be adopted in the future that could make
compliance much more difficult or expensive, restrict the Company's ability
to originate, broker, purchase or sell loans, further limit or restrict the
amount of commissions, interest and other charges earned on loans originated,
brokered, purchased or sold by the Company, or otherwise adversely affect the
business or prospects of the Company.
51
<PAGE>
COMBINATION
The Company was incorporated in Nevada in October 1994, to combine the
operations of SFAC, a Conventional Loan originator and FIRSTPLUS Financial,
an approved Title I Loan originator and servicer. The Company entered into an
agreement with the shareholders of SFAC and with Farm Bureau, which at the
time was an affiliate of a principal shareholder of FIRSTPLUS Financial,
whereby the shareholders of SFAC exchanged their common and preferred stock
of SFAC and Farm Bureau exchanged its common stock of FIRSTPLUS Financial for
common and preferred stock of the Company. Effective October 4, 1994,
FIRSTPLUS Financial and SFAC became wholly owned subsidiaries of the Company,
with the shareholders of SFAC controlling the voting shares of the Company.
For accounting purposes, the Combination was treated as a purchase of
FIRSTPLUS Financial by the Company, and SFAC was accounted for at book value
in a manner similar to a pooling of interests as a transaction between
entities under common control. In connection with the Combination, each of
SFAC and FIRSTPLUS Financial changed their respective fiscal year end from a
calendar year end to a September 30 year end.
EMPLOYEES
At June 30, 1996 the Company employed 754 persons: 218 primarily in loan
origination, 71 primarily in loan servicing and the rest in various other
clerical and administrative functions. Of the total number of employees at
such date, 291 were located at the Company's headquarters in Dallas, Texas,
and 463 at the Company's other offices. None of the Company's employees is
subject to a collective bargaining agreement, and the Company believes that
its relations with its employees are good.
PROPERTIES
The executive and administrative offices of the Company are located at
1250 West Mockingbird Lane, Dallas, Texas 75247, and consist of approximately
113,431 square feet. The lease on the premises extends through January 31,
2003 and the current annual rental is approximately $1.2 million.
The Company also leases space for 31 of its offices. These facilities
aggregate approximately 28,000 square feet, with an annual aggregate base
rental of approximately $300,000. The terms of these leases vary as to
duration and escalation provisions. In general, the leases expire through
April 1999.
The Company believes that its facilities are adequate for its current
needs, but it may need additional space within the next 12 months. The
Company believes that additional space is available for future expansion.
LEGAL PROCEEDINGS
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 material pending litigation which, if decided adversely to the
Company, would have a significant adverse effect on the business, income,
assets or operations of the Company. The Company is not aware of any material
threatened litigation that might involve the Company.
52
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table and the descriptions below set forth certain
information regarding the directors and executive officers of the Company as
of September 30, 1996.
NAME AGE POSITION
---- --- --------
Ronald M. Mankoff... 64 Chairman of the Board and General Counsel
Daniel T. Phillips.. 47 President, Chief Executive Officer and Director
Eric C. Green....... 41 Executive Vice President and Chief Financial Officer
Gene O'Bryan........ 41 Executive Vice President and Chief Production Officer
John Fitzgerald..... 47 Director
Daniel J. Jessee.... 43 Director
Paul Seegers........ 66 Director
Sheldon I. Stein.... 43 Director
All officers are appointed by and serve at the discretion of the Board
of Directors. Directors serve for one-year terms or until their successor is
duly elected and qualified.
RONALD M. MANKOFF - Mr. Mankoff has served as Chairman of the Board and
General Counsel of the Company since October 1994. From June 1991 to October
1994, Mr. Mankoff served as General Counsel for SFAC. Mr. Mankoff was the
President of and a shareholder in the Dallas, Texas law firm of Mankoff,
Hill, Held & Metzger, P.C. from 1985 to 1995 and a partner with the Dallas,
Texas law firm of Durant & Mankoff for the prior 25 years.
DANIEL T. PHILLIPS - Mr. Phillips has served as President and Chief
Executive Officer of the Company since October 1994. Mr. Phillips served as
President and Chief Executive Officer of SFAC from March 1993 to October
1994. During the period from October 1992 to March 1993, Mr. Phillips was
self-employed, primarily engaging in the purchase and sale of consumer
receivables. From February 1989 to October 1992, Mr. Phillips served as
President and Chief Executive Officer of LinCo Financial Corporation, a
factoring firm, in Sacramento, California. In March 1993, LinCo Financial
Corporation commenced a Chapter 11 proceeding under the federal bankruptcy
laws, which was converted to a Chapter 7 proceeding in April 1993. Such
proceeding is still ongoing. From November 1986 to October 1988, Mr. Phillips
served as President and Chief Executive Officer of American Equities
Financial Corporation.
ERIC C. GREEN - Mr. Green has served as Executive Vice President and
Chief Financial Officer of the Company since March 1995. For approximately
four years prior to beginning his tenure with the Company, Mr. Green operated
his own tax consulting practice where his responsibilities included
consulting with the Company in connection with the Combination and the
Company's first securitization transaction. Prior to consulting, Mr. Green
worked for Arthur Young & Company and Grant Thornton & Company as a Certified
Public Accountant for approximately 10 years.
GENE O'BRYAN - Mr. O'Bryan has served as Executive Vice President and
Chief Production Officer of the Company since April 1996. From April 1994 to
April 1996, Mr. O'Bryan served as Senior Vice President - Sales and Marketing
of CountryWide Funding, a first mortgage originator. Mr. O'Bryan served as
President and Chief Operating Officer of Alliance Costal Credit Corporation,
a home-equity lender, from June 1992 to April 1994, and served as President
of Spring Mountain Credit Corporation, an auto finance lender, from December
1987 to June 1992.
JOHN FITZGERALD - Mr. Fitzgerald has served as a Director of the Company
since September 1995. Mr. Fitzgerald is Executive Vice President of Dexter &
Company, an independent insurance agency and has held that position since
1989. Prior to joining Dexter & Company in 1989, Mr. Fitzgerald was a
professional football player with the Dallas Cowboys for 12 years.
DANIEL J. JESSEE - Mr. Jessee has served as a Director of the Company
since September 1995. Mr. Jessee currently serves as Vice Chairman of Banc
One Capital Corporation and has managed its Structured Finance Group since
1990. Mr. Jessee was employed in senior and other investment banking
capacities with Rotan Mosle Inc., Meuse, Rinker, Chapman, Endres and Brooks
and E.F. Hutton & Co.
53
<PAGE>
PAUL SEEGERS - Mr. Seegers has served as a Director of the Company since
September 1995. Mr. Seegers currently serves as President of Seegers
Enterprises, a company engaged in ranching, farming, oil and gas, real estate
and general investments. He is also a Director and Chairman of the Executive
Committee of Centex Corporation, the largest homebuilder in the United States
and a Director of Oryx Energy Company. Mr. Seegers retired as Chairman of the
Board from Centex Corporation in 1991, where he held various senior executive
positions during his 30-year tenure including Chief Executive Officer and
President.
SHELDON I. STEIN - Mr. Stein has served as a Director of the Company
since April 1996. Mr. Stein has served as a Senior Managing Director of Bear,
Stearns & Co. Inc. since August 1986. Mr. Stein is a director of Cinemark
USA, Inc., AMRE, Inc., Fresh America Corp., CellStar Corporation, The Men's
Wearhouse, Inc. and Tandycrafts, Inc.
OTHER SIGNIFICANT EMPLOYEES
RICK CARLIN - Mr. Carlin, age 44, has served as Senior Vice President of
Indirect Loan Production since June 1995 and has held other various positions
with the Company and SFAC since January 1994. From August 1993 to January
1994, Mr. Carlin was a consultant to the Company. From April 1992 to August
1993, Mr. Carlin served as Vice President, Secretary and Treasurer of Eagle
Capital Mortgage, Ltd., a home improvement mortgage company in Dallas, Texas.
From September 1985 to February 1992, Mr. Carlin served in various
capacities, most recently as a Senior Vice President, with Union Mortgage
Company, Inc., a consumer finance company in Dallas, Texas.
DUNCAN Y. CHIU - Mr. Chiu, age 43, has served as Vice President -
Servicing since June, 1996. From January 1992 to June, 1996 Mr. Chiu served
as Vice President - Loan and Administration Department for Beal Banc, S.A.
From October 1989 to January 1992 Mr. Chiu served as Vice President/District
Manager of Republic Realty Services, Inc.
CHRISTOPHER J. GRAMLICH - Mr. Gramlich, age 26, has served as Senior
Vice President - Capital Markets since October 1995. From March 1991 to
October 1995 Mr. Gramlich served as Assistant Vice President for Bank One
Capital Corp.
SCOTT HAHN - Mr. Hahn, age 33, has served as Senior Vice President -
Management Information Systems since October 1995. From November 1991 to
October 1995 Mr. Hahn served as Director of Data Processing for West Capital
Financial Services Corp. From March 1988 to October 1991 Mr. Hahn was
Management Information Systems Manager for First Associates Mortgage.
CINDA KNIGHT - Ms. Knight, age 37, has served as Senior Vice President
and Controller since July 1995. From September 1993 to July 1995, Ms. Knight
served as Vice President and Controller of AccuBanc Mortgage Company. From
November 1990 to September 1993, Ms. Knight served as Vice President and
Controller of Foster Mortgage Corporation.
JANIE OSBORNE - Ms. Osborne, age 41, has served as Senior Vice President
of Loan Control and Dealer Monitoring of the Company since August 1995. From
June to August 1995, Ms. Osborne served as Senior Vice President of Funding
and Document Control of the Company. Prior to joining the Company, Ms.
Osborne served as a loan officer for Ameritex Residential Mortgage from July
1994 to June 1995 and for Banc Plus Mortgage Corporation from April 1994 to
July 1994. Ms. Osborne served as Vice President of Acquisitions, Sales and
Escrow Services and various other positions at Foster from June 1984 to
December 1993.
CHARLES T. OWENS - Mr. Owens, age 60, has served as President of FPCFI
since June 1996. Prior to joining the Company, Mr. Owens held various
positions with Associates Financial Services from October 1959, including
Senior Vice President - Acquisitions.
JEFFREY A. PEIPER - Mr. Peiper, age 50, has served as Senior Vice
President - Administration since March 1996. From June 1994 to March 1996 Mr.
Peiper served as President and Chief Executive Officer of First American
Savings Bank, SSB. From December 1990 to March 1994 Mr. Peiper served as
President and Chief Executive Officer of Beal Banc, S.A.
JACK ROUBINEK - Mr. Roubinek, age 54, has served as the Senior Vice
President of Wholesale Loan Production since March 1995. From February 1993
to March 1995, Mr. Roubinek served as Vice President of Direct Lending and
54
<PAGE>
Vice President of Secondary Marketing for the Company and SFAC. Prior to
February 1993, Mr. Roubinek was a mortgage banking consultant to various
companies and individuals.
KEN SACKNOFF - Mr. Sacknoff, age 43, has served as Senior Vice President
of Risk Management since April 1996. Mr. Sacknoff served as Director of
Corporate Risk for Residential Funding Corporation in Minneapolis from March
1995 to March 1996 and as Vice President of Risk Management Information &
Analysis for Associates Corporation from July 1992 to March 1995. Mr.
Sacknoff served as Vice President of Risk Management at Beneficial National
Bank from November 1990 to July 1992 and as Director of Centralized
Operations at Beneficial Corporation from September 1989 to November 1990.
Prior thereto, Mr. Sacknoff was employed by G.E. Capital in various
management positions from 1979 to 1989.
BARRY S. TENENHOLTZ - Mr. Tenenholtz, age 39, has served as Senior Vice
President and Treasurer since January, 1995. From July 1990 to February 1993
Mr. Tenenholtz served as Corporate Tax Manager for TIC United Corp. From June
1988 to June 1990 Mr. Tenenholtz served as corporate tax manager for Dalfast
Corporation.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established two standing committees: the
Compensation Committee and the Audit Committee. Messrs. Fitzgerald, Jessee,
Stein and Seegers serve on the Compensation Committee and the Audit
Committee. The Compensation Committee is responsible for recommending to the
Board of Directors the Company's executive compensation policies for senior
officers and administering the 1995 Employee Plan and the Company's Employee
Stock Purchase Plan (the "Purchase Plan"). See "- Stock Option Plan" and "-
Employee Stock Purchase Plan." The Audit Committee is responsible for
recommending independent auditors, reviewing the audit plan, the adequacy of
internal controls, the audit report and management letter, and performing
such other duties as the Board of Directors may from time to time prescribe.
EMPLOYMENT AGREEMENTS; KEY-MAN LIFE INSURANCE
EMPLOYMENT AGREEMENTS. On August 25, 1995, the Company entered into
employment agreements with each of the executive officers named in the
Summary Compensation Table under "- Executive Compensation." Mr. Mankoff's,
Mr. Phillip's and Mr. O'Bryan's employment agreements are for terms of five
years, and Mr. Green's employment agreement is for a term of three years.
Each employment agreement automatically renews for successive periods after
the initial term, unless the employee or the Company notifies the other
within a specified time that the term will not be extended. On May 30, 1996,
Mr. Poythress retired and entered into a consulting agreement that will
expire on August 24, 1997.
Under the terms of the respective employment agreements, the Company
pays Mr. Mankoff a minimum base salary of $320,000 per year, Mr. Phillips a
minimum base salary of $400,000 per year and Mr. Green a minimum $230,000 per
year, which are adjusted annually to meet cost of living increases. Pursuant
to the Consulting Agreement, the Company pays Mr. Poythress a fee of $232,500
per year and provides certain insurance benefits to Mr. Poythress. Each
executive officer is entitled to participate generally in the Company's
employee benefit plans, including the 1995 Employee Plan and the Purchase
Plan, and is eligible for an incentive bonus under the Company's executive
bonus pool. Such cash bonuses are made at the discretion of the Company based
on subjective performance criteria.
If the executive officer is terminated "for cause," which definition
generally includes termination by the Company due to the executive's willful
failure to perform his duties under the employment agreement, executive's
personal dishonesty or breach of his fiduciary duties or the employment
agreement to which he is a party, then the Company is obligated to pay the
executive so terminated only his base salary up to the date upon which the
Company notifies the executive of his termination "for cause." On the other
hand, if the executive officer is terminated without cause, then the Company
is obligated to pay the executive officer so terminated a lump sum payment
equal to his base salary for the remaining term of the employment agreement.
If the executive officer resigns for "good reason," which generally includes
the executive officer's resignation due to a breach by the Company of his
employment agreement, the Company must pay the executive officer so
terminated a lump sum payment equal to the salary of the executive officer
for the remaining term of the employment agreement. In the case of the
retirement or death of the executive officer, the Company is obligated to pay
the executive officer only his base salary up to the date of such death or
retirement. If the executive officer becomes disabled, the Company must
continue to pay the executive officer his base salary for a period of up six
months
55
<PAGE>
and, if the disability extends beyond six months, the Company may terminate
the executive by giving him 30 days' notice of such termination.
Each of the executive officers named in the Summary Compensation Table
below, by virtue of his employment agreement, has agreed not to solicit
customers or employees of the Company in any manner for a period of 24 months
following his resignation or termination from the Company and, will not
compete for any period for which a lump sum has been paid by the Company in
accordance with the employment agreement. During the term of his consulting
agreement, Mr. Poythress has agreed not to (i) be employed by a lending
institution or company specializing in Title I Loans with its principal
office in the Dallas-Fort Worth area, (ii) be a consultant, director,
officer, employee or partner of any lending institution specializing in Title
I Loans that is ranked among the top five Title I lenders operating on a
nationwide basis, (iii) solicit business from anyone who purchased loans from
the Company within six months prior to the effective date of the consulting
agreement, (iv) induce or solicit any person to leave their employment with
Company and (v) disclose certain information obtained from the Company.
KEY-MAN LIFE INSURANCE. The Company maintains a $3.0 million key-man life
insurance policy on Mr. Phillips, which the Company has assigned to BOCP II.
The Company does not maintain key-man life insurance policies on any of its
other executive officers.
COMPENSATION OF DIRECTORS
The Company pays each nonemployee director a fee of $2,500 for each
meeting of the Board of Directors that he attends. The Company reimburses
each director for ordinary and necessary travel expenses related to such
director's attendance at Board of Director and committee meetings. For a
discussion of the 1995 Director Plan and the grant of certain nonqualified
stock options to the nonemployee directors of the Company under the 1995
Director Plan, see "- Nonemployee Director Stock Option Plan."
56
<PAGE>
EXECUTIVE COMPENSATION
The Summary Compensation Table below provides certain summary
information concerning compensation paid or accrued during fiscal 1994 and
1995 by the Company to or on behalf of the Chief Executive Officer and the
other executive officers of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
LONG-TERM COMPENSATION
----------------------------------------------
ANNUAL COMPENSATION (1) AWARDS PAYOUTS
------------------------------------ -------------------- -------
OTHER ANNUAL RESTRICTED OPTIONS/ ALL OTHER
NAME AND FISCAL SALARY BONUS COMPENSATION STOCK SARS LTIP COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) (4) ($) ($)
- ------------------ ------ -------- -------- ------------ ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ronald M. Mankoff........... 1996 $320,000 $320,000 - - - - -
Chairman of the Board, 1995 216,047 225,000 - - - - -
General Counsel
Daniel T. Phillips.......... 1996 $400,000 $800,000 - - - - -
President, Chief Executive
Officer and Director 1995 221,333 225,000 - - - - -
Eric C. Green............... 1996 232,500 300,000 - - - - -
Executive Vice President
and Chief Financial Officer 1995 110,000(2) 125,000 - - - - -
Gene O'Bryan................ 1996 $90,000(3) $100,000 - - - - -
Executive Vice President 1995 - - - - - - -
and Chief Production Officer
James H. Poythress.......... 1996 116,250 116,250 - - - - -
Executive Vice President 1995 37,885(4) 205,000 - - - - -
and Chief Operating Officer
</TABLE>
- -----------
(1) Annual compensation does not include the cost to the Company of benefits
certain executive officers receive in addition to salary and cash bonuses. The
aggregate amounts of such personal benefits, however, do not exceed the lesser
of either $50,000 or 10% of the total annual compensation of such executive
officer. Bonuses with respect to fiscal 1995 and 1996 were accrued during each
respective fiscal year and paid in November 1995 and 1996, respectively.
(2) Mr. Green joined the Company in April 1995, at an annual salary of
$180,000.
(3) Mr. O'Bryan joined the Company in April 1996, at an annual salary of
$180,000.
(4) Mr. Poythress joined the Company in June 1995, at an annual salary of
$100,000. Mr. Poythress retired from the Company in May 1996, and has agreed to
serve as a consultant to the Company through August 1997. See "- Employment
Agreements; Key-Man Life Insurance - Employment Agreements."
(5) No options were granted during fiscal 1995. See "- Stock Option Plan" for
options granted after fiscal 1995.
GRANTS OF OPTIONS AND STOCK APPRECIATION RIGHTS ("SARS")
The following table sets forth details regarding stock options granted to
the named executive officers listed in the Summary Compensation Table during the
fiscal 1996. In addition, there are shown the "option spreads" that would exist
for the respective options granted based upon assumed rates of annual compound
stock appreciation of 5% and 10% from the date the options were granted over the
full option term. The Company granted no SARs in fiscal 1996.
57
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
INDIVIDUAL GRANTS
----------------------------------------------------------
POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES
TOTAL OPTIONS/ OF STOCK PRICE APPRECIATION
OPTIONS/SARS SARS GRANTED TO EXERCISE FOR OPTION TERM (2)(3)
GRANTED(1) EMPLOYEES IN OR BASE PRICE EXPIRATION ---------------------------
NAME (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---------------------- ------------ --------------- ------------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Ronald M. Mankoff..... 50,000 8.12% 14.00 11/15/05 35,000 70,000
Daniel T. Phillips.... 50,000 8.12% 14.00 11/15/05 35,000 70,000
Eric C. Green......... 45,581 7.40% 14.00 11/15/05 31,907 63,813
Gene O'Bryan.......... 20,000 3.25% 19.00 04/01/06 19,000 38,000
James H. Poythress.... 45,581 7.40% 14.00 11/15/05 31,907 63,813
</TABLE>
_____________
1 Options granted to executives were granted under the Company's Stock Option
Plan.
2 These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises are dependent upon the future
performance of the Company's Common Stock, overall market conditions and
the executive's continued employment with the Company. The amounts
represented in this table may not necessarily be achieved.
3 Options vest generally in one-third increments over a three-year term. The
options have a term of five years, unless they are exercised or expire upon
certain circumstances set forth in the Stock Option Plan, including
retirement, termination in the event of a change in control, death or
disability.
EXERCISES OF OPTIONS AND SARS
The following table sets forth information with respect to the named
executive officers concerning the exercise of options during fiscal 1996, and
unexercised options held as of September 30, 1996. No SARs were exercised by
the named executive officers during fiscal 1996.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
FISCAL YEAR END OPTION/SAR VALUES
VALUE OF
NUMBER OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS OPTIONS/SARS
ACQUIRED VALUE AT FY-END (#) AT FY-END ($)
ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE(1)
- --------------------- ------------ -------- ------------- ----------------
Ronald M. Mankoff.... 0 $0.00 0/50,000 0/1,581,000
Daniel T. Phillips... 0 0.00 0/50,000 0/1,581,000
Eric C. Green........ 0 0.00 0/45,581 0/1,441,272
Gene O'Bryan......... 0 0.00 0/20,000 0/532,400
James H. Poythress... 0 0.00 0/45,581 0/1,441,272
58
<PAGE>
_____________
1 Values are stated based upon the closing price of $45.62 per share of the
Company's common stock on the NASDAQ/NMS on September 30, 1996, the last
trading day of fiscal 1996.
STOCK OPTION PLAN
In August 1995, the Board of Directors and stockholders adopted the 1995
Employee Plan. The purpose of the 1995 Employee Plan is to advance the interests
of the Company by providing additional incentives to attract and retain
qualified and competent employees and consultants of the Company and directors
of the Company's subsidiaries, upon whose efforts and judgment the success of
the Company is largely dependent. Nonemployee directors of RAC Financial
Group, Inc. are not eligible to participate in the 1995 Employee Plan. As of the
date hereof, substantially all of the Company's full-time employees are eligible
for grants of stock options ("Employee Options") under the terms of the 1995
Employee Plan. Options to purchase an aggregate of 211,162 shares of Common
Stock have been granted to certain executive officers as follows: Ronald M.
Mankoff (50,000 shares), Daniel T. Phillips (50,000 shares), Eric C. Green
(45,581 shares) and James H. Poythress (45,581 shares) and Gene O'Bryan
(20,000 shares). Such non-qualified stock options vest in one-third increments
in November 1996, 1997 and 1998, respectively.
The 1995 Employee Plan authorizes the granting of incentive stock options
("Incentive Options") and nonqualified stock options ("Nonqualified Options") to
purchase Common Stock to eligible persons. A total of 550,000 shares of Common
Stock are authorized for sale upon exercise of Employee Options granted under
the 1995 Employee Plan. The 1995 Employee Plan is currently administered by the
Compensation Committee of the Board of Directors, which consists of three
members of the Board of Directors, each of whom is a disinterested person. The
1995 Employee Plan provides for adjustments to the number of shares and to the
exercise price of outstanding options in the event of a declaration of a stock
dividend or any recapitalization resulting in a stock split-up, combination or
exchange of shares of Common Stock.
No Incentive Option may be granted with an exercise price per share less
than the fair market value of the Common Stock at the date of grant. The
Nonqualified Options may be granted with any exercise price determined by the
administrator of the 1995 Employee Plan. The exercise price of an Employee
Option may be paid in cash, by certified or cashier's check, by money order, by
personal check or by delivery of already owned shares of Common Stock having a
fair market value equal to the exercise price, or by delivery of a combination
of cash and already owned shares of Common Stock. However, if the optionee
acquired the stock to be surrendered directly or indirectly from the Company, he
must have owned the stock to be surrendered for at least six months prior to
tendering such stock for the exercise of an Employee Option.
An eligible employee may receive more than one Incentive Option, but the
maximum aggregate fair market value of the Common Stock (determined when the
Incentive Option is granted) with respect to which Incentive Options are first
exercisable by such employee in any calendar year cannot exceed $100,000. In
addition, no Incentive Option may be granted to an employee owning directly or
indirectly stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company, unless the exercise price is set at not
less than 110% of the fair market value of the shares subject to such Incentive
Option on the date of grant and such Incentive Option expires not later than
five years from the date of grant. Awards of Nonqualified Options are not
subject to these special limitations.
No Employee Option granted under the 1995 Employee Plan is assignable or
transferable, otherwise than by will or by laws of descent and distribution.
During the lifetime of an optionee, his Employee Option is exercisable only by
him or his guardian or legal representative. The expiration date of an Employee
Option is determined by the administrator at the time of the grant, but in no
event may an Employee Option be exercisable after the expiration of 10 years
from the date of grant of the Employee Option.
The administrator of the 1995 Employee Plan may limit an optionee's right
to exercise all or any portion of an Employee Option until one or more dates
subsequent to the date of grant. The administrator also has the right,
exercisable in its sole discretion, to accelerate the date on which all or any
portion of an Employee Option may be exercised. The 1995 Employee Plan also
provides that 30 days prior to certain major corporate events such as, among
other things, certain changes in control, mergers or sales of substantially all
of the assets of the Company (a "Major Corporate Event"), each Employee Option
shall immediately become exercisable in full. In anticipation of a Major
Corporate Event, however, the administrator may, after notice to the optionee,
cancel the optionee's Employee Options on the consummation of the
59
<PAGE>
Major Corporate Event. The optionee, in any event, will have the opportunity
to exercise his Employee Options in full prior to such Major Corporate Event.
If terminated for cause, all rights of an optionee under the 1995 Employee
Plan cease and the Employee Options granted to such optionee become null and
void for all purposes. The 1995 Employee Plan further provides that in most
instances an Employee Option must be exercised by the optionee within 30 days
after the termination of the consulting contract between such consultant and the
Company or termination of the optionee's employment with the Company, as the
case may be (for any reason other than termination for cause, mental or physical
disability or death), if and to the extent such Employee Option was exercisable
on the date of such termination. If the optionee is not otherwise employed by,
or a consultant to, the Company, his Employee Option must be exercised within 30
days of the date he ceases to be a director of a subsidiary of the Company.
Generally, if an optionee's employment or consulting contract is terminated due
to mental or physical disability, the optionee will have the right to exercise
the Employee Option (to the extent otherwise exercisable on the date of
termination) for a period of one year from the date on which the optionee
suffers the mental or physical disability. If an optionee dies while actively
employed by, or providing consulting services under a consulting contract to,
the Company, the Employee Option may be exercised (to the extent otherwise
exercisable on the date of death) within one year of the date of the optionee's
death by the optionee's legal representative or legatee.
NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
In August 1995, the Board of Directors adopted the 1995 Director Plan. The
1995 Director Plan was also approved by the stockholders of the Company in
August 1995. The purpose of the 1995 Director Plan is to advance the interests
of the Company by providing an incentive to retain as independent directors
persons of training, experience and ability, to encourage a sense of
proprietorship of such persons, and to stimulate the active interest of such
persons in the development and financial success of the Company.
Options under the 1995 Director Plan ("Director Options") are granted only
to nonemployee directors of the Company. Director Options are automatically
granted to each nonemployee director. Each person serving as a nonemployee
director of the Company on the date of adoption of the 1995 Director Plan
received a Director Option under the 1995 Director Plan exercisable for 5,000
shares of Common Stock at an exercise price of $15.81 per share (an "Initial
Option"). Subsequently, on the date of each annual meeting of stockholders of
the Company after such director's Initial Option has fully vested, such director
shall receive a nonqualified stock option to purchase 1,000 shares of Common
Stock, with an exercise price per share equal to the fair market value per share
of the Common Stock on the date of grant (a "Subsequent Option"). Each Director
Option expires 10 years after its date of grant. An aggregate of 20% of the
total number of shares subject to such Initial Option vest on the date of each
annual meeting of shareholders of the Company (at which such nonemployee
director is reelected to the Board of Directors) held after the date of grant of
the Initial Option. In addition, shares subject to a Subsequent Option vest in
full on the date of grant of such Subsequent Option. Shares subject to a
Director Option vest as to all shares then subject to the Director Option upon
the occurrence of a Major Corporate Event. The 1995 Director Plan is, to the
extent that discretion is allowed pursuant to the terms of the 1995 Director
Plan, administered by the Board of Directors. For example, the Board of
Directors may cancel outstanding unexercised options granted under the 1995
Director Plan upon the consummation of Major Corporate Events. In addition, the
Board of Directors has certain limited discretion in amending, modifying,
suspending or discontinuing the 1995 Director Plan.
A total of 50,000 shares of Common Stock are authorized for issuance upon
exercise of Director Options granted under the 1995 Director Plan. Director
Options are granted with an exercise price per share equal to the fair market
value of such shares on the date of grant. The exercise price of a Director
Option may be paid in cash, by certified or cashier's check, by money order, by
personal check or by delivery of already owned shares of Common Stock having a
fair market value equal to the exercise price, or by delivery of a combination
of cash and already owned shares of Common Stock. The 1995 Director Plan
provides for adjustments to the number of shares under which Director Options
may be granted and to the exercise price of such outstanding Director Options in
the event of a declaration of a stock dividend or any recapitalization resulting
in a stock split-up, combination or exchange of shares of Common Stock.
No Director Option granted under the 1995 Director Plan is assignable or
transferable, otherwise than by will or by laws of descent and distribution.
During the lifetime of an optionee, his Director Options are exercisable only by
him or his guardian or legal representative. In addition, no Director Option is
exercisable prior to the six-month anniversary of the date of grant for such
Director Option. The 1995 Director Plan also provides that 30 days prior to
certain Major Corporate Events, Director Employee Option shall immediately
become exercisable in full. The unexercised portion of
60
<PAGE>
a Director Option automatically and without notice terminates and becomes
null and void and is forfeited upon the earliest to occur of the following:
(i) if the optionee's position as a director terminates other than by reason
of such optionee's death, 30 days after the date that the optionee's position
as a director terminates; (ii) one year after the death of the optionee; or
(iii) 10 years after the date of grant of such Director Option.
EMPLOYEE STOCK PURCHASE PLAN
In August 1995, the Board of Directors adopted the RAC Financial Group,
Inc. Employee Stock Purchase Plan (the "Purchase Plan") and reserved shares of
Common Stock for issuance thereunder. The stockholders of the Company approved
the Purchase Plan in August 1995. The purpose of the Purchase Plan is to provide
eligible employees of the Company and its designated subsidiaries with an
opportunity to purchase Common Stock ("ESPP Shares") from the Company through
payroll deductions.
Offerings under the Purchase Plan generally have a duration ("Offering
Period") of 12 months and commence on October 1 of each year, but the Initial
Offering Period under the Purchase Plan will commence on the first day of the
calendar month immediately following the Offering. On the first business day of
an Offering Period (the "Enrollment Date"), each eligible employee who chooses
to participate ("Participant") is granted the right to purchase ("Purchase
Right") on the last business day of such Offering Period ("Purchase Date") a
number of whole ESPP Shares determined by dividing the Participant's total
annual payroll deductions accumulated during such Offering Period by the
Purchase Price described below. However, the number of ESPP Shares subject to
each Participant's Purchase Right during such Offering Period shall in no event
exceed the lesser of (i) the maximum number of ESPP Shares which could be
purchased with such Participant's total payroll deductions for the Offering
Period at a Purchase Price equal to 85% of the fair market value of the ESPP
Shares on the Enrollment Date, (ii) the number of ESPP Shares determined by
dividing $25,000 by the fair market value of the ESPP Shares on the Enrollment
Date or (iii) the maximum number of ESPP Shares that would cause the total owned
by the Participant to exceed the 5% ownership limits described below. Unless the
Participant's participation is discontinued, his or her Purchase Right will be
exercised automatically on the Purchase Date (i.e. the last business day of the
Offering Period) at the Purchase Price.
The total number of shares of Common Stock issuable under the Purchase Plan
is 250,000. No less than 15 days prior to each Offering Period, the
administrator of the Purchase Plan will determine the total number of ESPP
Shares that will be made available for purchase during such Offering Period and
will notify the eligible employees. With respect to ESPP Shares that are made
available for an Offering Period, but which are not purchased during such
Offering Period, the administrator may again make them available for purchase
with respect to any subsequent Offering Period. In the event that on the
Purchase Date of reference the aggregate amount of payroll deductions during the
corresponding Offering Period exceed the aggregate Purchase Price of all ESPP
Shares available for purchase during such Offering Period, each Purchase Right
of a participant shall be reduced to that percentage of available ESPP Shares as
the accumulated payroll deductions in his or her account is of the aggregate
accumulated payroll deductions in the accounts of all Participants.
Any employee who is customarily employed for at least 20 hours per week and
more than five months per calendar year by the Company or its designated
subsidiaries, who is employed on June 30 preceding the Enrollment Date of
reference, and who continues to be employed on the Enrollment Date, is eligible
to participate in offerings under the Purchase Plan during the Offering Period,
which includes such Enrollment Date. Employees become Participants by delivering
to the Company an agreement authorizing payroll deductions at any time during
the 45 days immediately preceding the Enrollment Date of reference. No employee
is permitted to purchase ESPP Shares under the Purchase Plan if such employee
owns 5% or more of the total combined voting power or value of all classes of
shares of stock of the Company, including as owned by such employee all ESPP
Shares subject to his Purchase Right, as adjusted, shares subject to any other
options, or shares whose ownership is attributable to the employee by reason of
ownership by certain members of his or her family. In addition, no Participant
is entitled to purchase during the Offering Period of reference more than the
maximum number of ESPP Shares subject to such Participant's Purchase Right
during such Offering Period.
The price at which ESPP Shares are sold under the Purchase Plan ("Purchase
Price") is 85% of the lower of the fair market value per Share of Common Stock
on the Enrollment Date (i.e., first business day of the Offering Period) or the
Purchase Date (i.e., the last business day of the Offering Period). The Purchase
Price of the ESPP Shares is accumulated by payroll deductions made during the
Offering Period. The total payroll deductions of a Participant for an Offering
Period may not be greater than the lesser of $21,250, or 25% of the
Participant's annualized "considered pay" as determined at the beginning of the
Offering Period, nor may such payroll deductions be less than an aggregate of
$500.
61
<PAGE>
For Participants who are salaried employees, their "considered pay" is their
basic rate of pay (i.e., exclusive of bonuses and other special payments),
and for Participants who are hourly employees, their "considered pay" is the
amount of their total pay for services rendered for the months of August and
September immediately preceding the Offering Period of reference, annualized
by multiplying that amount by six.
All payroll deductions of a Participant are credited to his or her account
under the Purchase Plan and are deposited with the general funds of the Company.
Such funds may be used for any corporate purpose. No charges for administrative
or other costs may be made by the Company against the accounts of Participants.
The Purchase Plan is administered by the Compensation Committee of the Board of
Directors. Any members of the Board of Directors who are not members of the
administrator for at least 12 months prior to the Offering Period of reference,
and who also are eligible employees, are permitted to participate in the
Purchase Plan during such Offering Period. However, members of the administrator
may not participate in the Purchase Plan during an Offering Period that
commences within 12 months of the most recent date on which they were a member
of the administrator.
A Participant may terminate his or her right to purchase ESPP Shares with
respect to a particular Offering Period by notifying the administrator at any
time prior to the last 15 days of the Offering Period that the Participant is
withdrawing all, but not less than all, of the accumulated payroll deductions
credited to such Participant's account. The withdrawal of accumulated payroll
deductions automatically terminates the Participant's Purchase Right with
respect to that Offering Period. As soon as practicable after notice of such
withdrawal, the payroll deductions credited to a Participant's account will be
returned to the Participant without interest. A Participant's withdrawal with
respect to an Offering Period does not have any effect upon such Participant's
eligibility to participate in subsequent Offering Periods. Termination of a
Participant's employment for any reason, including retirement or death,
immediately terminates his or her participation in the Offering Period during
which such termination of employment occurs. In such event, the payroll
deductions credited to the Participant's account will be returned to the
Participant as soon as practicable, or in the case of death, to the person or
persons entitled thereto, in either case without interest.
In the event of changes in the Common Stock of the Company, however, due to
stock dividends or other changes in capitalization, or in the event of any
merger, sale or any other reorganization, appropriate adjustments will be made
by the Company to the ESPP Shares subject to purchase, to the price per share
and, where necessary, to the conditions relating to the exercise of the Purchase
Right, so that, to the extent reasonably possible, such events do not adversely
affect the rights of Participants. If, however, there is a proposed dissolution
or liquidation of the Company, the Offering Period during which such event
occurs will be deemed terminated upon the occurrence of such event.
The Purchase Plan will terminate automatically on August 31, 2005, and
prior to that date the Board of Directors of the Company generally may at any
time amend or terminate the Purchase Plan. No amendment may be made to the
Purchase Plan without approval of the stockholders of the Company if such
amendment would increase the number of ESPP Shares that may be issued under the
Purchase Plan, change the designation of the employees eligible for
participation in the Purchase Plan, or constitute an amendment for which
shareholder approval is required in order to comply with Rule 16b-3 promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
any successor rule.
401(K) SAVINGS PLAN
In October 1995, the Company established the Company's 401(k) Savings Plan,
which is intended to comply with Sections 401(a) and 401(k) of the Internal
Revenue Code of 1986, as amended, and the applicable provisions of the Employee
Retirement Income Security Act of 1974, as amended. Amounts contributed to the
plan are held under a trust intended to be exempt from income tax pursuant to
Section 501(a) of the Internal Revenue Code. All full time employees of the
Company that have completed at least one month of service are eligible to
participate in the plan. Participating employees will be entitled to make
pre-tax contributions to their accounts in amounts equal to not less than 1% and
not more than 15% of their compensation each year, subject to certain maximum
annual limits imposed by law (approximately $9,500 in 1996). The Company may
elect to match employee contributions in amounts of up to 4% of their
compensation. The Company also has the right to make certain additional matching
contributions in amounts not to exceed 15% of employee compensation. Matching
contributions made by the Company vest in participating employees over a
five-year period after the date of contribution. Distributions generally are
payable in a lump-sum after retirement or death and, in certain circumstances,
upon termination of employment with the Company for other reasons.
62
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1994 and fiscal 1995, the Company had no compensation committee or
other committee of the Board of Directors performing similar functions.
Decisions concerning executive compensation for fiscal 1995 were made by the
Board of Directors, including Daniel T. Phillips and Ronald M. Mankoff, who both
were and continue to be executive officers of the Company and participated in
deliberations of the Board of Directors regarding executive officer
compensation. Decisions concerning executive compensation for fiscal 1996 were
made by the Compensation Committee, which was established by the Board of
Directors of the Company. See "-- Committees of the Board of Directors."
None of the executive officers of the Company currently serves on the
compensation committee of another entity or any other committee of the board of
directors of another entity performing similar functions.
The Company engaged in the following transactions with Daniel T. Phillips
and Ronald M. Mankoff. On October 15, 1994, the Company redeemed a total of
50,000 shares of Series A Cumulative Preferred Stock, of which 25,000 shares
were owned by the Mankoff Trust and 25,000 shares were owned by the Phillips
Partnership. Each such redemption was for $25,000 plus accrued and unpaid
dividends. In addition, in April 1995, the Company redeemed an additional
150,000 shares of Series A Cumulative Preferred Stock, of which 75,000 shares
were from the Mankoff Trust and 75,000 shares were from the Phillips
Partnership. Each such redemption was for $75,000 plus accrued and unpaid
dividends. In February 1996, the Company redeemed the 50,000 shares of Series A
Cumulative Preferred Stock owned by each of the Mankoff Trust and the Phillips
Partnership for $1.00 per share plus accrued and unpaid dividends. Accordingly,
the total redemption payment received by each of the Mankoff Trust and the
Phillips Partnership was approximately $57,500. See "Certain Relationships and
Related Party Transactions" and "Description of Capital Stock."
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Since its inception, the Company has had business relationships and engaged
in certain transactions with affiliated companies and parties as described
below. It is the policy of the Company to engage in transactions with related
parties only on terms that, in the opinion of the Company, are no less favorable
to the Company than could be obtained from unrelated parties.
RELATIONSHIP WITH FARM BUREAU
As of September 30, 1996, Farm Bureau was the beneficial owner of 402,871
shares of Non-Voting Common Stock and 1,566,000 shares of Common Stock. See
"Principal Stockholders" and "Description of Capital Stock."
On March 31, 1995, the Company issued to Farm Bureau an aggregate of $1.35
million principal amount of Subordinated Notes (out of a total of $6.35 million
principal amount of Subordinated Notes issued at that time by the Company). For
a description of the Subordinated Notes and the amount issued to BOCP II, see
"-- Relationship with Bank One." As of June 30, 1996, the Company had paid Farm
Bureau an aggregate of $81,000 in interest payments under the terms of the
Subordinated Notes, as well as an aggregate of approximately $27,000 in fees and
expenses related to the issuance by the Company of the Subordinated Notes to
Farm Bureau. In connection with the issuance of the Subordinated Notes to Farm
Bureau, the Company also issued Farm Bureau warrants to purchase an aggregate of
284,884 shares of Non-Voting Common Stock for a nominal exercise price, which
were exercised prior to the Company's initial public offering.
In April 1995, the Company issued additional warrants to Farm Bureau to
purchase an aggregate of 296,207 shares of Non-Voting Common Stock. Such
warrants were issued in consideration of Farm Bureau's agreement to waive
certain redemption rights with respect to the Series B Cumulative Preferred
Stock held by Farm Bureau and such warrants were exercised in full prior to the
Company's initial public offering.
In September 1995, the Company entered into the Farm Bureau Facility, under
which Farm Bureau has agreed to lend the Company up to $5.5 million at a rate of
interest of 12% per annum. The Company had borrowed $5.5 million under this
financing facility. All borrowings pursuant to such financing were repaid in
February 1996 with a portion of the net proceeds to the Company from its initial
public offering and the facility was terminated. In connection with the
facility, the Company issued to Farm Bureau warrants to purchase that number of
shares of Common Stock equal to the quotient of $400,000 divided by 70% of the
initial public offering price of $17.00 per share. Accordingly, Farm Bureau's
warrants are exercisable for the purchase of 33,613 shares of Common Stock at an
exercise price of $11.90 per share.
63
<PAGE>
RELATIONSHIP WITH BANK ONE
As of September 30, 1996, BOCP II was the beneficial owner of 1,681,077
shares of Non-Voting Common Stock, and BOCP V was the beneficial owner of
136,390 shares of Non-Voting Common Stock (assuming its conversion of its
warrants to purchase shares of Non-Voting Common Stock). See "Principal
Stockholders."
Banc One Capital Corporation ("BOCC"), an affiliate of Bank One, acted as
placement agent with respect to each of the securitizations completed by the
Company during fiscal 1995 and the four securitizations completed in the nine
months ended June 30, 1996. As consideration for acting as placement agent, the
Company paid BOCC an aggregate of $4.1 million representing fees, commissions
and expenses (comprised of approximately $700,000 in connection with the first
securitization, $346,623 in connection with the 1995-1 securitization,
$1.0 million in connection with the 1995-2 securitization, $406,000 in
connection with the 1995-3 securitization $544,500 in connection with the 1995-4
securitization, $309,000 in connection with the 1996-1 securitization, $730,000
in connection with the 1996-2 securitization and $51,000 in connection with the
1996-A securitization).
The Company maintains the Bank One Warehouse Facility, which was
established in March 1995. As of June 30, 1996, the Company had paid Bank One an
aggregate of $881,579 in interest payments under the prescribed terms of the
Bank One Warehouse Facility, as well as an aggregate of $36,612 in other fees
and expenses related to amounts borrowed by the Company under this facility. For
a more complete description of the terms of the Bank One Warehouse Facility, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
On March 31, 1995, the Company issued to BOCP II an aggregate of $5.0
million principal amount of its Subordinated Notes (out of a total of
$6.35 million principal amount of Subordinated Notes). The Subordinated Notes
bear interest at the rate of 12% per annum, except that upon the occurrence of
an event of default under the Subordinated Notes, the interest rate increases to
15% per annum. As of June 30, 1996, the Company had paid BOCP II an aggregate of
$300,000 in interest payments under the terms of the Subordinated Notes, as well
as an aggregate of approximately $125,000 in fees and expenses related to the
issuance by the Company of the Subordinated Notes to BOCP II. The Subordinated
Notes are subordinated to all amounts at any time due and owing to the Warehouse
Lender and Bank One. In connection with the issuance of the Subordinated Notes
to BOCP II, the Company also issued BOCP II warrants to purchase an aggregate of
1,055,116 shares of Non-Voting Common Stock for a nominal exercise price, which
were fully exercised prior to the Company's initial public offering, and
warrants to purchase an aggregate of 893,311 shares of Non-Voting Common Stock
for an aggregate of $450,000, which were fully exercised prior to the Company's
initial public offering.
In February 1995, the Company and BOCP V entered into a financing
arrangement to provide $700,000 of interim financing (the "BOCP V Financing").
In July 1995, the Company and BOCP V agreed to amend the terms of the BOCP V
Financing so that the Company's debt arrangements with BOCP V would be on
similar terms as those with BOCP II and Farm Bureau. As a consequence, the
Company issued $700,000 principal amount of the Subordinated Notes to BOCP V. As
of September 30, 1995, under the terms of the BOCP V Financing and the
Subordinated Notes, the Company had paid BOCP V an aggregate of $67,356 in
interest payments and an aggregate of $14,000 in other fees and expenses. In
connection with the amendments of the BOCP V Financing and the issuance of the
Subordinated Notes to BOCP V, the Company issued BOCP V warrants to purchase an
aggregate of 145,390 shares of Non-Voting Common Stock for a nominal exercise
price, which were fully exercised prior to the Company's initial public
offering.
In June 1995, the Company engaged BOCC to render financial advisory and
consultation services in connection with the Company's initial public offering.
For such engagement, the Company paid BOCC $75,000 and paid BOCC an additional
$75,000 upon the closing of the Company's initial public offering.
OTHER TRANSACTIONS
During calendar 1994, 1995 and 1996, the Company paid legal fees and
expenses to Jeffrey W. Mankoff, P.C., which were in excess of 5% of the gross
revenues of Jeffrey W. Mankoff, P.C. Such amounts, however, did not exceed
$60,000. Jeffrey W. Mankoff, P.C. is a Dallas, Texas law firm owned by the son
of Ronald M. Mankoff, the Chairman of the Board of the Company.
64
<PAGE>
For a description of certain other transactions, see "Management --
Compensation Committee Interlocks and Insider Participation."
65
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of September 30, 1996, of:
(i) each person known by the Company to own beneficially five percent or more
of the outstanding Common Stock; (ii) each of the Company's directors;
(iii) each of the executive officers named in the Summary Compensation Table;
and (iv) all directors and executive officers of the Company as a group. The
address of each person listed below is 1250 Mockingbird Lane, Dallas, Texas
75247, unless otherwise indicated.
<TABLE>
NAME OF BENEFICIAL OWNER CLASS OF COMMON STOCK NUMBER PERCENT OF CLASS
- ------------------------ --------------------- ------ ----------------
SHARES BENEFICIALLY OWNED (1)
-----------------------------
<S> <C> <C> <C>
Farm Bureau Life Insurance Company (2)......................... Voting 1,566,000 13.9
Non-Voting 402,871 18.1
Phillips Partnership (3)(4).................................... Voting 2,060,020 18.3
Daniel T. Phillips (3)(5)...................................... Voting 2,076,687 18.5
Ronald M. Mankoff (3)(6)....................................... Voting 1,901,581 16.9
BOCP II, Limited Liability Company (7)......................... Non-Voting 1,681,077 75.7
Eric C. Green (3)(8)........................................... Voting 229,214 2.0
Banc One Capital Partners V, Ltd. (9).......................... Non-Voting 136,390 6.1
Gene O'Bryan................................................... Voting 10,000 *
James H. Poythress (3)(10)..................................... Voting 97,604 *
John Fitzgerald (3)............................................ Voting 8,367 *
Dan Jessee (3)(11)............................................. Voting 8,367 *
Paul Seegers (3)............................................... Voting 8,367 *
Sheldon I. Stein (3)........................................... Voting 6,667 *
All directors and executive officers as a group (8 persons)(3). Voting 4,249,250 38.6
</TABLE>
- -----------
* Represents less than one percent.
(1) Based on 11,249,570 shares of Common Stock and 2,220,338 shares of
Non-Voting Common Stock outstanding on September 30, 1996. Beneficial
ownership is determined in accordance with the rules of the Commission and
generally includes voting or investment power with respect to securities.
Except as indicated in the footnotes to this table and subject to applicable
community property laws, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock beneficially
owned.
(2) The address of Farm Bureau is 5400 University Avenue, West Des Moines,
Iowa 50266. See "Certain Relationships and Related Party Transactions --
Relationships with Farm Bureau."
(3) Includes options that are currently exercisable, or become exercisable
within 60 days of September 30, 1996, to purchase the number of shares of
Common Stock indicated for the following persons: Daniel T. Phillips
(16,667), Ronald M. Mankoff (16,667), Eric C. Green (15,194), James H.
Poythress (15,194), John Fitzgerald (1,667), Dan Jessee (1,667), Paul Seegers
(1,667) and Sheldon I. Stein (1,667).
(4) Lenox Investment Corporation, which is wholly owned by Daniel T.
Phillips (1.0%), is the general partner and the Daniel T. Phillips Trust (the
"Phillips Trust") (54.0%) and Mr. Phillips (45.0%) are each limited partners
of the Phillips Partnership. Mr. Phillips has voting control over the shares
of Common Stock owned by the Phillips Partnership through an irrevocable
five-year voting proxy. Lenox Investment Corporation retains investment power
with respect to such shares. Ronald M. Mankoff is the trustee of the Phillips
Trust.
(5) Includes 2,060,020 shares of Common Stock owned by the Phillips
Partnership but with respect to which Mr. Phillips has voting control. See
Footnote 4.
(6) Includes 240,000 shares of Common Stock owned by the Mankoff Generation
Trust. Mr. Mankoff has voting control (but not investment power) over such
shares through an irrevocable proxy, and the trustee is Jerome J. Frank, Jr.
(who retains investment power with respect to such shares). Includes 60,000
shares of Common Stock owned by the Mankoff Charitable Trust of which the
trustee is Jeffrey W. Mankoff, Ronald M. Mankoff's son, and Ronald M. Mankoff
and his wife, Joy Mankoff, are the beneficiaries. Also includes 1,300,000
shares of Common Stock owned by RJM Properties, Ltd., of which SFA Mortgage
Company, which is wholly owned by Mr. Mankoff, is general partner (1.0%)
66
<PAGE>
and Mr. Mankoff (48.5%), Joy Mankoff (48.5%), Mr. Mankoff's wife, and Mankoff
Irrevocable Trust (2.0%) are each limited partners. Mr. Mankoff also has
voting control (but not investment power) over such shares through an
irrevocable voting proxy. SFA Mortgage Company retains investment power with
respect to such shares. Also includes 50,000 shares of Common Stock owned by
the Mankoff Irrevocable Trust of which the trustee is Jerome J. Frank, Jr.
and members of the Mankoff family are beneficiaries. Mr. Mankoff is the sole
trustee of the Donald Rubin Children's Trust, which owns 210,430 shares of
Common Stock, and, therefore, may be deemed to beneficially own the shares of
Common Stock held by such trust. Mr. Mankoff disclaims beneficial ownership
of such shares of Common Stock and such shares are not included in Mr.
Mankoff's total above.
(7) Beneficial ownership of the shares of Common Stock is held by the
members of BOCP II. The address of BOCP II is 10 West Broad Street, Columbus,
Ohio 43215. See "Certain Relationships and Related Party Transactions --
Relationship with Bank One."
(8) Includes 173,020 shares of Common Stock held by G.B. Kline Residuary
Trust, of which Beverly Sellers, Mr. Green's mother, is the trustee. Mr.
Green is an income beneficiary and Mr. Green's children have a remainder
interest in the G.B. Kline Residuary Trust. Also includes 1,000 shares of
Common Stock held by Mr. Green's wife.
(9) Beneficial ownership of the shares of Common Stock is held by the
general and limited partners of BOCP V. The address of BOCP V is 10 West
Broad Street, Columbus, Ohio 43215. See "Certain Relationships and Related
Party Transactions -- Relationship with Bank One."
(10) Mr. Poythress retired from the Company in May 1996 and has agreed to
serve as a consultant to the Company through August 1997.
(11) Does not include the 1,681,077 shares of Non-Voting Common Stock held by
BOCP II and 136,390 shares of Non-Voting Common Stock held by BOCP V, which,
in limited circumstances, may be exchanged for shares of Common Stock on a
share-for-share basis. See "Description of Capital Stock -- Registration
Rights." Mr. Jessee is Vice-Chairman of Banc One Capital Corporation, an
affiliate of BOCP II and BOCP V, and disclaims beneficial ownership of these
shares.
DESCRIPTION OF THE NOTES
The Notes were issued under an Indenture, dated as of August 20, 1996
(the "Indenture"), between the Company and Bank One, Columbus, N.A., as
trustee (the "Trustee"). A copy of the form of Indenture is being filed with
the Commission as an exhibit to the Registration Statement. The terms of the
Indenture are also governed by certain provisions contained in the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The following
summaries of certain provisions of the Notes and the Indenture do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, all the provisions of the Notes and the Indenture, including
the definitions therein of certain terms that are not otherwise defined in
this Prospectus and those terms made a part of the Indenture by reference to
the Trust Indenture Act as in effect on the date of the Indenture. Wherever
particular provisions or defined terms of the Indenture (or of the form of
Notes that is a part thereof) are referred to, such provisions or defined
terms are incorporated herein by reference in their entirety. As used in this
"Description of the Notes," the "Company" refers to RAC Financial Group, Inc.
and does not, unless the context otherwise indicates, include its
subsidiaries.
GENERAL
The Notes represent general unsecured subordinated obligations of the
Company and are convertible into Common Stock as described below under the
subheading "-- Conversion of Notes." The Notes are limited to $100,000,000
aggregate principal amount, have been issued in fully registered form only in
denominations of $1,000 in principal amount or any multiple thereof and
mature on August 15, 2003, unless earlier redeemed at the option of the
Company or repurchased at the option of the Holder upon a Change of Control.
The Indenture does not contain any financial covenants or any
restrictions on the payment of dividends, the repurchase of securities of the
Company or the incurrence of debt by the Company or any of its subsidiaries.
The Notes bear interest from the date of original issue at the annual
rate of 7.25% payable semi-annually on February 15 and August 15, commencing
on February 15, 1997, to Holders of record at the close of business on the
67
<PAGE>
preceding February 1 and August 1, respectively. Interest will be computed on
the basis of a 360-day year composed of twelve 30-day months.
Unless other arrangements are made, interest is to be paid by check
mailed to Holders entitled thereto. Principal will be payable, and the Notes
may be presented for conversion, registration of transfer and exchange,
without service charge, at the office of the Trustee in New York, New York.
Reference is made to the information set forth below under the subheading
"-- Form, Denomination and Registration" for information as to Notes held by
"qualified institutional buyers" or by Holders outside of the United States
of Notes offered in reliance upon Regulation S.
BOOK ENTRY; DELIVERY AND FORM
The Notes have been issued in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple thereof.
GLOBAL NOTES; BOOK ENTRY FORM. Notes held by "qualified institutional
buyers," as defined in Rule 144A under the Securities Act ("QIBs"), will be
evidenced initially by a global note (the "144A Global Note") that will be
deposited with, or on behalf of, DTC and registered in the name of Cede & Co.
("Cede") as DTC's nominee. Notes sold to persons in offshore transactions in
compliance with Regulation S under the Securities Act (each a "Non-U.S.
Person") will be evidenced initially by a global note (the "Regulation S
Global Note") that will be deposited with, or on behalf of, DTC and
registered in the name of Cede as DTC's nominee for the accounts of Euroclear
and Cedel Bank. Prior to and including the 40th day after the later of the
commencement of the offering or the closing date (the "Unrestricted Date"),
beneficial interests in the Notes represented by the Regulation S Global Note
may only be held through Euroclear or Cedel Bank.
The 144A Global Note and the Regulation S Global Note are hereinafter
collectively referred to as the Global Note. Except as set forth below, the
record ownership of the Global Note may be transferred, in whole or in part,
only to another nominee of DTC or to a successor of DTC or its nominee.
On or prior to the Unrestricted Date, a beneficial interest in the Notes
represented by the Regulation S Global Note may be transferred to a person
who takes delivery in the form of a beneficial interest in the Notes
represented by the 144A Global Note only upon receipt by the Trustee from the
transferor of a written certification (a "Rule 144A Transfer Certificate") to
the effect that such transfer is being made to a person who the transferor
reasonably believes is purchasing for its own account or accounts as to which
it exercises sole investment discretion and that such person and each such
account is a QIB within the meaning of Rule 144A, in each case in a
transaction meeting the requirements of Rule 144A and in accordance with any
applicable securities laws of any state of the United States or any other
jurisdiction. After the Unrestricted Date, such certification requirements
will no longer apply to such transfers. Beneficial interests in the Notes
represented by the 144A Global Note may be transferred to a person who takes
delivery in the form of a beneficial interest in the Notes represented by the
Regulation S Global Note, whether before, on or after the Unrestricted Date,
only upon receipt by the Trustee from the transferor of a written
certification (a "Regulation S Transfer Certificate") to the effect that such
transfer is being made in accordance with Rule 904 of Regulation S and that,
if such transfer occurs on or prior to the Unrestricted Date, the interest
transferred will be held immediately thereafter, until the Unrestricted Date,
through Euroclear or Cedel Bank.
Any beneficial interest in Notes represented by either of the Global
Notes that is transferred to a person who takes delivery in the form of a
beneficial interest in Notes represented by the other Global Note will, upon
transfer, cease to be a beneficial interest in Notes represented by such
Global Note and become a beneficial interest in Notes represented by the
other Global Note and, accordingly, will thereafter be subject to all
transfer restrictions and other procedures applicable to beneficial interests
in Notes represented by such other Global Note for as long as it remains such
an interest.
Any beneficial interest in Notes represented by the 144A Global Note
that is transferred to an institutional "accredited investor" (as that term
is defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act (an
"institutional accredited investor")) that is not a QIB will be delivered in
the form of a definitive note in registered and certified form (a "Definitive
Note") and shall cease to be an interest in Notes represented by such 144A
Global Note and, accordingly, will thereafter be subject to all transfer
restrictions and other procedures applicable to a Definitive Note held by
institutional accredited investors.
68
<PAGE>
No person other than a QIB or a Non-U.S. Person may own a beneficial
interest in the 144A Global Note. QIBs and Non-U.S. Persons may hold their
interest in the 144A Global Note directly through DTC if such holder is a
participant in DTC or indirectly through organizations that are participants in
DTC (the "Participants"). QIBs and Non-U.S. Persons who are not Participants may
beneficially own interests in the 144A Global Note held by DTC only through
Participants or certain banks, brokers, dealers, trust companies and other
parties that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants"). So long as
Cede, as the nominee of DTC, is the registered owner of the Global Note, Cede
for all purposes will be considered the sole holder of the 144A Global Note.
Owners of beneficial interests in the 144A Global Note will be entitled to have
certificates registered in their names and to receive physical delivery of
certificates in definitive form.
Investors may hold their interests in Notes represented by the
Regulation S Global Note through Cedel Bank or Euroclear, if they are
participants in such systems, or indirectly through organizations that are
participants in such systems. Following the Unrestricted Date (but not on the
Unrestricted Date or earlier), investors may also hold such beneficial
interests through organizations other than Euroclear and Cedel Bank that are
participants in the DTC system. Cedel Bank and Euroclear will hold interests
in the Notes represented by the Regulation S Global Note on behalf of their
participants through customers' securities accounts in Cedel Bank's or
Euroclear's respective names on the books of their respective depositories,
which in turn will hold such interests in Notes represented by the Regulation
S Global Note in customers' securities accounts in the depositories' names on
the books of DTC. Transfers between participants in Euroclear and Cedel Bank
will be affected in the ordinary way in accordance with their respective
rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
Notes described above and in "Transfer Restrictions," cross-market transfers
between DTC, on the one hand, and directly or indirectly through Euroclear or
Cedel Bank participants, on the other, will be effected in DTC in accordance
with DTC rules on behalf of Euroclear or Cedel Bank, as the case may be, by
its respective depositary; however, such cross-market transactions will
require delivery of instructions to Euroclear or Cedel Bank, as the case may
be, by the counterpart in such system in accordance with its rules and
procedures and within its established deadlines (Brussels's time). Euroclear
or Cedel Bank, as the case may be, will, if the transaction meets its
settlement requirements, deliver instructions to its respective depositary to
take action to effect final settlement on its behalf of delivering or
receiving beneficial interests in the relevant Global Note in DTC, and making
or receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Cedel Bank participants and participants in
Euroclear may not deliver instructions directly to the depositories for Cedel
Bank or Euroclear.
Because of time zone differences, the securities account of a Euroclear
or Cedel Bank participant purchasing a beneficial interest in a Global Note
from a DTC participant will be credited during the securities settlement
processing day immediately following the DTC settlement date and such credit
of any transactions in beneficial interests in such Global Note settled
during such processing will be reported to the relevant Euroclear or Cedel
Bank participant on such business day. Cash received in Euroclear or Cedel
Bank as a result of sales of beneficial interests in a Global Note by or
through a Euroclear or Cedel Bank participant to a DTC participant will be
received with value on the DTC settlement date but will be available in the
relevant Euroclear or Cedel Bank cash account only as of the business day
following settlement in DTC.
Payment of interest on and the redemption price of the Global Note will
be made to Cede, the nominee for DTC, as registered owner of the Global Note,
by wire transfer of immediately available funds on each interest payment
date. None of the Company, the Trustee or any paying agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Note
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interest.
The Company has been informed by DTC that, with respect to any payment
of interest on, or the redemption price of, the Global Note, DTC's practice
is to credit Participants' accounts on the payment date therefor with
payments in amounts proportionate to their respective beneficial interests in
the principal amount represented by the Global Note as shown on the records
of DTC, unless DTC has reason to believe that it will not receive payment on
such payment date. Payments by Participants to owners of beneficial interests
in the principal amount represented by the Global Note held through such
Participants will be the responsibility of such Participants, as is now the
case with securities held for the accounts of customers registered in "street
name."
69
<PAGE>
Transfers between Participants will be effected in the ordinary way in
accordance with DTC rules and will be settled in clearing house funds. The
laws of some states require that certain persons take physical delivery of
securities in definitive form. Consequently, the ability to transfer
beneficial interests in the Global Note to such persons may be limited.
Because DTC can only act on behalf of Participants, who in turn act on behalf
of Indirect Participants and certain banks, the ability of a person having a
beneficial interest in the principal amount represented by the Global Note to
pledge such interest to persons or entities that do not participate in the
DTC system, or otherwise take actions in respect of such interest, may be
affected by the lack of a physical certificate evidencing such interest.
Neither the Company nor the Trustee (or any registrar, paying agent or
conversion agent under the Indenture) will have any responsibility for the
performance of DTC, Euroclear or Cedel Bank or their Participants or Indirect
Participants of their respective obligations under the rules and procedures
governing their operations. DTC has advised the Company that it will take any
action permitted to the taken by a holder of Notes (including, without
limitation, the presentation of Notes for exchange as described below) only
at the direction of one or more Participants to whose account with DTC
interests in the Global Note are credited, and only in respect of the
principal amount of the Notes represented by the Global Note as to which such
Participant or Participants has or have given such direction.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its Participants and to facilitate the clearance and
settlement of securities transactions between Participants through electronic
book-entry changes to accounts of its Participants, thereby eliminating the
need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations such as the Initial Purchasers. Certain
of such Participants (or their representatives), together with other
entities, own DTC. Indirect access to the DTC system is available to others
such as banks, brokers, dealers and trust companies that clear through, or
maintain a custodial relationship with, a Participant, either directly or
indirectly.
Although DTC, Euroclear and Cedel Bank have agreed to the foregoing
procedures in order to facilitate transfers of interests in the Global Note
among Participants, they are under no obligation to perform or continue to
perform such procedures, and such procedures may be discontinued at any time.
If DTC is at any time unwilling or unable to continue as depositary and a
successor depositary is not appointed by the Company within 90 days, the
Company will cause the Notes to be issued in definitive form in exchange for
the Global Note.
CERTIFICATED NOTES. Notes sold to investors that are neither QIBs nor
Non-U.S. Persons will be issued in the form of a Definitive Note (which will
initially bear the Securities Act Legend, as defined below) and may not be
represented by the Global Note. In addition, QIBs and Non-U.S. Persons may
request that certificated Notes be issued in exchange for Notes represented
by the Global Note. Furthermore, certificated Notes may be issued in exchange
for Notes represented by the Global Note if no successor depositary is
appointed by the Company as set forth above.
Unless determined otherwise by the Company in accordance with applicable
law, Definitive Notes issued upon transfer or exchange of beneficial
interests in Notes represented by the 144A Global Note will bear a legend
setting forth transfer restrictions under the Securities Act as set forth
under "Transfer Restrictions" (the "Securities Act Legend"). Unless
determined otherwise by the Company in accordance with applicable law, after
the Unrestricted Date, Definitive Notes issued upon transfer or exchange of
beneficial interests in Notes represented by the Regulation S Global Note
will not bear the Securities Act Legend. Upon the transfer, exchange or
replacement of Notes bearing the legend, or upon specific request for removal
of the Securities Act Legend on a Note, the Trustee shall deliver only Notes
that bear such legend, or shall refuse to remove such legend, as the case may
be, unless there is delivered to the Company and the Trustee such
satisfactory evidence, in the form of a Regulation S Transfer Certificate or
an opinion of counsel, that neither the legend nor the restrictions on
transfer set forth therein are required to ensure compliance with the
provisions of the Securities Act.
Any holder desiring to exchange a legended Definitive Note for a
beneficial interest in Notes represented by the Rule 144A Global Note must
provide a certification that it is a QIB (a "Rule 144A Exchange
Certificate"), or alternatively, after Unrestricted Date, that the Note was
purchased in a transaction complying with Rule 904 of Regulation S (a
"Regulation S Exchange Certificate"). Any holder desiring to exchange a
legended Definitive Note for a beneficial interest in Notes represented by
the Regulation S Global Note must provide a Regulation S Exchange
Certificate.
70
<PAGE>
Any holder desiring to transfer a legended Definitive Note to a
transferee that takes delivery in the form of a beneficial interest in Notes
represented by the 144A Global Note must provide a Rule 144A Transfer
Certificate, or alternatively, provided that the transfer takes place after
the Unrestricted Date, a Regulation S Transfer Certificate. Any holder
desiring to transfer a legended Definitive Note to a transferee which takes
delivery in the form of a beneficial interest in Notes represented by the
Regulation S Global Note must provide a Regulation S Transfer Certificate.
Any holder desiring to exchange an unlegended Definitive Note for, or
transfer an unlegended Definitive Note to a transferee which takes delivery
in the form of, a beneficial interest in Notes represented by either Global
Note may do so without need for such certification, except that on and until
the Unrestricted Date, if such holder desires to exchange for, or transfer to
a transferee which takes delivery in the form of, a beneficial interest in
Notes represented by the Rule 144A Global Note, such holder must certify, in
the case of an exchange, in the form of a Rule 144A Exchange Certificate or,
in the case of a transfer, in the form of a Rule 144A Transfer Certificate.
RESTRICTIONS ON TRANSFER; LEGENDS. The Notes are subject to certain
transfer restrictions as described below under "Transfer Restrictions" and
certificates evidencing the Notes bear a legend to such effect.
CONVERSION OF NOTES
The Holders of Notes will be entitled at any time after 60 days
following the latest date of original issuance thereof through the close of
business August 15, 2003, subject to prior redemption, to convert any Notes
or portions thereof (in denominations of $1,000 in principal amount or
multiples thereof) into Common Stock at $32.60 per share, subject to
adjustment as described below; provided that in the case of Notes called for
redemption, conversion rights will expire immediately prior to the close of
business on the date fixed for redemption, unless the Company defaults in
payment of the redemption price. A Note (or portion thereof) in respect of
which a Holder is exercising its option to require repurchase upon a Change
of Control may be converted only if such Holder withdraws its election to
exercise such redemption option in accordance with the terms of the Indenture.
Except as described below, no adjustment will be made on conversion of
any Notes for interest accrued thereon or for dividends paid on any Common
Stock issued. Holders of the Notes at the close of business on a record date
will be entitled to receive the interest payable on such Note on the
corresponding interest payment date. However, Notes surrendered for
conversion after the close of business on a record date, and before the
opening of business on the corresponding interest payment date must be
accompanied by funds equal to the interest payable on such succeeding
interest payment date on the principal amount so converted (unless such Note
is subject to redemption on a redemption date between such record date and
the corresponding interest payment date). The interest payment with respect
to a Note called for redemption on a date during the period from the close of
business on or after any record date to the opening of business on the
business day following the corresponding payment date will be payable on the
corresponding interest payment date to the registered Holder at the close of
business on that record date (notwithstanding the conversion of such Note
before the corresponding interest payment date) and a Holder of Notes who
elects to convert need not include funds equal to the interest paid. The
Company is not required to issue fractional shares of Common Stock upon
conversion of Notes and, in lieu thereof, will pay a cash adjustment based
upon the closing price of the Common Stock on the last business day prior to
the date of conversion.
The conversion price is subject to adjustment (under formulae set forth
in the Indenture) upon the occurrence of certain events, including: (i) the
issuance of Common Stock as a dividend or distribution on the outstanding
Common Stock, (ii) the issuance to all holders of Common Stock of certain
rights, options or warrants to purchase Common Stock at less than the current
market price, (iii) certain subdivisions, combinations and reclassifications
of Common Stock, (iv) distributions to all holders of Common Stock of capital
stock of the Company (other than Common Stock) or evidences of indebtedness
of the Company or assets (including securities, but excluding those
dividends, rights, option, warrants and distributions referred to in clause
(i) above and dividends and distributions in connection with the liquidation,
dissolution or winding up of the Company and dividends and distributions paid
exclusively in cash), (v) distributions consisting exclusively of cash
(excluding any cash portion of distributions referred to in clause (iv) or in
connection with a consolidation, merger or sale of assets of the Company as
referred to in clause (ii) of the second paragraph below) to all holders of
Common Stock in an aggregate amount that, together with (x) all other such
all-cash distributions made within the preceding 12 months in respect of
which no adjustment has been made and (y) any cash and the fair market value
of other consideration payable in respect of any tender offers by the Company
or any of its subsidiaries for Common Stock concluded within the preceding
12 months in respect of which no adjustment has been made, exceeds 20% of the
Company's market capitalization (being the product of the then current market
price of the Common Stock times the
71
<PAGE>
number of shares of Common Stock then outstanding) on the record date for
such distribution and (vi) the purchase of Common Stock pursuant to a tender
offer made by the Company or any of its subsidiaries which involves an
aggregate consideration that, together with (x) any cash and the fair market
value of any other consideration payable in any other tender offer by the
Company or any of its subsidiaries for Common Stock expiring within the 12
months preceding such tender offer in respect of which no adjustment has been
made and (y) the aggregate amount of any such all-cash distributions referred
to in clause (v) above to all holders of Common Stock within the 12 months
preceding the expiration of such tender offer in respect of which no
adjustments have been made, exceeds 20% of the Company's market
capitalization on the expiration of such tender offer. No adjustment of the
conversion price will be made for shares issued pursuant to a plan for
reinvestment of dividends or interest. Except as stated above, the conversion
price will not be adjusted for the issuance of Common Stock or any securities
convertible into or exchangeable for Common Stock or carrying the right to
purchase any of the foregoing. No adjustment in the conversion price will be
required unless such adjustment would require a change of at least 1% in the
conversion price then in effect; provided that any adjustment that would
otherwise be required to be made shall be carried forward and taken into
account in any subsequent adjustment.
No adjustment will be made pursuant to clause (iv) of the preceding
paragraph if the Company makes proper provision for each Holder of Notes who
converts a Note to receive, in addition to the Common Stock issuable upon
such conversion, the kind and amount assets (including securities) if such
Holder had been a holder of the Common Stock at the time of the distribution
of such assets or securities. Rights, options or warrants distributed by the
Company to all holders of the Common Stock that entitle the holders thereof
to purchase shares of the Company's capital stock and that, until the
occurrence of an event (a "Triggering Event"), (i) are deemed to be
transferred with the Common Stock, (ii) are not exercisable and (iii) are
also issued in respect of future issuances of Common Stock, shall not be
deemed to be distributed until the occurrence of the Triggering Event.
In the case of (i) any reclassification or change of the Common Stock
(other than changes in par value or from par value to no par value or
resulting from a subdivision or a combination) or (ii) a consolidation or
merger involving the Company or a sale or conveyance to another corporation
of the property and assets of the Company as an entirety or substantially as
an entirety (determined on a consolidated basis), in each case as a result of
which holders of Common Stock shall be entitled to receive stock, other
securities, other property or assets (including cash) with respect to or in
exchange for such Common Stock, the Holders of the Notes then outstanding
will be entitled thereafter to convert such Notes into the kind and amount of
shares of stock, other securities or other property or assets that they would
have owned or been entitled to receive upon such reclassification, change,
consolidation, merger, sale or conveyance had such Notes been converted into
Common Stock immediately prior to such reclassification, change,
consolidation, merger, sale or conveyance, after giving effect to any
adjustment event, assuming that a Holder of Notes would not have exercised
any rights of election as to the stock, other securities or other property or
assets receivable in connection therewith and received per share the kind and
amount received per share by a plurality of non-electing share holders.
In the event of a taxable distribution to holders of Common Stock (or
other transaction) that results in any adjustment of the conversion price,
the Holders of Notes may, in certain circumstances, be deemed to have
received a distribution subject to the United States income tax as a
dividend; in certain other circumstances, the absence of such an adjustment
may result in a taxable dividend to the holders of Common Stock. See "Certain
Tax Considerations -- U.S. Holders -- Adjustments to Conversion Price."
The Company from time to time may to the extent permitted by law reduce
the conversion price by any amount for any period of at least 20 days, in
which case the Company shall give at least 15 days' notice of such decrease,
if the Board of Directors has made a determination that such decrease would
be in the best interests of the Company, which determination shall be
conclusive. The Company may, at its option, make such reductions in the
conversion price, in addition to those set forth above, as the Company deems
advisable to avoid or diminish any income tax to its stockholders resulting
from any dividend or distribution of stock (or rights to acquire stock) or
from any event treated as such for income tax purposes. See "Certain Tax
Considerations."
SUBORDINATION
The payment of principal of, premium, if any, and interest on the Notes
is, to the extent set forth in the Indenture, subordinated in right of
payment to the prior payment in full of all Senior Indebtedness. Upon any
distribution to creditors of the Company in a liquidation or dissolution of
the Company or in a bankruptcy, reorganization, insolvency, receivership or
similar proceeding related to the Company or its property, in an assignment
for the benefit of creditors or any marshalling of the Company's assets and
liabilities, the holders of all Senior Indebtedness will first be entitled to
72
<PAGE>
receive payment in full of all amounts due or to become due thereon before
the Holders of the Notes will be entitled to receive any payment in respect
of the principal of, premium, if any, or interest on the Notes (except that
Holders of Notes may receive securities that are subordinated at least to the
same extent as the Notes to Senior Indebtedness and any securities issued in
exchange for Senior Indebtedness).
The Company also may not make any payment upon or in respect of the
Notes (except in such subordinated securities) if (a) a default in the
payment of the principal of, premium, if any, or interest on Senior
Indebtedness occurs and is continuing beyond any applicable period of grace
or (b) any other default occurs and is continuing with respect to Senior
Indebtedness that permits holders of the Senior Indebtedness as to which such
default relates to accelerate its maturity and the Trustee receives a notice
of such default (a "Payment Blockage Notice") from the representative or
representatives of holders of at least a majority in principal amount of
Senior Indebtedness then outstanding. Payments on the Notes may and shall be
resumed (i) in the case of a payment default, upon the date on which such
default is cured or waived, or (ii) in the case of a non-payment default,
179 days after the date on which the applicable Payment Blockage Notice is
received (or sooner, if such default is cured or waived), unless the maturity
of any Senior Indebtedness has been accelerated. No new period of payment
blockage may be commenced within 360 days after the receipt by the Trustee of
any prior Payment Blockage Notice. No nonpayment default that existed or was
continuing on the date of delivery of any Payment Blockage Notice to the
Trustee shall be, or be made, the basis for a subsequent Payment Blockage
Notice.
"Senior Indebtedness" with respect to the Notes means the principal of,
premium, if any, and interest on, and any fees, costs, expenses and any other
amounts (including indemnity payments) related to the following, whether
outstanding on the date of the Indenture or thereafter incurred, created,
assumed or guaranteed: (a) indebtedness, matured or unmatured, whether or not
contingent, of the Company for money borrowed evidenced by notes or other
written obligations, (b) any interest rate contract, interest rate swap
agreement or other similar agreement or arrangement designed to protect the
Company or any of its subsidiaries against fluctuations in interest rates,
(c) indebtedness, matured or unmatured, whether or not contingent, of the
Company evidenced by notes, debentures, bonds or similar instruments or
letters of credit (or reimbursement agreements in respect thereof),
(d) obligations of the Company as lessee under capitalized leases and under
leases of property made as part of any sale and leaseback transactions,
(e) indebtedness of others of any of the kinds described in the preceding
clauses (a) through (d) assumed or guaranteed by the Company and
(f) renewals, extensions, modifications, amendments and refundings of, and
indebtedness and obligations of a successor person issued in exchange for or
in replacement of, indebtedness or obligations of the kinds described in the
preceding clauses (a) through (f); provided, however, that the following
shall not constitute Senior Indebtedness: (i) any indebtedness or obligation
of the Company in respect of the Notes; (ii) any indebtedness of the Company
to any of its subsidiaries or other affiliates; (iii) any indebtedness
described in clauses (a) through (f) ranking PARI PASSU with or subordinate
to the Notes pursuant to the terms of the instrument creating or evidencing
such indebtedness; and (iv) any indebtedness incurred for the purchase of
goods or materials in the ordinary course of business.
In the event that the Trustee (or paying agent if other than the
Trustee) or any Holder receives any payment of principal or interest with
respect to the Notes at a time when such payment is prohibited under the
Indenture, such payment shall be held in trust for the benefit of, and shall
be paid over and delivered to, the holders of Senior Indebtedness or their
representative as their respective interests may appear. After all Senior
Indebtedness is paid in full and until the Notes are paid in full, Holders
shall be subrogated (equally and ratably with all other Indebtedness PARI
PASSU with the Notes) to the rights of holders of Senior Indebtedness to
receive distributions applicable to Senior Indebtedness to the extent that
distributions otherwise payable to the Holders have been applied to the
payment of Senior Indebtedness.
As of September 30, 1996, the Company had approximately $341.0 million
in principal amount of indebtedness that would be considered Senior
Indebtedness. Additional borrowings under the Company's warehouse facilities
constitute Senior Indebtedness and will rank prior in right of payment to the
Holders of the Notes, notwithstanding that they are incurred subsequent to
the issuance of the Notes. The Indenture does not prohibit or limit the
incurrence of such Senior Indebtedness.
In addition, because the Company's operations are conducted primarily
through its operating subsidiaries, claims of holders of indebtedness of such
subsidiaries, as well as claims of regulators and creditors of such
subsidiaries, will have priority with respect to the assets and earnings of
such subsidiaries over the claims of creditors of the Company, including
Holders of the Notes. As of September 30, 1996, the aggregate liabilities of
such subsidiaries, which were not also Senior Indebtedness, were
approximately $178.9 million. The Indenture does not limit the amount of
additional indebtedness that any of the Company's subsidiaries can create,
incur, assume or guarantee.
73
<PAGE>
Because of these subordination provisions, in the event of a liquidation
or insolvency of the Company or any of its subsidiaries, Holders of Notes may
recover less, ratably, than the holders of Senior Indebtedness.
The Company expects from time to time to incur indebtedness constituting
Senior Indebtedness other than debt under its warehouse facilities. The
Indenture does not prohibit or limit the incurrence of additional
indebtedness, including Senior Indebtedness, by the Company or its
subsidiaries.
No provision contained in the Indenture or the Notes will affect the
obligation of the Company, which is absolute and unconditional, to pay, when
due, principal of, premium, if any, and interest on the Notes. The
subordination provisions of the Indenture and the Notes will not prevent the
occurrence of any Default or Event of Default under the Indenture or limit
the rights of the Trustee or any other holder, subject to the two preceding
paragraphs, to pursue any other rights or remedies with respect to the Notes.
OPTIONAL REDEMPTION BY THE COMPANY
The Notes are not redeemable at the option of the Company prior to
August 17, 1999. At any time on or after that date, the Notes may be redeemed
at the Company's option on at least 30 but not more than 60 days' notice, in
whole at any time or in part from time to time, at the following prices
(expressed in percentages of the principal amount), together with accrued
interest to the date fixed for redemption if redeemed during the period
beginning:
DATE REDEMPTION PRICE
---- ----------------
August 17, 1999..................... 103.63%
August 15, 2000..................... 102.42%
August 15, 2001..................... 101.21%
after August 14, 2002............... 100.00%
If fewer than all the Notes are to be redeemed, the Trustee will select
the Notes to be redeemed in principal amounts of $1,000 or integral multiples
thereof by lot or, in its discretion, on a pro rata basis. If any Note is to
be redeemed in part only, a new Note or Notes in principal amount equal to
the unredeemed principal portion thereof will be issued. If a portion of a
Holder's Notes is selected for partial redemption and such Holder converts a
portion of such Notes, such converted portion shall be deemed to be taken
from the portion selected for redemption. No sinking fund is provided for the
Notes.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes shall
have the right to require that the Company repurchase such Holder's Notes in
whole or in part in integral multiples of $1,000, at a purchase price in cash
in an amount equal to 101% of the principal amount thereof, together with
accrued and unpaid interest to the date of purchase, pursuant to an offer
(the "Change of Control Offer") made in accordance with the procedures
described below and the other provisions in the Indenture.
A "Change of Control" means an event or series of events in which (i)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d)
of the Exchange Act) acquires "beneficial ownership" (as determined in
accordance with Rule 13d-3 under the Exchange Act), directly or indirectly,
of more than 50% of the combined voting power of the then outstanding
securities entitled to vote generally in elections of directors of the
Company (the "Voting Stock") or (ii) the Company consolidates with or merges
into any other corporation, or conveys, transfers or leases all or
substantially all of its assets to any person, or any other corporation
merges into the Company, and, in the case of any such transaction, the
outstanding Common Stock of the Company is changed or exchanged as a result,
unless the shareholders of the Company immediately before such transaction
own, directly or indirectly, at least 51% of the combined voting power of the
outstanding voting securities of the corporation resulting from such
transaction in substantially the same proportion as their ownership of the
Voting Stock immediately before such transaction; provided that a Change in
Control shall not be deemed to have occurred if either (i) the closing price
per share of the Common Stock for any five trading days within the period of
10 consecutive trading days ending immediately after the announcement of such
Change of Control shall equal or exceed 105% of the conversion price of the
Notes in effect on such trading day or (ii) at least 90% of the consideration
in the Change of Control transaction consists of shares of common stock
traded on a national securities exchange or quoted on the Nasdaq National
Market, and as a result of such transaction, the Notes become convertible
solely into such common stock.
74
<PAGE>
Within 30 days following any Change of Control, the Company shall send
by first-class mail, postage prepaid, to the Trustee and to each Holder of
Notes, at such Holder's address appearing in the security register, a notice
stating, among other things, that a Change of Control has occurred, the
purchase price, the purchase date, which shall be a business day no earlier
than 30 days nor later than 60 days from the date such notice is mailed, and
certain other procedures that a Holder of Notes must follow to accept a
Change of Control Offer or to withdraw such acceptance.
The Company will comply, to the extent applicable, with the requirements
of Rule 13e-4 under the Exchange Act and other securities laws or regulations
in connection with the repurchase of the Notes as described above.
Future indebtedness of the Company may contain prohibitions of certain
events that would constitute a Change of Control or require the Company to
offer to repurchase such indebtedness upon a Change of Control. Moreover, the
exercise by the Holders of Notes of their right to require the Company to
purchase the Notes could cause a default under such indebtedness, even if the
Change of Control itself does not, due to the financial effect of such
purchase on the Company. Finally, the Company's ability to pay cash to
Holders of Notes upon a purchase may be limited by the Company's then
existing financial resources. There can be no assurance that sufficient funds
will be available when necessary to make any required purchases. Furthermore,
the Change of Control provisions may in certain circumstances make more
difficult or discourage a takeover of the Company and the removal of the
incumbent management.
MERGER, CONSOLIDATION AND SALE OF ASSETS
The Company shall not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its assets (determined on a
consolidated basis whether in a single transaction or a series of related
transactions) to any person unless: (i) either the Company is the resulting,
surviving or transferee person (the "Successor Company") or the Successor
Company is a corporation organized and existing under the laws of the United
States or any State thereof or the District of Columbia, and the Successor
Company (if not the Company) expressly assumes by a supplemental indenture,
executed and delivered to the Trustee, in form satisfactory to the Trustee,
all the obligations of the Company under the Indenture and the Notes,
including the conversion rights described above under "-- Conversion of
Notes," (ii) immediately after giving effect to such transaction no Event of
Default has happened and is continuing and (iii) the Company delivers to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
such consolidation, merger or transfer and such supplemental indenture (if
any) comply with the Indenture.
EVENTS OF DEFAULT AND REMEDIES
An Event of Default is defined in the Indenture as being: default in
payment of the principal of or premium, if any, on the Notes when due at
maturity, upon redemption or otherwise, including failure by the Company to
purchase the Notes when required as described under "-- Change of Control"
(whether or not such payment shall be prohibited by the subordination
provisions of the Indenture); default for 30 days in payment of any
installment of interest on the Notes (whether or not such payment shall be
prohibited by the subordination provisions of the Indenture); default by the
Company for 90 days after notice in the observance or performance of any
other covenants in the Indenture; or certain events involving bankruptcy,
insolvency or reorganization of the Company. The Indenture provides that the
Trustee may withhold notice to the Holders of Notes of any default (except in
payment of principal, premium, if any, or interest with respect to the Notes)
if the Trustee considers it in the interest of the Holders of Notes to do so.
The Indenture provides that if any Event of Default shall have occurred
and be continuing, the Trustee or the Holders of not less than 25% in
principal amount of the Notes then outstanding may declare the principal of
and premium, if any, on the Notes to be due and payable immediately, but if
the Company shall cure all defaults (except the nonpayment of interest on,
premium, if any, and principal of any Notes which shall have become due by
acceleration) and certain other conditions are met, such declaration may be
canceled and past defaults may be waived by the Holders of a majority in
principal amount of Notes then outstanding.
The Holders of a majority in principal amount of the Notes then
outstanding shall have the right to direct the time, method and place of
conducting any proceedings for any remedy available to the Trustee, subject
to certain limitations specified in the Indenture. The Indenture provides
that, subject to the duty of the Trustee following an Event of Default to act
with the required standard of care, the Trustee will not be under an
obligation to exercise any of its rights or powers under the Indenture at the
request or direction of any of the Holders, unless the Trustee receives
satisfactory indemnity against any associated loss, liability or expense.
75
<PAGE>
SATISFACTION AND DISCHARGE; DEFEASANCE
The Indenture will cease to be of further effect as to all outstanding
Notes (except as to (i) rights of registration of transfer and exchange and the
Company's right of optional redemption, (ii) substitution of apparently
mutilated, defaced, destroyed, lost or stolen Notes, (iii) rights of Holders of
Notes to receive payments of principal of, premium, if any, and interest on, the
Notes, (iv) rights of Holders of Notes to convert to Common Stock, (v) rights,
obligations and immunities of the Trustee under the Indenture and (vi) rights of
the Holders of Notes as beneficiaries of the Indenture with respect to the
property so deposited with the Trustee payable to all or any of them), if
(A) the Company will have paid or caused to be paid the principal of, premium,
if any, and interest on the Notes as and when the same will have become due and
payable or (B) all outstanding Notes (except lost, stolen or destroyed Notes
that have been replaced or paid) have been delivered to the Trustee for
cancellation or (C) (x) the Notes not previously delivered to the Trustee for
cancellation will have become due and payable or are by their terms to become
due and payable within one year or are to be called for redemption under
arrangements satisfactory to the Trustee upon delivery of notice and (y) the
Company will have irrevocably deposited with the Trustee, as trust funds, cash,
in an amount sufficient to pay principal of and interest on the outstanding
Notes, to maturity or redemption, as the case may be. Such trust may only be
established if such deposit will not result in a breach or violation of, or
constitute a default under, any agreement or instrument pursuant to which the
Company is a party or by which it is bound and the Company has delivered to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
all conditions related to such defeasance have been complied with.
The Indenture will also cease to be in effect (except as described in
clauses (i) through (vi) in the immediately preceding paragraph) and the
indebtedness on all outstanding Notes will be discharged on the 123rd day after
the irrevocable deposit by the Company with the Trustee, in trust, specifically
pledged as security for, and dedicated solely to, the benefit of the Holders of
Notes, of cash, U.S. Government Obligations (as defined in the Indenture) or a
combination thereof, in an amount sufficient, in the opinion of a nationally
recognized firm of independent public accountants expressed in a written
certification thereof delivered to the Trustee, to pay the principal of,
premium, if any, and interest on the Notes then outstanding in accordance with
the terms of the Indenture and the Notes ("legal defeasance"). Such legal
defeasance may only be effected if (i) such deposit will not result in a breach
or violation of, or constitute a default under, any agreement or instrument to
which the Company is a party or by which it is bound, (ii) the Company has
delivered to the Trustee an opinion of counsel stating that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of this Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, based
thereon, the holders of the Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such deposit, defeasance and
discharge by the Company and will be subject to federal income tax on the same
amount and in the same manner and at the same times as would have been the case
if such deposit, defeasance and discharge had not occurred, (iii) the Company
has delivered to the Trustee an opinion of counsel to the effect that after the
123rd day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally and (iv) the Company has delivered to the
Trustee an Officers' Certificate and an opinion of counsel stating that all
conditions related to the defeasance have been complied with.
The Company may also be released from its obligations under the covenants
described above under "-- Change of Control" and "-- Merger, Consolidation and
Sale of Assets" with respect to the Notes outstanding on the 123rd day after the
irrevocable deposit by the Company with the Trustee, in trust, specifically
pledged as security for, and dedicated solely to, the benefit of the Holders of
Notes, of cash, U.S. Government Obligations or a combination thereof, in an
amount sufficient in the opinion of a nationally recognized firm of independent
public accountants expressed in a written certification thereof delivered to the
Trustee, to pay the principal of, premium, if any, and interest on the Notes
then outstanding in accordance with the terms of the Indenture and the Notes
("covenant defeasance"). Such covenant defeasance may only be effected if
(i) such deposit will not result in a breach or violation of, or constitute a
default under, any agreement or instrument to which the Company is a party or by
which it is bound, (ii) the Company has delivered to the Trustee an Officers'
Certificate and an opinion of counsel to the effect that the Holders of Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such deposit and covenant defeasance by the Company and will be
subject to federal income tax on the same amount, in the same manner and at the
same times as would have been the case if such deposit and covenant defeasance
had not occurred, (iii) the Company has delivered to the Trustee an opinion of
counsel to the effect that after the 123rd day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights generally
and (iv) the Company has delivered to the Trustee an Officers' Certificate and
an opinion of counsel stating that all conditions related to the covenant
defeasance have been complied with. Following such covenant defeasance, the
Company will no
76
<PAGE>
longer be required to comply with the obligations described above under "--
Merger, Consolidation and Sale of Assets" and will have no obligation to
repurchase the Notes pursuant to the provisions described under "-- Change of
Control."
Notwithstanding any satisfaction and discharge or defeasance of the
Indenture, the obligations of the Company described under "-- Conversion of
Notes" will survive to the extent provided in the Indenture until the Notes
cease to be outstanding.
MODIFICATIONS OF THE INDENTURE
The Indenture contains provisions permitting the Company and the Trustee,
with the consent of the Holders of not less than a majority in principal amount
of the Notes at the time outstanding, to modify the Indenture or any
supplemental indenture or the rights of the Holders of Notes, except that no
such modification shall (i) extend the fixed maturity of any Note, reduce the
rate or extend the time of payment of interest thereon, reduce the principal
amount thereof or premium, if any, thereon, reduce any amount payable upon
redemption thereof, change the obligation of the Company to make redemption of
any Note upon the happening of a Change of Control, impair or affect the right
of a Holder to institute suit for the payment thereof, change the currency in
which the Notes are payable, modify the subordination provisions of the
Indenture in a manner adverse to the Holders of Notes or impair the right to
convert the Notes into Common Stock subject to the terms set forth in the
Indenture, without the consent of the Holder of each Note so affected or
(ii) reduce the aforesaid percentage of Notes, without the consent of the
Holders of all of the Notes then outstanding.
CONCERNING THE TRUSTEE
Bank One, Columbus, N.A., the Trustee under the Indenture, has been
appointed by the Company as the paying agent, conversion agent, registrar and
custodian with regard to the Notes. The Trustee and/or its affiliates currently
provide and may in the future provide banking and other services to the Company
in the ordinary course of their respective businesses. See "Certain
Relationships and Related Party Transactions -- Relationship with Bank One."
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 27,600,000 shares
of preferred stock, par value $1.00 per share ("Preferred Stock"), 25,000,000
shares of Non-Voting Common Stock, par value $0.01 ("Non-Voting Common Stock"),
and 100,000,000 shares of Common Stock, par value $0.01 per share.
COMMON STOCK
The rights of the holders of Non-Voting Common Stock and the holders of
Common Stock are essentially identical, except that holders of Non-Voting Common
Stock are not entitled to vote on any matters, except as otherwise required by
Nevada law. As of August 1, 1996, there were 11,249,570 shares of Common Stock
outstanding, which were held of record by 33 holders, and there were 2,220,338
shares of Non-Voting Common Stock outstanding, which were held of record by
three holders. Holders of Common Stock and Non-Voting Common Stock are entitled
to receive dividends when, as and if declared by the Board of Directors from
funds legally available therefor.
Each share of Common Stock entitles the holder thereof to one vote. Holders
of Non-Voting Common Stock are not entitled to vote, except as otherwise
required by Nevada law. Cumulative voting for the election of directors is not
permitted, which means that the holders of the majority of shares voting for the
election of directors can elect all members of the Board of Directors. Except as
otherwise required by Nevada law, a majority vote is sufficient for any act of
the stockholders. The holders of Common Stock do not have any preemptive,
subscription, redemption or conversion rights. The holders of Non-Voting Common
Stock do not have any preemptive, subscription or redemption rights, but holders
of Non-Voting Common Stock, other than Farm Bureau, BOCP II, BOCP V and any of
its or their affiliates, generally have the right to exchange shares of
Non-Voting Common Stock for an equivalent number of shares of Common Stock. In
addition, under certain circumstances, the shares of Non-Voting Common Stock
held by BOCP II, BOCP V and Farm Bureau are exchangeable for shares of Common
Stock.
Upon liquidation of the Company, subject to the rights of holders of any
Preferred Stock outstanding, the holders of Common Stock and Non-Voting Common
Stock are entitled to receive the Company's assets remaining after payment
77
<PAGE>
of liabilities proportionate to their pro rata ownership of the outstanding
shares of Common Stock and Non-Voting Common Stock.
All shares of Common Stock and Non-Voting Common Stock now outstanding are,
and the shares of Common Stock to be outstanding upon the completion of the
Offering will be, fully paid and non-assessable.
PREFERRED STOCK
GENERAL. The Board of Directors is authorized, without further action of the
stockholders of the Company, to issue from time to time shares of Preferred
Stock in one or more series and with such relative rights, powers, preferences,
limitations as the Board of Directors may determine at the time of issuance.
Such shares may be convertible into Common Stock and may be superior to the
Common Stock in the payment of dividends, liquidation, voting and other rights,
preferences and privileges. The issuance of shares of Preferred Stock could
adversely affect the holders of Common Stock and Non-Voting Common Stock. By way
of example, the issuance of Preferred Stock could be used in certain
circumstances to render more difficult or discourage a merger, tender offer,
proxy contest or removal of incumbent management. Preferred Stock may be issued
with voting and conversion rights that could adversely affect the voting power
and other rights of the holders of Common Stock. The Company does not have any
shares of Preferred Stock outstanding, and currently, the Company has no
intention to issue shares of Preferred Stock after the Offering.
REGISTRATION RIGHTS
The Company has granted certain demand and incidental registration rights
to BOCP II, BOCP V, Farm Bureau and the Warehouse Lender. BOCP II, BOCP V and/or
Farm Bureau may, and the Warehouse Lender after September 1, 1997 may, by
written notice, request that the Company register the shares of Common Stock and
Non-Voting Common Stock then held by BOCP II, BOCP V, Farm Bureau or the
Warehouse Lender, as the case may be (the "Registrable Securities"). The Company
is required to use its best efforts to effect any such registration requested by
BOCP II, BOCP V, Farm Bureau or the Warehouse Lender, but is not obligated to
effect more than one such registration for each of BOCP II, BOCP V, Farm Bureau
and the Warehouse Lender.
The Warehouse Lender, Farm Bureau, BOCP II and BOCP V also are entitled to
certain incidental registration rights with respect to their respective
Registrable Securities. These incidental registration rights provide, generally,
that if the Company proposes to register any of its capital stock under the
Securities Act, the Warehouse Lender, Farm Bureau, BOCP II and BOCP V are
entitled to notice by the Company of such proposed registration and are entitled
to include any or all of their Registrable Securities in the registration.
However, if the underwriters for any such offering deliver a written opinion to
the Warehouse Lender, Farm Bureau, BOCP II or BOCP V, as the case may be, to the
effect that the number of securities which the Warehouse Lender, Farm Bureau,
BOCP II, BOCP V, the Company and all other holders of securities intend to
include in such registration is sufficiently large as to potentially have an
adverse effect on the offering, then the number of securities to be offered
pursuant to such registration statement by the Warehouse Lender, Farm Bureau,
BOCP II, BOCP V and the other holders proposed to be included in such
registration, but in no event the Company, will be reduced pro rata among such
holders to the recommended level of the underwriter. The Company is not required
to effect more than three incidental registrations for each of Farm Bureau,
BOCP II and BOCP V and an unlimited number of incidental registrations for the
Warehouse Lender.
In connection with each of the registrations required to be effected by the
Company for the Warehouse Lender, Farm Bureau, BOCP II and BOCP V, the Company
has agreed to pay all expenses incurred in connection with any such
registration, except for any underwriting discounts.
Farm Bureau, BOCP II and BOCP V are by written agreement entitled to
exchange any shares of Non-Voting Common Stock held by them for shares of Common
Stock, on a share-for-share basis under the following circumstances: (i) Farm
Bureau, BOCP II or BOCP V, as the case may be (in such case, the "exchanging
stockholder"), sells its Registrable Securities in a widely dispersed public
offering, (ii) the exchanging stockholder sells its Registrable Securities in a
private placement pursuant to Rule 144 or Rule 144A promulgated under the
Securities Act, provided that no purchaser of such shares acquires more than 2%
of the Company's outstanding voting capital stock, (iii) the exchanging
stockholder sells its Registrable Securities directly to a third party who
elects to exchange such shares, or (iv) the exchanging stockholder does not own
or have the right to acquire more than 4.9% of the outstanding voting capital
stock of the Company.
78
<PAGE>
In connection with the acquisition of FIRSTPLUS West, the Company agreed to
file with Commission, prior to November 20, 1996, a registration statement for
the public sale of an aggregate of $5,000,000 of Common Stock held by the former
shareholders of FIRSTPLUS West. In the event such offering is not underwritten,
the former shareholders of FIRSTPLUS West may require the Company to file one
shelf registration for such securities, provided the former shareholders pay all
expenses incident thereto. It is anticipated that such registration statement
will be filed by the Company in November 1996. Farm Bureau has informed the
Company that it intends to exercise its right to include 800,000 shares in such
registration.
CERTAIN CHARTER, BYLAWS AND STATUTORY PROVISIONS
Certain provisions in the Articles of Incorporation, the Bylaws and the
Nevada General Corporation Law could have the effect of delaying, deferring or
preventing changes in control of the Company. See "Risk Factors -- Effect of
Certain Charter, Bylaw and Statutory Provisions."
MISCELLANEOUS
Certain state securities laws restrict issuers with dual classes of common
stock from offering equity securities of such issuers. The Company does not
believe that any such state law restrictions will have a material adverse effect
on the amount of equity securities the Company will be able to offer or the
price obtainable for such securities by the Company or by stockholders in the
secondary trading market.
TRANSFER AGENT AND REGISTRAR
The Transfer agent and registrar for the Company's Common Stock is KeyCorp
Shareholder Services, Inc.
79
<PAGE>
CERTAIN TAX CONSIDERATIONS
GENERAL
The following is a discussion of certain U.S. federal income tax and estate
tax consequences of the purchase, ownership and disposition of the Notes as of
the date hereof. For purposes of this discussion, a "U.S. Holder" is a Holder
that is an individual who is a citizen or resident of the United States, a
corporation or a partnership that is organized under the laws of the United
States or any state thereof or an estate or trust whose income is includible in
gross income regardless of its source. A "Non-U.S. Holder" is a Holder that is
not a U.S. Holder. This summary applies only to Notes and Common Stock held as
capital assets within the meaning of Section 1221 of the Internal Revenue Code
of 1986, as amended (the "Code"). It does not discuss all of the tax
consequences that may be relevant to a Holder in light of its particular
circumstances or to Holders subject to special rules, such as dealers in
securities or foreign currencies, financial institutions, life insurance
companies, or regulated investment companies, or to Holders whose functional
currency is not the United States dollar or who hold the Notes or the Common
Stock as part of a synthetic security, conversion transaction, or certain
"straddle" or hedging transactions.
The U.S. federal income tax and estate tax considerations set forth below
are based upon the Code and regulations, rulings and judicial decisions
thereunder as of the date hereof, and such authorities may be repealed, revoked
or modified, possibly with retroactive effect, so as to result in U.S. federal
income tax consequences different from those presented below.
U.S. HOLDERS
INTEREST. Interest on a Note should be taxable to a U.S. Holder as ordinary
interest income in accordance with the U.S. Holder's method of accounting for
U.S. federal income tax purposes.
SALE, EXCHANGE OR REDEMPTION OF A NOTE. A U.S. Holder should recognize gain or
loss, if any, on the sale, redemption or other taxable disposition of a Note in
an amount equal to the difference, if any, between the U.S. Holder's adjusted
tax basis in the Note and the amount received therefor (other than amounts
attributable to accrued and unpaid interest on the Notes, which should be
treated as interest for U.S. federal income tax purposes). Subject to the market
discount rules noted under "U.S. Holders -- Market Discount and Bond Premium"
below, gain or loss, if any, recognized on the sale, redemption or other taxable
disposition of a Note generally should be long-term capital gain or loss if the
Note was held for more than one year as of the date of disposition.
MARKET DISCOUNT AND BOND PREMIUM. If a U.S. Holder acquires a Note subsequent
to its original issuance and the Note's stated redemption price at maturity
exceeds the U.S. Holder's initial tax basis in the Note by more than a
de-minimis amount, the U.S. Holder should generally be treated as having
acquired the Note at a "market discount" equal to such excess. In addition, if a
U.S. Holder's initial tax basis in a Note exceeds the stated redemption price at
maturity of the Note, the U.S. Holder should generally be treated as having
acquired the Note with "bond premium" in an amount equal to such excess. U.S.
Holders should consult their tax advisers regarding the existence, if any, and
tax consequences of market discount and bond premium.
CONVERSION OF THE NOTES. A U.S. Holder should not recognize gain or loss upon
conversion of the Notes into Common Stock. The U.S. Holder's tax basis in shares
of Common Stock received upon conversion should be the same as the U.S. Holder's
adjusted tax basis of the Notes converted (reduced by the portion of such basis
allocable to any fractional Common Stock interest for which the U.S. Holder
receives a cash payment from the Company). The holding period of the Common
Stock received in the conversion should include the holding period of the Notes
that were converted. A U.S. Holder generally should recognize gain (or loss)
upon a conversion to the extent that any cash paid in lieu of a fractional share
of Common Stock exceeds (or is less than) its tax basis allocable to such
fractional share.
DIVIDENDS. Dividends paid on Common Stock received upon conversion will be
taxable to a U.S. Holder as ordinary income, to the extent paid out of the
Company's current or accumulated earnings and profits. Subject to certain
restrictions, dividends received by a corporate U.S. Holder generally should be
eligible for the 70% dividends received deduction.
SALE OF COMMON STOCK. A U.S. Holder of Common Stock received on conversion who
sells or otherwise disposes of such stock in a taxable transaction will
recognize capital gain or loss equal to the difference between the cash and the
fair
80
<PAGE>
market value of any property received on such sale and the U.S. Holder's
tax basis in such stock. Such gain or loss will be long term gain or loss if the
holding period for such Common Stock was more than one year.
REDEMPTION OF COMMON STOCK. A redemption by the Company of some or all of a
U.S. Holder's Common Stock will be treated as a dividend to the redeeming U.S.
Holder to the extent of the Company's current and accumulated earnings and
profits unless the redemption meets one of the tests under Section 302(b) of the
Code. If one of the tests under Section 302(b) is met, the redemption will be
treated as an exchange giving rise to capital gain or loss, except to the extent
of declared but unpaid dividends. Such gain or loss will be long term capital
gain or loss if the holding period for such Common Stock was more than one year.
U.S. Holders should consult their tax advisors as to the application of Section
302(b) to their particular circumstances.
ADJUSTMENTS TO CONVERSION PRICE. Pursuant to Treasury Regulations promulgated
under Section 305 of the Code, a U.S. Holder of a Note should be treated as
having received a constructive distribution from the Company upon an adjustment
in the conversion price of the Notes if (i) as a result of such adjustment, the
proportionate interest of such U.S. Holder in the assets or earnings and profits
of the Company is increased, and (ii) the adjustment is not made pursuant to a
bona fide, reasonable, anti-dilution formula. An adjustment in the conversion
price would not be considered made pursuant to such a formula, if the adjustment
were made to compensate for certain taxable distributions with respect to the
Common Stock into which the Notes are convertible. Thus, under certain
circumstances, a decrease in the conversion price of the Notes may be taxable to
a U.S. Holder of a Note as a dividend to the extent of the current or
accumulated earnings and profits of the Company. In addition, the failure to
adjust fully the conversion price of the Notes to reflect distributions of stock
dividends with respect to the Common Stock may result in a taxable dividend to
the U.S. Holders of the Common Stock.
BACKUP WITHHOLDING AND INFORMATION REPORTING. A U.S. Holder of a Note, or of
Common Stock issued upon conversion of a Note, may be subject to information
reporting and possible backup withholding. If applicable, backup withholding
would apply at a rate of 31% with respect to dividends or interest on, or the
proceeds of a sale, exchange, redemption, retirement, or other disposition of,
such Note or Common Stock, as the case may be, unless (i) such U.S. Holder is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact, or (ii) provides a taxpayer identification number,
certifies as to no loss of exemption from backup withholding, and otherwise
complies with applicable backup withholding rules.
NON-U.S. HOLDERS
THE NOTES. The payment of interest on a Note should generally not be subject
to U.S. federal withholding tax, if (1) the interest is not effectively
connected with the conduct of a trade or business within the United States,
(2) the Non-U.S. Holder does not actually or constructively own 10% or more of
the total combined voting power of all classes of stock of the Company entitled
to vote, (3) the Non-U.S. Holder is not a controlled foreign corporation that is
related to the Company actually or constructively through stock ownership and
(4) either (i) the beneficial owner of the Note certifies to the Company or its
agent, under penalties of perjury, that it is not a U.S. Holder and provides its
name and address on U.S. Treasury Form W-8 (or on a suitable substitute form) or
(ii) a securities clearing organization, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
(a "financial institution") and holds the Note certifies under penalties of
perjury that such a Form W-8 (or suitable substitute form) has been received
from the beneficial owner by it or by a financial institution between it and the
beneficial owner and furnishes the payer with a copy thereof.
A Non-U.S. Holder should generally not be subject to U.S. federal income
tax on any gain or income realized in connection with the sale, exchange,
retirement, or other disposition of a Note, including the exchange of a Note for
Common Stock, unless the Non-U.S. Holder is an individual who is present in the
United States for 183 days or more in the taxable year of the disposition, and
either (a) has a tax home in the United States and the gain from the disposition
is not attributable to an office of other fixed place of business maintained by
such non-U.S. Holder in a foreign country or (b) the gain from the disposition
is attributable to an office or other fixed place of business maintained by such
non-U.S. Holder in the United States.
A Note held directly by an individual who, at the time of death, is not a
citizen or resident of the United States should not be includible in such
individual's gross estate for U.S. estate tax purposes as a result of such
individual's death if the individual does not actually or constructively own 10%
or more of the total combined voting power of all classes of stock of the
Company entitled to vote and, at the time of the individual's death, if payments
with respect to such Note
81
<PAGE>
would not have been effectively connected with the conduct by such individual
of a trade or business in the United States. Even if the Note was includible
in the gross estate under the foregoing rules, the Note may be excluded under
the provisions of an applicable estate tax treaty.
THE COMMON STOCK. In general, dividends (including any amounts that are
treated as dividends as described above) paid to a Non-U.S. Holder of the Common
Stock should be subject to U.S. federal income tax withholding at a 30% rate
unless such rate is reduced by an applicable income tax treaty. Dividends that
are effectively connected with such Non-U.S. Holder's conduct of a trade or
business in the United States or, if a tax treaty applies, attributable to a
permanent establishment, or, in the case of an individual, a "fixed base," in
the United States ("U.S. trade or business income") are generally subject to
U.S. federal income tax at regular rates, but are not generally subject to the
30% withholding tax if the Non-U.S. Holder files the appropriate form with the
payer. Any U.S. trade or business income received by a Non-U.S. Holder that is a
corporation may also, under certain circumstances, be subject to an additional
"branch profits tax" at a 30% rate or such lower rate as may be applicable under
an income tax treaty.
Dividends paid to an address in a foreign country are presumed (absent
actual knowledge to the contrary) to be paid to a resident of such country for
purposes of the withholding tax discussed above and, under the current
interpretation of Treasury Regulations, for purposes of determining the
applicability of a tax treaty rate. Under proposed Treasury Regulations not
currently in effect, however, a Non-U.S. Holder of the Common Stock who wishes
to claim the benefit of an applicable tax treaty rate would be required to
satisfy applicable certification and other requirements, which would include
filing a form that contains the Non-U.S. Holder's name and address and an
official statement by the competent authority in the foreign country (as
designated in the applicable tax treaty), attesting to the Non-U.S. Holder's
status as a resident thereof.
A Non-U.S. Holder of the Common Stock that is eligible for a reduced rate
of U.S. federal withholding tax pursuant to an income tax treaty may obtain a
refund of any excess amounts withheld by filing an appropriate claim for refund
with the IRS.
A Non-U.S. Holder of the Common Stock should generally not be subject to
U.S. income or withholding tax on gain realized on the sale or exchange of such
stock, or a redemption treated as a sale or exchange of the stock, unless the
Non-U.S. Holder is an individual who is present in the United States for 183
days or more in the taxable year of the disposition, and either (a) has a tax
home in the United States and the gain from the disposition is not attributable
to an office or other fixed place of business maintained by such Non-U.S. Holder
in a foreign country, or (b) the gain from the disposition is attributable to an
office or other fixed place of business maintained by such Non-U.S. Holder in
the United States. Common Stock held directly by an individual who at the time
of death is not a citizen or resident of the United States will nevertheless
generally be includible in the gross estate of such individual for U.S. estate
tax purposes, subject to contrary provisions of an applicable estate tax treaty.
BACKUP WITHHOLDING AND INFORMATION REPORTING. Payments on the Notes made by
the Company or any paying agent of the Company and payments of dividends on the
Common Stock to certain noncorporate Non U.S. Holders generally should be
subject to information reporting and possibly to "backup withholding" at a rate
of 31%. Information reporting and backup withholding do not apply, however, to
payments made outside the United States by the Company or a paying agent on a
Note or to payments of dividends on the Common Stock if the certification
described under "Non-U.S. Holders -- The Notes" above is received, provided in
each case that the payer does not have actual knowledge that the Holder is a
U.S. Holder.
Payment of proceeds from a sale of a Note or the Common Stock to or through
the U.S. office of a broker is subject to information reporting and backup
withholding unless the Non-U.S. Holder certifies as to its non U.S. status or
otherwise establishes an exemption from information reporting and backup
withholding. Payment outside the United States of the proceeds of the sale of a
Note or the Common Stock to or through a foreign office of a "broker" (as
defined in applicable U.S. Treasury Regulations) should not be subject to
information reporting or backup withholding, except that if the broker is a U.S.
person, a controlled foreign corporation for U.S. federal income tax purposes or
a foreign person 50% or more of whose gross income is from a U.S. trade or
business, information reporting should apply to such payment unless the broker
has documentary evidence in its records that the beneficial owner is not a U.S.
Holder and certain other conditions are not met or the beneficial owner
otherwise establishes an exemption.
THE U.S. FEDERAL INCOME TAX AND ESTATE TAX DISCUSSION SET FORTH ABOVE IS
INTENDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE TO A PARTICULAR
82
<PAGE>
HOLDER'S SITUATION. PERSONS CONSIDERING A PURCHASE OF THE SECURITIES SHOULD
CONSULT THEIR OWN TAX ADVISORS REGARDING THE PARTICULAR TAX CONSEQUENCES OF
PURCHASING, OWNING AND DISPOSING OF THE SECURITIES, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL OR FOREIGN LAWS AND OTHER TAX LAWS AND THE
POSSIBLE EFFECTS OF CHANGES (POSSIBLY INCLUDING RETROACTIVE CHANGES) IN U.S.
FEDERAL AND OTHER TAX LAWS.
SELLING HOLDERS
The Notes were initially issued and sold pursuant to a Purchase Agreement,
dated as of August 20, 1996, between the Company and Bear Stearns & Co., Inc.,
Prudential Securities Incorporated and Keefe, Bruyette & Woods, Inc. (together,
the "Initial Purchasers"). The Notes were acquired from the Initial Purchasers
by the Selling Holders in compliance with Rule 144A, Regulation D or Regulation
S under the Securities Act, or in other permitted resale transactions from the
Initial Purchasers or holders who acquired such Notes from the Initial
Purchasers or their successors in further permitted resale transactions exempt
from registration under the Securities Act. The Company agreed to indemnify and
hold the Initial Purchasers harmless against certain liabilities under the
Securities Act that may arise in connection with the sale of the Notes by the
Initial Purchasers.
Except as otherwise indicated, the table below sets forth certain
information with respect to the Securities as of October 1, 1996. The term
"Selling Holders" includes the beneficial owners of such Securities listed
below. Other than as a result of the ownership of the Securities indicated
below, none of the Selling Holders has had any material relationship with the
Company or any of its affiliates within the past three years.
AGGREGATE PRINCIPAL AMOUNT NUMBER OF SHARES OF
OF NOTES OWNED AND THAT COMMON STOCK THAT
NAME OF SELLING SHAREHOLDER MAY BE SOLD MAY BE SOLD
- --------------------------- -------------------------- -------------------
Depository Trust Company $100,000,000 3,067,485
The preceding table has been prepared based on information furnished to the
Company by the Depository Trust Company New York, New York ("DTC") and by or on
behalf of the Selling Holders.
In view of the fact that Selling Holders may offer all or a portion of the
Notes or shares of Common Stock held by them pursuant to this offering, and
because this offering is not being underwritten on a firm commitment basis, no
estimate can be given as to the amount of Notes or the number of shares of
Common Stock that will be held by the Selling Holders after completion of this
offering.
Information concerning the Selling Holders may change from time to time and
any such changed information that the Company becomes aware of will be set forth
in supplements to this Prospectus if and when necessary. In addition, the per
share conversion price, and the number of shares issuable upon conversion of the
Notes, is subject to adjustment under certain circumstances. Accordingly, the
aggregate principal amount of Notes and the number of shares of Common Stock
issuable upon conversion thereof offered hereby may increase or decrease. As of
September 30, 1996, the aggregate principal amount of Notes outstanding is $100
million.
83
<PAGE>
PLAN OF DISTRIBUTION
The Securities covered hereby may be offered and sold from time to time by
the Selling Holders. The Selling Holders will act independently of the Company
in making decisions with respect to the timing, manner and size of each sale.
Such sales may be made in the over-the-counter market or otherwise, at market
prices prevailing at the time of the sale, at prices related to the then
prevailing market prices or in negotiated transactions, including, without
limitation, pursuant to an underwritten offering or pursuant to one or more of
the following methods: (a) purchases by a broker-dealer as principal and resale
by such broker-dealer for its account pursuant to this Prospectus; (b) ordinary
brokerage transactions and transactions in which a broker solicits purchasers;
and (c) block trades in which a broker-dealer so engaged will attempt to sell
the shares as agent but may take a position and resell a portion of the block as
principal to facilitate the transaction.
The Company has been advised that, as of the date hereof, the Selling
Holders have made no arrangement with any broker for the offering or sale of the
Notes or the shares of Common Stock issuable upon conversion thereof.
Underwriters, brokers, dealers or agents may participate in such transactions as
agents and may, in such capacity, receive brokerage commissions from the Selling
Holders or purchasers of such Notes or shares of Common Stock. Such
underwriters, brokers, dealers or agents may also purchase the Notes or shares
of common Stock issuable upon conversion thereof and resell such securities for
their own account. The Selling Holders and such underwriters, brokers, dealers
or agents may be considered "underwriters" as that term is defined by the
Securities Act, although the Selling Holders disclaim such status. Any
commissions, discounts or profits received by such underwriters, brokers,
dealers or agents in connection with the foregoing transactions may be deemed to
be underwriting discounts and commissions under the Securities Act.
To comply with the securities laws of certain jurisdictions, if applicable,
the Notes and Common Stock issuable upon conversion thereof may be offered or
sold in such jurisdictions only through registered or licensed brokers or
dealers. In addition, in certain jurisdictions, the Notes and Common Stock
issuable upon conversion thereof may not be offered or sold unless they have
been registered or qualified for sale in such jurisdictions or unless an
exemption from registration or qualification is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in a distribution of the Notes or the shares of Common Stock issuable
upon conversion thereof may be limited in its ability to engage in market
activities with respect to such Notes or the shares of Common Stock issuable
upon conversion thereof. In addition and without limiting the foregoing, each
Selling Holder will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including, without limitation, Rules 10b-
2, 10b-5, 10b-6 and 10b-7, which provisions may limit the timing of purchases
and sales of any of the Notes and shares of Common Stock issuable upon
conversion thereof by the Selling Holders. All of the foregoing may effect the
marketability of the Notes and shares of Common Stock issuable upon conversion
thereof.
The Company may suspend the use of this Prospectus, and any supplements
hereto, in certain circumstances due to pending corporate developments, public
filings with the Commission or similar events. The Company is obligated, in the
event of such suspension, to use its reasonable efforts to ensure that the use
of the Prospectus may be resumed as soon as possible.
The Company has agreed to pay substantially all of the expenses incident to
the registration, offering and sale of the Notes or the shares of Common Stock
issuable upon conversion thereof to the public other than commissions and
discounts of agents, dealers or underwriters. Such expenses (excluding such
commissions and discounts) are estimated to be approximately $_________. The
Company has also agreed to indemnify the Selling Holders against certain
liabilities, including certain liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Securities to be offered hereby will be passed upon for
the Company and the Selling Holders by Jenkens & Gilchrist, a Professional
Corporation, Dallas, Texas.
84
<PAGE>
EXPERTS
The consolidated financial statements of the Company at June 30, 1996 and
September 30, 1995 and 1994 and for the nine months in the periods ended
June 30, 1996 and 1995 and for each of the three years in the period ended
September 30, 1995, appearing in this Offering Circular have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The financial statements of Remodelers National Funding Corp. (referred to
herein as FIRSTPLUS Financial) at September 30, 1994 and for the nine-month
period then ended, appearing in this Offering Circular have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The financial statements of First Security Mortgage Corporation (referred
to herein as FIRSTPLUS East) as of and for the year ended December 31, 1994,
appearing in this Offering Circular, have been audited by Scott & Holloway, LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on
Form S-1 under the Securities Act, of which this Prospectus is a part, with
respect to the Securities offered hereby. This Prospectus omits certain
information contained in the Registration Statement, including exhibits thereto,
and reference is made to the Registration Statement for further information with
respect to the Company and the Securities offered hereby. Statements contained
herein concerning the provisions of documents are necessarily summaries of such
documents and when any such document is an exhibit to the Registration
Statement, each such statement is qualified in its entirety by reference to the
copy of such document filed with the Commission. Copies of the Registration
Statement, and exhibits thereto, may be acquired upon payment of the prescribed
fees or examined without charge at the public reference facilities of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports and other information with the
Commission. Reports and other information filed by the Company with the
Commission pursuant to the information requirements of the Exchange Act may be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and at the following Regional Offices of the Commission: Seven
World Trade Center, 13th Floor, New York, New York 10048 and Northwest Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
can be obtained at prescribed rates from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
The Commission also maintains a World Wide Web Site that contains reports, proxy
statements and other information regarding registrants, such as the Company,
that file electronically with the Commission. The address of the site is
http://www.sec.gov.
85
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Report of Independent Auditors.......................................................................... F-2
Consolidated Balance Sheets as of September 30, 1994, 1995 and June 30, 1996............................ F-3
Consolidated Statements of Income for the Years Ended September 30, 1993, 1994 and 1995 and the Nine
Months Ended June 30, 1995 and 1996.................................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1993, 1994 and 1995
and the Nine Months Ended June 30, 1996................................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended September 30, 1993, 1994 and 1995 and the Nine
Months Ended June 30, 1995 and 1996.................................................................... F-6
Notes to Consolidated Financial Statements.............................................................. F-7
REMODELERS NATIONAL FUNDING CORP. (FIRSTPLUS FINANCIAL)
Report of Independent Auditors.......................................................................... F-18
Balance Sheet as of September 30, 1994.................................................................. F-19
Statement of Operations for the Nine Months Ended September 30, 1994.................................... F-20
Statement of Stockholder's Equity for the Year Ended December 31, 1993 and the Nine Months Ended
September 30, 1994..................................................................................... F-21
Statement of Cash Flows for the Nine Months Ended September 30, 1994.................................... F-22
Notes to Financial Statements........................................................................... F-23
FIRST SECURITY MORTGAGE CORPORATION (FIRSTPLUS EAST)
Report of Independent Auditors.......................................................................... F-26
Balance Sheet as of December 31, 1994 and as of November 30, 1995 (unaudited)........................... F-27
Statement of Operations for the Year Ended December 31, 1994 and for the eleven months ended November
30, 1994 and 1995 (unaudited).......................................................................... F-28
Statement of Changes in Shareholders' Equity for the Year Ended December 31, 1994 and for the eleven
months ended November 30, 1995 (unaudited)............................................................. F-29
Statement of Cash Flows for the Year Ended December 31, 1994 and for the eleven months ended November
30, 1994 and 1995 (unaudited).......................................................................... F-30
Notes to Consolidated Financial Statements.............................................................. F-31
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
RAC Financial Group, Inc.
We have audited the accompanying consolidated balance sheets of RAC
Financial Group, Inc. and subsidiaries as of September 30, 1994 and 1995 and
June 30, 1996, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended September
30, 1995, and for the nine months ended June 30, 1995 and 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of RAC Financial
Group, Inc. and subsidiaries at September 30, 1994 and 1995 and June 30, 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended September 30, 1995, and for the nine
months ended June 30, 1995 and 1996, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
August 1, 1996
F-2
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS (NOTE 7)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------- JUNE 30,
1994 1995 1996
------------ ------------ --------------
<S> <C> <C> <C>
Cash and cash equivalents............................................ $ 2,308,267 $ 2,485,511 $ 2,337,175
Loans held for sale, net (Notes 3 and 4)............................. 6,104,710 19,435,177 165,739,548
Excess servicing receivable (Note 5)................................. -- 29,743,987 116,752,613
Subordinated certificates held for sale (Note 5)..................... -- 1,312,500 16,527,471
Receivable from trusts............................................... -- 2,571,668 10,969,916
Other assets (Note 6)................................................ 3,728,421 5,791,665 10,526,174
------------ ------------ --------------
Total assets..................................................... $ 12,141,398 $ 61,340,508 $ 322,852,897
------------ ------------ --------------
------------ ------------ --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities............................. $ 2,176,033 $ 6,936,703 $ 14,804,804
Warehouse financing facilities with affiliates (Note 7).............. 4,994,504 18,529,557 142,829,746
Term line of credit (Note 7)......................................... -- 9,248,872 37,068,982
Notes payable (Note 7)............................................... 650,000 871,906 1,120,298
Subordinated notes payable to affiliates (Note 7).................... -- 8,002,500 7,002,500
Allowance for possible credit losses on loans sold (Note 4).......... -- 3,906,506 27,381,893
Deferred tax liabilities, net (Note 8)............................... -- 2,110,593 11,450,838
------------ ------------ --------------
Total liabilities................................................ 7,820,537 49,606,637 241,659,061
Contingencies and Commitments (Note 14)
Stockholders' Equity:
Preferred stock Series A, non-voting, $1 par value, 8% cumulative
dividend (Note 9):
Authorized -- 300,000
Issued and outstanding shares -- 300,000 -- 1994; 100,000 --
1995; none -- 1996.............................................. 300,000 100,000 --
Preferred stock Series B, non-voting, $1 par value, 8% cumulative
dividend (Note 9):
Authorized, issued, and outstanding shares -- 2,300,000.......... -- 2,300,000 --
Common stock, $0.01 par value (Note 9):
Authorized shares -- 100,000,000
Issued and outstanding shares -- 5,490,000 -- 1994; 7,500,000 --
1995; 11,249,570 -- 1996........................................ 54,900 75,000 112,496
Non-voting common stock, $0.01 par value (Note 9):
Authorized shares -- 25,000,000
Issued and outstanding shares -- 1,474,402 -- 1995; 2,220,338 --
1996............................................................ -- 14,744 22,203
Additional capital................................................. 5,179,200 3,626,928 54,830,257
Retained earnings (deficit)........................................ (1,213,239) 5,617,199 26,228,880
------------ ------------ --------------
Total stockholders' equity....................................... 4,320,861 11,733,871 81,193,836
------------ ------------ --------------
Total liabilities and stockholders' equity....................... $ 12,141,398 $ 61,340,508 $ 322,852,897
------------ ------------ --------------
------------ ------------ --------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, NINE MONTHS ENDED JUNE 30,
------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Gains on sales of loans, net.............. $ 17,115,097 $ 27,671,211 $ 29,113,701 $ 18,183,825 $ 89,815,498
Interest.................................. 145,420 1,845,001 2,860,372 1,672,700 10,760,783
Servicing income.......................... -- 71,982 1,049,188 698,097 2,673,773
Other income.............................. 54,146 251,766 873,077 923,080 5,391,887
------------- ------------- ------------- ------------- -------------
Total revenues.......................... 17,314,663 29,839,960 33,896,338 21,477,702 108,641,941
Expenses:
Salaries and employee benefits............ 7,265,077 17,054,236 10,110,448 5,984,052 22,542,156
Interest.................................. 28,345 1,040,552 2,660,407 1,461,840 8,609,778
Other operating........................... 2,631,594 6,464,674 6,962,933 4,985,516 17,319,595
Provision for possible credit losses...... -- 125,000 4,419,736 2,256,134 26,561,482
------------- ------------- ------------- ------------- -------------
Total expenses.......................... 9,925,016 24,684,462 24,153,524 14,687,542 75,033,011
------------- ------------- ------------- ------------- -------------
Income before income taxes.................. 7,389,647 5,155,498 9,742,814 6,790,160 33,608,930
Provision for income taxes.................. -- -- (3,903,304) (2,659,974) (12,771,393)
------------- ------------- ------------- ------------- -------------
Net income.................................. $ 7,389,647 $ 5,155,498 $ 5,839,510 $ 4,130,186 $ 20,837,537
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Net income per share of common
stock...................................... $ 0.94 $ 0.62 $ 0.56 $ 0.39 $ 1.70
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Weighted average common shares
and common equivalent shares
outstanding................................ 7,798,437 8,138,437 10,148,437 10,148,437 12,206,335
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------------------------ -------------------------------
SERIES "A" SERIES "B" VOTING NON-VOTING
-------------------- -------------------- -------------------- ---------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1992................... 300,000 $ 300,000 5,150,000 $ 51,500
Preferred Stock dividends.......................
Distributions (Note 1)..........................
Net (loss) income...............................
--------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1993................... 300,000 300,000 5,150,000 51,500
Preferred Stock dividends.......................
Issuance of common stock........................ 340,000 3,400
Cancellation of loans to officer assumed by
stockholders...................................
Distributions (Note 1)..........................
Net (loss) income...............................
--------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1994................... 300,000 300,000 5,490,000 54,900
Investment in subsidiary -- RNFC................ 2,300,000 $2,300,000 2,010,000 20,100
Issuance of common stock and stock warrants..... 1,474,402
Redemption of preferred stock................... (200,000) (200,000)
Preferred Stock dividends.......................
Distributions (Note 1)..........................
Net (loss) income...............................
--------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1995................... 100,000 100,000 2,300,000 2,300,000 7,500,000 75,000 1,474,402
Issuance of common stock and stock warrants..... 3,295,000 32,950 1,200,506
Transfer of Non-voting to Voting................ 454,570 4,546 (454,570)
Redemption of preferred stock................... (100,000) (100,000) (2,300,000) (2,300,000)
Preferred Stock dividends.......................
Net (loss) income...............................
Other...........................................
--------- --------- --------- --------- --------- --------- ---------
Balance at June 30, 1996........................ -- $ -- -- $ -- 11,249,570 $ 112,496 2,220,338
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
RETAINED
ADDITIONAL EARNINGS
AMOUNT CAPITAL (DEFICIT) TOTAL
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at September 30, 1992................... $1,216,336 $ (82,729) $1,485,107
Preferred Stock dividends....................... (32,340) (32,340)
Distributions (Note 1).......................... (4,196,871) (4,196,871)
Net (loss) income............................... 7,569,955 (180,308) 7,389,647
----------- ---------- ---------- ----------
Balance at September 30, 1993................... 4,589,420 (295,377) 4,645,543
Preferred Stock dividends....................... (70,500) (70,500)
Issuance of common stock........................ 1,659,848 1,663,248
Cancellation of loans to officer assumed by
stockholders................................... (200,000) (200,000)
Distributions (Note 1).......................... (6,872,928) (6,872,928)
Net (loss) income............................... 5,802,860 (647,362) 5,155,498
----------- ---------- ---------- ----------
Balance at September 30, 1994................... 5,179,200 (1,213,239) 4,320,861
Investment in subsidiary -- RNFC................ 1,147,239 3,467,339
Issuance of common stock and stock warrants..... $ 14,744 485,256 500,000
Redemption of preferred stock................... (200,000)
Preferred Stock dividends....................... (26,864) (26,864)
Distributions (Note 1).......................... (2,166,975) (2,166,975)
Net (loss) income............................... (1,017,792) 6,857,302 5,839,510
----------- ---------- ---------- ----------
Balance at September 30, 1995................... 14,744 3,626,928 5,617,199 11,733,871
Issuance of common stock and stock warrants..... 12,005 51,165,999 51,210,954
Transfer of Non-voting to Voting................ (4,546) --
Redemption of preferred stock................... (2,400,000)
Preferred Stock dividends....................... (264,842) (264,842)
Net (loss) income............................... (38,986) 20,876,523 20,837,537
Other........................................... 76,316 76,316
----------- ---------- ---------- ----------
Balance at June 30, 1996........................ $ 22,203 $54,830,257 $26,228,880 $81,193,836
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
</TABLE>
See accompanying notes.
F-5
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED JUNE 30,
---------------------------------------- --------------
1993 1994 1995 1995
----------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income..................................................... $ 7,389,647 $ 5,155,498 $ 5,839,510 $ 4,130,186
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for possible credit losses......................... 16,066 264,429 4,387,186 2,256,134
Depreciation and amortization................................ 152,495 359,629 419,801 280,425
Gain on sales of loans....................................... (438,607) (2,071,620) (34,009,029) (19,149,185)
Changes in operating assets and liabilities:
Excess servicing receivable amortization................... -- -- 487,618 294,450
Loans originated or acquired............................... (2,614,783) (812,643) (208,709,884) (196,891,056)
Principal collected and proceeds from sale of loans........ -- -- 203,840,116 186,229,090
Accrued interest receivable................................ -- -- 457,945 232,615
Excess servicing receivable, net........................... -- -- 1,364,909 (2,670,125)
Receivable from trusts..................................... -- -- (2,417,202) (3,564,185)
Subordinated Certificates held for sale.................... -- -- (1,312,500) --
Other assets............................................... 409,299 (639,279) (1,048,753) (33,501)
Accounts payable and accrued expenses...................... 87,127 979,293 2,381,646 953,985
Other liabilities.......................................... -- 416,532 483,988 --
Deferred tax liability..................................... -- -- 2,110,593 1,893,682
----------- ----------- -------------- --------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............ 5,001,244 3,651,839 (25,724,056) (26,037,485)
INVESTING ACTIVITIES:
Cash from acquisitions......................................... -- -- 624,571 524,571
Proceeds from maturity of short-term investments............... 100,000
Acquisition costs of RNFC...................................... -- -- (530,562) --
Advances to stockholders....................................... (324,589) (776,168) 552,932 --
Marketable securities.......................................... (628,735) 628,735 -- --
Purchases of equipment and leasehold improvements.............. (435,447) (635,366) (761,132) (424,840)
----------- ----------- -------------- --------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES............ (1,388,771) (782,799) (114,191) 199,731
----------- ----------- -------------- --------------
FINANCING ACTIVITIES:
Borrowings on warehouse financing facilities, net.............. 1,862,774 157,260 10,436,052 8,634,749
Borrowings on term line of credit.............................. -- 2,888,872 9,248,872 5,135,423
Borrowings on (repayments of) notes payable, net............... -- 350,000 221,906 5,712,524
Proceeds from (repayments of) subordinated notes payable to
affiliates.................................................... -- -- 8,002,500 7,175,004
Repayments on subordinated notes payable to affiliates......... (212,000) -- -- --
Redemptions of preferred stock................................. -- -- (200,000) (200,000)
Common stock issued............................................ -- 1,663,248 500,000 450,000
Distributions.................................................. (4,196,871) (6,872,928) (2,166,975) (2,166,975)
Preferred stock dividends...................................... (32,340) (70,500) (26,864) (26,864)
----------- ----------- -------------- --------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES............ (2,578,437) (1,884,048) 26,015,491 24,713,861
----------- ----------- -------------- --------------
INCREASE (DECREASE) IN CASH.................................... 1,034,036 984,992 177,244 (1,123,893)
Cash and cash equivalents at beginning of period............... 289,239 1,323,275 2,308,267 3,433,509
----------- ----------- -------------- --------------
Cash and cash equivalents at end of period..................... $ 1,323,275 $ 2,308,267 $ 2,485,511 $ 2,309,616
----------- ----------- -------------- --------------
----------- ----------- -------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period................................ $ 28,345 $ 1,040,552 $ 1,997,129 $ 1,441,033
----------- ----------- -------------- --------------
----------- ----------- -------------- --------------
Non-cash Investing and Financing Activities:
Acquisition of assets, net..................................... -- -- $ 2,312,206 --
----------- ----------- -------------- --------------
----------- ----------- -------------- --------------
<CAPTION>
1996
--------------
<S> <C>
OPERATING ACTIVITIES:
Net income..................................................... $ 20,837,537
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for possible credit losses......................... 26,561,482
Depreciation and amortization................................ 521,706
Gain on sales of loans....................................... (94,036,911)
Changes in operating assets and liabilities:
Excess servicing receivable amortization................... 7,279,761
Loans originated or acquired............................... (909,102,380)
Principal collected and proceeds from sale of loans........ 785,068,615
Accrued interest receivable................................ (1,297,768)
Excess servicing receivable, net........................... (179,626)
Receivable from trusts..................................... (9,748,781)
Subordinated Certificates held for sale.................... (15,214,971)
Other assets............................................... (3,581,762)
Accounts payable and accrued expenses...................... 6,445,574
Other liabilities.......................................... --
Deferred tax liability..................................... 9,340,245
--------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............ (177,107,279)
INVESTING ACTIVITIES:
Cash from acquisitions......................................... 251,894
Proceeds from maturity of short-term investments...............
Acquisition costs of RNFC...................................... --
Advances to stockholders....................................... --
Marketable securities.......................................... --
Purchases of equipment and leasehold improvements.............. (784,985)
--------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES............ (533,091)
--------------
FINANCING ACTIVITIES:
Borrowings on warehouse financing facilities, net.............. 102,440,083
Borrowings on term line of credit.............................. 27,820,110
Borrowings on (repayments of) notes payable, net............... (795,917)
Proceeds from (repayments of) subordinated notes payable to
affiliates.................................................... (1,000,000)
Repayments on subordinated notes payable to affiliates......... --
Redemptions of preferred stock................................. (2,400,000)
Common stock issued............................................ 51,210,954
Distributions.................................................. --
Preferred stock dividends...................................... (264,842)
--------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES............ 177,010,388
--------------
INCREASE (DECREASE) IN CASH.................................... (629,982)
Cash and cash equivalents at beginning of period............... 2,967,157
--------------
Cash and cash equivalents at end of period..................... $ 2,337,175
--------------
--------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period................................ $ 8,609,778
--------------
--------------
Non-cash Investing and Financing Activities:
Acquisition of assets, net..................................... --
--------------
--------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
1. ACQUISITION
RAC Financial Group, Inc., a Nevada corporation (RAC or the Company),
through its four subsidiaries, FIRSTPLUS Financial, Inc. (FIRSTPLUS Financial),
formerly known as Remodelers National Funding Corp., a Texas corporation, SFA:
State Financial Acceptance Corp., a Texas corporation (SFAC), FIRSTPLUS
Financial West, Inc., formerly known as Mortgage Plus Incorporated, a Colorado
corporation, and First Security Mortgage Corporation (FIRSTPLUS East), a South
Carolina corporation, is a specialized consumer finance company that originates,
services, and sells Title I and conventional home improvement loans, including
debt consolidation loans. The Company originates loans through wholesale
purchase, indirect and direct transactions. The Company sells substantially all
of the loans it originates and purchases through asset-backed securitizations to
investors in the form of pass-through certificates and retains the loan
servicing rights.
SFAC is a conventional home improvement lender. In prior years, SFAC
purchased property improvement loans at a discount from contractors and sold
packages of these loans at a premium. On October 4, 1994, RAC was formed by the
senior management of SFAC together with Farm Bureau Life Insurance Company (Farm
Bureau), which, at the time indirectly owned 100% of the common stock of
FIRSTPLUS Financial, for the purpose of purchasing FIRSTPLUS Financial (the
Combination). FIRSTPLUS Financial is an approved Title I Loan originator and
servicer.
In connection with the formation of RAC, the stockholders of SFAC exchanged
all of the common and preferred stock of SFAC for 4,690,000 shares of the $0.01
par value voting common stock (Common Stock) and 300,000 shares of the $1 par
value preferred stock of RAC (Series A Preferred Stock). This exchange between
SFAC and RAC was accounted for at book value since the exchange of shares of
SFAC for RAC was between enterprises under common control and the financial
statements have been restated in a manner similar to a pooling of interests. At
the same time, RAC acquired FIRSTPLUS Financial through the issuance of
2,010,000 shares of Common Stock and 2,300,000 shares of the $1 par value
preferred stock of RAC (Series B Preferred Stock) to Farm Bureau in exchange for
all of the common stock of FIRSTPLUS Financial. The acquisition of FIRSTPLUS
Financial was accounted for using the purchase method of accounting to reflect
fair values. After the formation of RAC, the former management and stockholders
of SFAC maintained control of the management and voting stock of RAC. Therefore,
the historical financial statements of SFAC are included with RAC's.
Assets and liabilities acquired from FIRSTPLUS Financial were recorded at
their respective fair values. The primary assets acquired were loans held for
sale of approximately $5 million and excess servicing receivable of
approximately $1.7 million. The primary liabilities assumed were a warehouse
financing facility of approximately $3.1 million and principal and interest due
on loan participations sold of approximately $1.8 million. The difference
between the fair value of the assets acquired less liabilities assumed and the
purchase price including acquisition costs of approximately $530,000 was
recorded as goodwill.
In November 1995, the Company purchased the capital stock of another home
improvement lender, First Security Mortgage Corporation. The significant assets
of FIRSTPLUS East consisted of approximately $9.3 million in mortgage loans held
for sale. The acquisition was accounted for as a purchase business combination
and all tangible and identified intangible assets and liabilities were recorded
at their respective fair values. (See Note 16)
In May 1996, 800,000 common shares of the Company were issued in exchange
for all of the outstanding common stock of Mortgage Plus, Incorporated (MPI), in
a transaction accounted for as a pooling of interests. MPI was subsequently
renamed FIRSTPLUS Financial West, Inc. (FIRSTPLUS West). As such, the
consolidated financial information of the Company has been restated to include
the accounts of FIRSTPLUS West for all periods presented. As FIRSTPLUS West was
a Subchapter S corporation prior to the pooling with RAC, its retained earnings
activity (net income (loss) and distributions) on a separate company basis has
been reclassified to additional capital. Prior to the acquisition, FIRSTPLUS
West operated on a fiscal year end of April 30.
F-7
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACQUISITION (CONTINUED)
FIRSTPLUS West's prior years financial statements have been combined with the
Company's financial statements without recasting the periods presented, except
for the financial information as of and for the nine months ended June 30, 1996
and 1995. Such combination results in operations for FIRSTPLUS West for the
period from July 1, 1995 through September 30, 1995 being excluded from the
presentation. Net income for FIRSTPLUS West for this period was approximately
$58,000. Separate results of the Company and FIRSTPLUS West for the periods
presented are as follows (dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------------- ---------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Revenue:
RAC..................................................... $ 533 $ 2,446 $ 28,951 $ 17,860 $ 94,887
FIRSTPLUS West.......................................... 16,781 27,394 4,962 3,618 13,911
Elimination of intercompany transactions................ -- -- (18) -- (156)
--------- --------- --------- --------- ----------
17,314 29,840 33,895 21,478 108,642
Expenses:
RAC..................................................... 714 3,093 18,172 10,332 61,059
FIRSTPLUS West.......................................... 9,211 21,592 5,981 4,356 13,974
Provision for income taxes.............................. -- -- 3,903 2,660 12,771
--------- --------- --------- --------- ----------
9,925 24,685 28,056 17,348 87,804
Net income (loss):
RAC..................................................... (181) (647) 6,876 4,868 21,057
FIRSTPLUS West.......................................... 7,570 5,802 (1,019) (738) (63)
Elimination of intercompany transactions................ -- -- (18) -- (156)
--------- --------- --------- --------- ----------
$ 7,389 $ 5,155 $ 5,839 $ 4,130 $ 20,838
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
</TABLE>
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of RAC and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
REVENUE RECOGNITION
The Company generates revenue from the sale of loans through asset-backed
securitizations by selling pass-through certificates through grantor trust
conduits (the Trusts). Excess servicing gains on sales of loans through
securitizations principally represent the present value of the differential
between the interest rates charged on the loans and the interest rates passed on
to the purchasers of the certificates, after considering the effects of
estimated prepayments, servicing fees, and other administrative costs. Excess
servicing gains on sales of loans are recorded at the settlement date. All
related premiums or discounts on the loans sold are netted against the gain on
sale of the loans. The securitizations have been recorded as sales in accordance
with Statement of Financial Accounting Standards No. 77, "Reporting by
Transferors for Transfers of Receivables with Recourse."
An excess servicing receivable (the Receivable) is recorded at the time of
sale that is equal to the excess servicing gain on sale of loans. The Receivable
is amortized in proportion to and over the expected lives of the related loans
giving effect to the prepayment assumptions utilized in its determination and is
carried at its estimated net realizable value.
The carrying value of the Receivable is analyzed for possible impairment
quarterly by the Company on a disaggregated basis by the predominant risk
characteristic of loan type to determine whether prepayment and default
experience has an impact on carrying value. Expected cash flows of the
underlying loans sold are
F-8
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reviewed based upon current economic conditions and the type of loans originated
and are revised as necessary using the original discount rate used in
calculating the gain on sale. The Company generally makes loans to
credit-impaired borrowers whose borrowing needs may not be met by traditional
financial institutions due to credit qualification requirements, primarily due
to high loan-to-value ratios. The Company has found that credit-impaired
borrowers are payment sensitive rather than interest-rate sensitive. As such,
the Company does not consider interest rates to be a predominant risk
characteristic for purposes of valuation impairment. Impairment losses, if any,
arising from adverse prepayment and default experience are recognized as a
charge to earnings while favorable experience is not recognized until realized.
During the nine months ended June 30, 1996, the Company pooled and
securitized $427.2 million of loans through five grantor trust conduits. Four
trusts sold pass-through certificates in private placements. One trust (1996-2)
sold pass-through certificates in a public offering. The certificates have fixed
coupon rates and estimated remaining maturities ranging from 2 to 20 years.
To a lesser extent, the Company generates revenue from the bulk sale of
loans. Bulk sale gains represent the difference between the sale price, which is
received in cash, and the cost of the loans sold.
The Company generally retains servicing rights and recognizes servicing
income from fees, prepayment penalties and late payment charges earned for
servicing the loans owned by investors, certificate holders, and others.
Servicing and other fees are generally earned at rates ranging from
approximately 0.75% to 1.25% of the unamortized loan balance being serviced.
Servicing income is recognized when collected.
Interest income from loans is recognized using the interest method. The
Company ceases to accrue interest income on loans which become 90 days past due.
CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
LOANS HELD FOR SALE
Title I and conventional loans held for sale are carried at the lower of
cost or market. Typically, the Company obtains a second or third property
improvement lien as collateral.
RECEIVABLE FROM TRUSTS
The Company is required to maintain a deposit with the trustees for the
Trusts equal to a set percentage of the par value of the securitized portfolio
to supplement unanticipated shortfalls in payments to certificate holders (the
Receivable from Trusts). The certificate holders' recourse to the Company is
limited to this required reserve balance and the Receivable related to the
specific securitization. The amounts on deposit are invested in certain
short-term instruments as permitted by each Trust's pooling and servicing
agreement. To the extent that amounts on deposit exceed specified levels,
distributions are made to the Company. Upon maturity of the certificates, any
remaining amounts on deposit are distributed to the Company.
ALLOWANCE FOR POSSIBLE CREDIT LOSSES
Provision for credit losses is charged to income in amounts sufficient to
maintain the allowance at a level considered adequate to cover anticipated
losses resulting from liquidation of outstanding loans. The allowance for credit
losses is based upon periodic analysis of the portfolio, economic conditions and
trends, historical credit loss experience, borrowers' ability to repay, and
collateral values. The allowance for credit losses on loans sold represents the
Company's best estimate of future credit losses likely to be incurred over the
life of the loans sold. This allowance has been discounted using an interest
rate of 6.5% which is considered to be equivalent to the risk-free market rate
for securities with a duration consistent with the estimated timing of losses
based on guidance issued by the Financial Accounting Standards Board's Emerging
Issues Task Force (EITF) in Issue 92-2. The Company's charge-off policy is based
on a review of each individual receivable.
F-9
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Federal and state income taxes are accounted for utilizing the liability
method, and deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using enacted tax rates and laws that will be in effect when
the differences are expected to reverse.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Earnings per common and common equivalent are computed by dividing net
income less preferred dividends by the weighted average number of shares of
Common Stock and Common Stock equivalents outstanding. Common Stock equivalents
consist of the dilutive effect of Common Stock which may be issued upon exercise
of stock warrants assuming such warrants were outstanding the entire fiscal
period. All share and per-share amounts have been restated to reflect the
67-for-one stock split the Company effected in July 1995. Earnings per share and
fully diluted earnings per share are substantially the same. Pursuant to the
requirements of the Securities and Exchange Commission, common shares and common
equivalent shares issued at prices below the estimated public offering price
during the 12 months immediately preceding the date of the initial filing of the
Registration Statement have been included in the calculation of common shares
and common share equivalents, using the treasury stock method, as if they were
outstanding for all periods presented. All common share and per share data,
except par value per share, have been retroactively adjusted to reflect the
67-for-one stock split of the Company's Common Stock.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments at June 30, 1996 and September 30, 1995
consist primarily of loans held for sale, excess servicing receivable, and
subordinated certificates held for sale as well as warehouse financing
facilities, term lines of credit, and other debt instruments. The loans held for
sale represent recent production and as such, their carrying value approximates
their current fair value. The excess servicing receivable is primarily related
to loans sold during the nine months ended June 30, 1996. The discount rate used
to calculate the present value of the excess servicing during this period
remains consistent with the prior period presented and management believes it is
still appropriate as of June 30, 1996. Also, prepayment and default assumptions
used to calculate the excess servicing receivable are substantially consistent
with the performance experience of the underlying loans. Additionally, the
market rates applicable to the subordinated certificates held for sale is not
significantly different than the rates used to record the asset originally. All
significant outstanding debt, including the warehouse financing facilities, term
lines of credit, and other debt instruments, are at variable rates at terms the
Company believes represent present market conditions. As such, the carry amounts
of the Company's outstanding debt instruments approximate their respective fair
value.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which will
primarily be applicable to the Company's securitization of receivables as well
as its repurchase agreements. SFAS No. 125 will require entities that acquire or
originate loans and subsequently sell or securitize those loans with retained
servicing rights to allocate the total cost of the loans to the mortgage
servicing rights and the mortgage loans. At this time, the Company has not
determined what effect,
F-10
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
if any, that the adoption of SFAS No. 125 may have on the Company's results of
operations or financial condition for fiscal 1997. The Company will be required
to assess the servicing rights for impairment based upon the fair value of those
rights. SFAS No. 125 is effective only for transactions after January 1, 1997.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which is effective beginning in the Company's 1997 fiscal year.
SFAS No. 123 allows companies to continue to account for stock-based employee
compensation plans under the existing accounting standard Accounting Principles
Board ("APB") Opinion No. 25, or adopt a fair value-based method of accounting
for stock options as compensation expense over the service period (generally the
vesting period) as defined in the new standard. SFAS No. 123 requires that if a
company continues to account for stock options under APB Opinion No. 25, it must
provide pro forma net income and earnings per share information "as if" the new
fair value approach had been adopted. The Company plans to continue to account
for stock-based compensation under APB Opinion No. 25 and will make the required
disclosures in its 1997 fiscal year financial statements.
3. LOANS HELD FOR SALE
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------- JUNE 30,
1994 1995 1996
------------ ------------- --------------
<S> <C> <C> <C>
Title I loans............................................. $ -- $ 7,202,788 $ 9,700,814
Conventional loans........................................ 3,809,041 14,066,740 133,581,226
First lien mortgages...................................... 3,061,481 27,871 17,535,170
Construction loans........................................ -- -- 2,447,800
------------ ------------- --------------
Subtotal................................................ 6,870,522 21,297,399 163,265,010
Participations sold....................................... -- (902,390) (29,595)
Allowance for possible credit losses...................... (325,429) (887,879) (1,616,173)
Net purchase premiums/(discount) on conventional loans.... (440,383) (71,953) 4,120,306
------------ ------------- --------------
Total................................................... $ 6,104,710 $ 19,435,177 $ 165,739,548
------------ ------------- --------------
------------ ------------- --------------
</TABLE>
The serviced loan portfolio, which includes the loans held for sale, as well
as loans serviced for the securitizations and other investors, consisted of
$238.3 million in Title I loans and $512.2 million in conventional loans at June
30, 1996.
4. ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The activity in the allowance for possible credit losses is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
SEPTEMBER 30, ENDED JUNE
------------------------ 30,
1994 1995 1996
---------- ------------ -------------
<S> <C> <C> <C>
Balance, beginning of period.................................. $ 131,367 $ 325,429 $ 4,794,385
Allowance from FIRSTPLUS Financial acquisition................ -- 160,000 --
Provision for possible credit losses.......................... 264,429 4,452,286 26,561,482
Charge-offs, net.............................................. (70,367) (143,330) (2,357,801)
---------- ------------ -------------
Balance, end of period........................................ $ 325,429 $ 4,794,385 $ 28,998,066
---------- ------------ -------------
---------- ------------ -------------
Components of Allowance:
Allowance for possible credit losses.......................... $ 325,429 $ 887,879 $ 1,616,173
Allowance for possible credit losses on loans sold............ -- 3,906,506 27,381,893
</TABLE>
F-11
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ALLOWANCE FOR POSSIBLE CREDIT LOSSES (CONTINUED)
At June 30, 1996 and September 30, 1995, the gross allowance for possible
credit losses on loans sold was approximately $36.6 million and $6.8 million,
respectively, which was recorded at a discount using a risk-free interest rate
of 6.5%.
5. EXCESS SERVICING RECEIVABLE AND SUBORDINATED CERTIFICATES AVAILABLE FOR SALE
The activity in the Receivable is summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, JUNE 30,
1995 1996
------------- --------------
<S> <C> <C>
Balance, beginning of period............................................ $ -- $ 29,743,987
Acquired in FIRSTPLUS East acquisition.................................. 1,685,887 197,829
Excess servicing gains.................................................. 30,065,093 94,036,878
Excess servicing write-off.............................................. (969,412) (408,915)
Amortization............................................................ (487,618) (6,817,166)
Receivable reclassified to Receivable from Trust........................ (549,963) --
------------- --------------
Balance, end of period.................................................. $ 29,743,987 $ 116,752,613
------------- --------------
------------- --------------
</TABLE>
The Company discounts the cash flows on the securitized loans at a rate it
believes a purchaser would require as a rate of return. The rate used to
discount the cash flows was 11% for the year ended September 30, 1995 and for
the nine months ended June 30, 1996. These rates are based upon customer rates
on the respective loans, the use of which management believes is appropriate
when compared to the use of market data on interest-only strips on a risk
adjusted basis.
At June 30, 1996, the Company held as available for sale four subordinated
certificates from securitizations. The certificates were unrated and as such
there was no current established market values. Estimates of the fair market
value based on discounted cash flow analysis indicates that the carrying value
of the subordinated certificates approximates their fair value.
6. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------- JUNE 30,
1994 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
Goodwill, net............................................... $ -- $ 477,506 $ 430,635
Furniture, equipment and leasehold improvements,
net........................................................ 1,102,335 1,277,660 3,797,271
Prepaids and other.......................................... 2,626,086 4,036,499 6,298,268
------------ ------------ -------------
$ 3,728,421 $ 5,791,665 $ 10,526,174
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
Depreciable assets are stated at cost less accumulated depreciation.
Equipment is depreciated using a straight-line method based on estimated useful
lives ranging from 1 to 5 years. Leasehold improvements are amortized over the
life of the lease or asset whichever is shorter.
Goodwill is amortized on a straight-line basis over ten years.
7. DEBT
WAREHOUSE FINANCING FACILITIES
The Company has a $60 million warehouse facility with Bank One, Texas, N.A.,
an affiliate, for warehousing loans prior to sale through securitization. In
March 1996, the Company increased the Bank One Warehouse Facility from $20
million to $40 million, with a one-year maturity and, in June 1996,
F-12
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
increased the Bank One Warehouse Facility to $60 million. At June 30, 1996,
approximately $46.8 million was outstanding under this warehouse facility. This
warehouse facility bears interest at the federal funds rate (5.3% at June 30,
1996) plus 1.25%, payable monthly. During the term of the facility, borrowings
have no stated maturity other than the repayment obligations coincident with the
principal payments of the underlying loans. Upon the sale of the warehoused
loans the warehouse facility is repaid. This warehouse facility matures in March
1997.
The Company also has a $130 million warehouse financing facility with a
nationally recognized finance company (the Warehouse Lender) for warehousing
loans prior to sale through securitization. This financing facility bears
interest at a rate based on the commercial paper rate of the Warehouse Lender's
parent plus 125 basis points payable monthly. This warehouse facility matures in
March 1997. The Warehouse Lender received a participation interest in the
securitizations completed in June and September 1995. At June 30, 1996,
approximately $56.7 million was outstanding under this warehouse facility.
Additionally, the Company has approximately $28.1 million outstanding under
several other warehouse lines bearing interest at rates primarily based on
spreads above LIBOR or prime.
In May 1996, the Company entered into a master repurchase agreement with
Bear Stearns Home Equity Trust 1996-1, which provided the Company with a $200
million loan repurchase facility (the "Bear Stearns Facility") which bears
interest based on a spread over the 30-day LIBOR and expires in May 1997.
Approximately $11.2 million is outstanding under this facility at June 30, 1996.
TERM LINE OF CREDIT
The Company has a $70 million working capital term line of credit with the
Warehouse Lender that is secured by the Company's subordinated certificates and
the Company's servicing rights. This line of credit bears interest at the rate
of 2.5% over the thirty day commercial paper issued by the Warehouse Lender's
parent with the principal amortized over 60 months. No additional borrowings may
occur under the term line beyond March 1997. The line of credit matures in
February 1999.
SUBORDINATED NOTES PAYABLE TO AFFILIATES
At June 30, 1996, the Company had $5.7 million principal amount of 12% fixed
rate subordinated notes (the Notes) outstanding which are held by Bank One,
which is an affiliate. The Notes become due on March 31, 2000. In addition, the
Company had a $1.35 million credit facility with Farm Bureau, which is an
affiliate. Advances under the facility carry 12% interest rates with principal
due March 31, 2000.
Both the Bank One Notes and the Farm Bureau credit facility referred to
above were issued with detachable stock warrants, allowing the affiliates to
purchase a total of 15% of the Company. All such warrants were exercised in
February 1996. See Note 9. The Notes are recorded at a discount which equals the
value of the warrants at the time of issuance. The Notes are secured by the
assets of the Company, but are subordinated to the rights of the various
warehouse lenders.
In conjunction with the various borrowings, the Company has agreed to
certain financial covenants regarding tangible net worth and leverage and was in
compliance with all such financial covenants at June 30, 1996.
F-13
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED JUNE
SEPTEMBER 30, 30,
1995 1996
------------- -------------
<S> <C> <C>
Current:
Federal................................................................. $ 1,613,443 $ 3,160,268
State................................................................... 179,268 270,880
------------- -------------
1,792,711 3,431,148
Deferred:
Federal................................................................. 1,794,000 8,602,858
State................................................................... 316,593 737,387
------------- -------------
2,110,593 9,340,245
------------- -------------
$ 3,903,304 $ 12,771,393
------------- -------------
------------- -------------
</TABLE>
The tax effects of temporary differences that give rise to the deferred tax
asset and liabilities are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1995 1996
------------- -------------
<S> <C> <C>
Deferred tax asset -- Allowance for possible credit losses................ $ 1,787,800 $ 614,146
Deferred tax liabilities:
Excess servicing rights................................................. 3,705,325 11,980,189
Other................................................................... 193,068 84,795
------------- -------------
3,898,393 12,064,984
------------- -------------
Net deferred tax liabilities.............................................. $ 2,110,593 $ 11,450,838
------------- -------------
------------- -------------
</TABLE>
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, JUNE 30,
1995 1996
---------------- ---------------
<S> <C> <C>
Statutory rate............................................................. 34.0% 34.0%
State tax, net of federal benefit.......................................... 3.0 3.0
Other...................................................................... 1.5 1.0
Net operating loss carryforward............................................ (2.4) --
--- ---
36.1% 38.0%
--- ---
--- ---
</TABLE>
Net income reflects the effect of FIRSTPLUS West as a Subchapter S
corporation and, accordingly, FIRSTPLUS West included no federal income taxes in
its financial statements since its income was taxed at the shareholder level.
Due to net operating losses experienced by RAC prior to the pooling with
FIRSTPLUS West and as FIRSTPLUS West was a Subchapter S corporation, no tax
provision was necessary for the years ended September 30, 1994 and 1993.
F-14
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Series A Preferred Stock and Series B Preferred Stock paid dividends,
when declared by the Board of Directors, at an annual rate of $0.08 per share.
The dividends accrued and were payable upon redemption. The outstanding shares
of the preferred stock were redeemed and all related dividends were paid in
February 1996.
WARRANTS AND OPTIONS
As of September 30, 1995, the Company had outstanding stock warrants held by
affiliates that were exercised for 1,200,506 shares of Non-voting Common Stock
for a nominal exercise price during the nine months ended June 30, 1996. The
warrants were associated with the issuance of and amendments to the Notes. In
January 1996 to facilitate the increase in the term line from its original $20
million limit, the Company issued the Warehouse Lender warrants to purchase
250,000 shares of the Company's Common Stock at an exercise price of $14.00 per
share. During the nine months ended June 30, 1996, the Company granted 87,250
options at market values at the date of grant to purchase Common Stock to
certain new employees and certain employees hired through acquisitions.
INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Income per common and common equivalent share is calculated as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30, NINE MONTHS ENDED JUNE 30,
---------------------------------------- ---------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Net income.................................... $ 7,389,647 $ 5,155,498 $ 5,839,510 $ 4,130,186 $ 20,837,537
Less: Accrual of preferred stock dividends.... (32,000) (71,000) (198,667) (151,000) (66,000)
------------ ------------ ------------ ------------ -------------
Net income applicable to common stock......... $ 7,357,647 $ 5,084,498 $ 5,640,843 $ 3,979,186 $ 20,771,537
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Average common shares outstanding............. 6,597,931 6,937,931 8,947,931 8,947,931 11,962,859
Common stock equivalents:
Warrants and options........................ 1,200,506 1,200,506 1,200,506 1,200,506 243,476
------------ ------------ ------------ ------------ -------------
Weighted average common and common equivalent
shares outstanding........................... 7,798,437 8,138,437 10,148,437 10,148,437 12,206,335
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Net income per share.......................... $ 0.94 $ 0.62 $ 0.56 $ 0.39 $ 1.70
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
</TABLE>
10. EMPLOYEE STOCK OPTION, DIRECTOR STOCK OPTION, AND EMPLOYEE STOCK PURCHASE
PLANS
The Company has adopted the 1995 Employee Stock Option Plan. The 1995
Employee Stock Option Plan provides for grants of incentive stock options
(Incentive Options) and nonqualified stock options (Nonqualified Options) to all
eligible employees of the Company and its subsidiaries. All Incentive Options
will have an exercise price per share no less than the market value of the
Company's Common Stock on the date the option is granted. Nonqualified Options
may be granted with an exercise price per share less than fair market value of
the Common Stock at the date of grant. No options under the 1995 Employee Option
Plan may be exercised more than ten years from the date of grant. A maximum of
550,000 shares of Common Stock have been reserved for sale upon exercise of
options under this plan. Approximately 473,320 options have been granted during
the nine months ended June 30, 1996 at exercise prices equal to the market value
on the date of grant. No options have been exercised through June 30, 1996.
The Company has adopted the 1995 Non-Employee Director Plan to grant options
to members of the Board of Directors who are not employees of the Company or its
subsidiaries on the date they become a director. Each non-employee director, at
the time the 1995 Non-Employee Director Plan was adopted, received an option to
purchase 5,000 shares of Common Stock (Initial Option) at the initial public
offering
F-15
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE STOCK OPTION, DIRECTOR STOCK OPTION, AND EMPLOYEE STOCK PURCHASE
PLANS (CONTINUED)
price less the underwriter's discount. Subsequently, on the date of each annual
stockholder's meeting, after such director's Initial Option has vested, the
director will receive a nonqualified stock option to purchase 1,000 shares of
Common Stock with an exercise price equal to the fair market value of the Common
Stock on the date of grant. A maximum of 50,000 shares of Common Stock have been
reserved under the 1995 Director Plan.
The Company has adopted the RAC Financial Group, Inc. Employee Stock
Purchase Plan (Purchase Plan) and reserved a total number of common shares
issuable under this plan of 250,000. The Purchase Plan provides a means for
employees to purchase shares of Common Stock at 85% of the fair market value.
11. GAINS ON SALES OF LOANS
The gains on sales of loans, as defined in Note 2, and the related cost is
as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE
NINE MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED
SEPTEMBER 30, JUNE 30, JUNE 30,
1995 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Excess servicing gain.................................. $ 41,064,028 $ 25,872,599 $ 94,573,426
Sharing arrangements................................... (10,998,935) (7,201,078) (536,548)
-------------- -------------- --------------
30,065,093 18,671,521 94,036,878
Gain on whole loan and bulk sales...................... 4,517,100 3,298,543 10,682,769
-------------- -------------- --------------
34,582,193 21,970,064 104,719,647
Residual interest income............................... -- -- 2,873,638
Premiums, net.......................................... (1,993,613) (919,418) (12,899,411)
Transaction costs...................................... (3,474,879) (2,866,821) (4,878,376)
-------------- -------------- --------------
Gains on sales of loans, net........................... $ 29,113,701 $ 18,183,825 $ 89,815,498
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
In fiscal years 1993 and 1994, the gain on sale of loans was from bulk and
wholesale loan sales as the Company did not begin to securitize loans until
fiscal year 1995.
12. TRANSACTIONS WITH AFFILIATES
In December 1994, the Company repurchased certain loan participations from
an affiliate, Farm Bureau, and other investors at par value. The repurchased
loans were sold in a securitization transaction. The affiliate received a
participation interest in the securitization. The affiliate held $2,569,706 of
loan participations at September 30, 1995.
The Company has a warehouse facility with Bank One, an affiliate of Bank One
Capital Partners II and Bank One Capital Partners V, which are stockholders of
the Company.
The Company has issued the Notes to Bank One Capital Partners II, Bank One
Capital Partners V, and Farm Bureau. Additionally, the Company used Bear,
Stearns & Co. Inc., as co-placement agent in the Company's 1995-4, 1996-1, and
1996-2 securitization transactions. The Company also is provided financing
through the Bear Stearns Facility. A managing director from Bear, Stearns & Co.
Inc., is a board of directors member of the Company. (See Note 7.)
The Company has a credit facility with Farm Bureau, which is a stockholder
of the Company (See Note 7.)
13. EMPLOYEE BENEFIT PLANS
The Company has an Employees' 401(k) Savings Plan (the Plan) for eligible
employees. An employee is eligible to participate in the Plan after employment
of at least one month.
F-16
<PAGE>
RAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. EMPLOYEE BENEFIT PLANS (CONTINUED)
Participants may elect to make contributions to the Plan in amounts equal to
not less than 1% nor more than 15% of their eligible compensation. The Company
may elect to match elective contributions up to a maximum of 4% of the
participant's eligible compensation. The Company has made no such contributions
for the nine months ended June 30, 1996.
14. CONTINGENCIES AND COMMITMENTS
The Company leases premises and equipment under operating leases with
various expiration dates. Approximate future minimum lease payments are as
follows:
<TABLE>
<S> <C>
1997.................................................... $2,138,428
1998.................................................... 2,027,260
1999.................................................... 1,752,268
2000.................................................... 1,641,529
---------
$7,559,485
---------
---------
</TABLE>
Rent expense for the years ended September 30, 1994 and 1995 was $1,221,113
and $715,088, respectively. Rent expense for the nine months ended June 30, 1995
and 1996 was $413,955 and $1,467,244, respectively.
The Company is involved in certain litigation arising in the normal course
of business. Management's opinion is that the resolution of such litigation will
not have a material adverse effect on the Company's financial condition.
15. CONCENTRATION OF CREDIT RISK
The Company is active in originating loans to customers throughout the
United States. All loans are made on a secured or unsecured basis after
reviewing each potential borrower's credit application and evaluating their
financial history and ability to repay.
Approximately 60% of the loans in the Company's serviced loan portfolio at
June 30, 1996 was secured by residential properties located in California. No
other state accounted for more than 10%.
16. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The Company acquired FIRSTPLUS East in November 1995. As the pro forma
adjustments relating to this acquisition are limited, the following is furnished
as a narrative description of the pro forma effects in lieu of presenting
separate pro forma financial statements.
BALANCE SHEET. The pro forma balance sheet for the Company as of September
30, 1995 as adjusted for the acquisition of FIRSTPLUS East, as if such
acquisition had occurred on such date, would reflect total assets of
approximately $73.4 million and total liabilities of approximately $61.3
million. The primary increase in total assets would be FIRSTPLUS East's
approximately $30.7 million in loans held for sale. The primary increase in
total liabilities would be FIRSTPLUS East's mortgage warehouse lines of credit
with an outstanding balance of approximately $29.6 million. The only significant
pro forma adjustment considered necessary for the combined pro forma balance
sheet would be the addition of approximately $315,000 in goodwill resulting from
the acquisition.
INCOME STATEMENT. The pro forma statement of income for the Company for the
year ended September 30, 1995 as adjusted for the acquisition of FIRSTPLUS East,
as if such acquisition had occurred on October 1, 1994, would reflect total
revenue of approximately $37.2 million and total expenses of approximately $27.4
million. The only significant pro forma adjustment for the combined pro forma
statement of income would be to include approximately $35,000 in goodwill
amortization expense.
F-17
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Remodelers National Funding Corp.
We have audited the balance sheet of Remodelers National Funding Corp. as of
September 30, 1994, and the related statements of operations, stockholder's
equity, and cash flows for the nine months then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Remodelers National Funding
Corp. at September 30, 1994, and the results of its operations and its cash
flows for the nine months then ended in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
January 10, 1995
F-18
<PAGE>
REMODELERS NATIONAL FUNDING CORP.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1994
-------------
<S> <C>
Cash and cash equivalents.......................................................................... $ 524,571
Short-term investments............................................................................. 100,000
Loans held for sale, net (Note 2).................................................................. 4,978,469
Excess servicing receivable (Note 3)............................................................... 1,685,887
Interest receivable................................................................................ 488,563
Furniture and equipment, net (Note 4).............................................................. 99,469
Other assets....................................................................................... 55,914
-------------
Total assets................................................................................... $ 7,932,873
-------------
-------------
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Accounts payable and accrued liabilities......................................................... $ 107,891
Principal/interest due on loan participations sold............................................... 1,787,117
Warehouse financing facility with affiliates (Note 5)............................................ 3,100,000
-------------
Total liabilities.............................................................................. 4,995,008
-------------
Commitments (Note 8)
STOCKHOLDER'S EQUITY
Common stock, $1 par value:
Authorized shares -- 100,000
Issued and outstanding shares -- 600........................................................... 600
Additional capital............................................................................... 4,272,930
Accumulated deficit.............................................................................. (1,335,665)
-------------
Total stockholder's equity..................................................................... 2,937,865
-------------
Total liabilities and stockholder's equity..................................................... $ 7,932,873
-------------
-------------
</TABLE>
See accompanying notes.
F-19
<PAGE>
REMODELERS NATIONAL FUNDING CORP.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1994
-------------
<S> <C>
REVENUES
Gains on sales of loan participations............................................................ $ 175,638
Interest......................................................................................... 4,864,739
Servicing income................................................................................. 208,959
Other income..................................................................................... 280,317
-------------
Total revenues................................................................................. 5,529,653
-------------
EXPENSES
Salaries and employee benefits................................................................... 923,851
Interest......................................................................................... 3,953,514
Cost of servicing................................................................................ 515,926
FHA insurance premium............................................................................ 407,390
Other operating.................................................................................. 201,646
Provision for possible credit loss............................................................... 44,907
-------------
Total expenses................................................................................. 6,047,234
-------------
Net loss........................................................................................... $ (517,581)
-------------
-------------
</TABLE>
See accompanying notes.
F-20
<PAGE>
REMODELERS NATIONAL FUNDING CORP.
STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ ADDITIONAL ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993........................ 600 $ 600 $ 4,272,930 $ (818,084) $ 3,455,446
Net loss............................................ (517,581) (517,581)
--- ----- ------------ ------------- ------------
Balance at September 30, 1994....................... 600 $ 600 $ 4,272,930 $ (1,335,665) $ 2,937,865
--- ----- ------------ ------------- ------------
--- ----- ------------ ------------- ------------
</TABLE>
See accompanying notes.
F-21
<PAGE>
REMODELERS NATIONAL FUNDING CORP.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1994
-------------
<S> <C>
OPERATING ACTIVITIES
Net loss........................................................................................... $ (517,581)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.................................................................... 34,365
Excess servicing receivable collections.......................................................... 529,995
Gains on sales of loan participations............................................................ (175,638)
Addition to excess servicing receivable.......................................................... (116,858)
Changes in assets and liabilities:
Loans held for sale, net....................................................................... (3,850,546)
Interest receivable............................................................................ 120,546
Accounts payable and accrued expenses.......................................................... 35,763
Principal/interest due on loan participations sold............................................. (294,863)
Other operating activity....................................................................... (8,365)
-------------
Net cash used in operating activities.............................................................. (4,243,182)
-------------
INVESTING ACTIVITIES
Purchase of property and equipment................................................................. (61,494)
-------------
Net cash used in investing activities.............................................................. (61,494)
-------------
FINANCING ACTIVITIES
Draws on line of credit, net....................................................................... 3,100,000
-------------
Net cash provided by financing activities.......................................................... 3,100,000
-------------
Decrease in cash................................................................................... (1,204,676)
Cash at beginning of period........................................................................ 1,729,247
-------------
Cash at end of period.............................................................................. $ 524,571
-------------
-------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid during period........................................................................ $ 4,031,127
-------------
-------------
</TABLE>
See accompanying notes.
F-22
<PAGE>
REMODELERS NATIONAL FUNDING CORP.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1994
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND ORGANIZATION
Remodelers National Funding Corp. (RNFC or the Company) is a Title I
nonsupervised lender approved by the Department of Housing and Urban Development
(HUD). Title I loans are made to finance home improvements up to $25,000. In
addition to originating these loans, RNFC sells them to investors and contracts
to service them for the investors. Prior to ownership changes discussed in Note
10, the Company was a wholly owned subsidiary of the Anchor Group, Inc.
(Anchor). Anchor is a subsidiary of Rural Mutual Insurance Company (Rural
Mutual) and Farm Bureau Life Insurance Company (Farm Bureau), each entity with a
50% ownership interest. In conjunction with the subsequent ownership change, the
Company changed its year-end from calendar year-end to September 30 year-end.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
LOANS HELD FOR SALE
Loans held for sale consisting of HUD Title I and conventional home
improvement loans are carried at the lower of cost or market. Typically, the
Company obtains a second or third mortgage on the property as collateral.
PROVISION AND ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The provision for possible credit losses includes current period credit
losses and an amount which, in the judgment of management, is necessary to
maintain the allowance for possible credit losses at a level that reflects known
and inherent risks in the loans held-for-sale portfolio.
SALES OF LOAN PARTICIPATIONS
Gains resulting from the sales of loan participations to investors are
recognized in the periods in which the sales occur. The gain amounts are
determined from the yield differential between interest on the loan originated
and the interest on the loan participations sold to the investors.
EXCESS SERVICING RECEIVABLE
For the majority of the loan participations sold, an excess servicing
receivable (the Receivable) is recognized for an amount equal to the gain from
the sale of loan participations. The Receivable is then amortized to interest
over a weighted average life of the loan participations, which has generally
been determined to be 84 months after considering an estimated rate of
prepayments. These assumptions are evaluated periodically in relation to
estimated future net servicing revenues.
FURNITURE AND EQUIPMENT
Furniture and equipment are carried at cost, net of accumulated depreciation
and amortization. Depreciation of furniture and equipment is provided on a
straight-line basis over the estimated useful lives of the assets. Leasehold
improvements are amortized over the leases of the economic useful life of the
improvement or the term of the lease.
FEDERAL INCOME TAXES
Federal income taxes are accounted for utilizing the liability method, and
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax basis of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
F-23
<PAGE>
REMODELERS NATIONAL FUNDING CORP.
NOTES TO FINANCIAL STATEMENTS
2. LOANS HELD FOR SALE
Loans held for sale consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1994
--------------
<S> <C>
Title I loans................................................................. $ 55,076,912
Conventional loans............................................................ 288,315
Premium finance loans......................................................... 34,930
--------------
55,400,157
Loan participations sold...................................................... (50,261,688)
Allowance for possible credit losses.......................................... (160,000)
--------------
$ 4,978,469
--------------
--------------
</TABLE>
Activity in the allowance for possible credit losses is summarized as
follows for the nine months ended September 30, 1994:
<TABLE>
<S> <C>
Balance at beginning of period................................... $ 175,000
Provision charged to income...................................... 44,907
Charge-offs and recoveries (net)................................. (59,907)
---------
Balance at end of period......................................... $ 160,000
---------
---------
</TABLE>
3. EXCESS SERVICING RECEIVABLE
Activity in the Receivable is summarized as follows for the nine months
ended September 30, 1994:
<TABLE>
<S> <C>
Balance at beginning of period.................................. $2,099,024
Gain on sale of loans........................................... 116,858
Excess servicing collected...................................... (529,995)
---------
Balance at end of period........................................ $1,685,887
---------
---------
</TABLE>
There have been no changes in prepayment assumptions during the period;
therefore, no valuation adjustments have been recorded.
4. FURNITURE AND EQUIPMENT
The major classes of furniture and equipment and related accumulated
depreciation and amortization are shown below:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1994
-------------
<S> <C>
Furniture and leasehold improvements........................................... $ 144,043
Equipment...................................................................... 392,958
Computer software.............................................................. 81,439
Automobiles.................................................................... 27,047
-------------
645,487
Accumulated depreciation and amortization...................................... (546,018)
-------------
$ 99,469
-------------
-------------
</TABLE>
5. WAREHOUSE FINANCING FACILITY WITH AFFILIATE
RNFC is subject to HUD Handbook 4700.2 requirements Rule 2-4.B. which
requires the maintenance of a warehouse line of credit of at least $500,000 for
Title I loans.
F-24
<PAGE>
REMODELERS NATIONAL FUNDING CORP.
NOTES TO FINANCIAL STATEMENTS
5. WAREHOUSE FINANCING FACILITY WITH AFFILIATE (CONTINUED)
On July 30, 1993, Farm Bureau provided a line of credit to RNFC for
$10,000,000, for the purpose of originating Title I loans, which expires on July
30, 1996. Interest will accrue on the outstanding balance at a rate of 300 basis
points less than the weighted average coupon rate of the Title I loans which
secure the note.
6. INCOME TAXES
Net deferred tax assets are not significant to the financial statements and
consist mainly of $217,260 as of September 30, 1994, relating to loss
carryforwards, which are entirely offset by a valuation allowance.
The Company filed its tax return as part of a consolidated group.
Net operating loss carryforwards at September 30, 1994 consist of the
following:
<TABLE>
<CAPTION>
YEAR OF
YEAR ORIGINATED AMOUNT EXPIRATION
- ---------------------------------------------------------------------- ---------- -------------
<S> <C> <C>
July 31, 1991 (one month)............................................. $ 58,000 2006
December 31, 1993 (twelve months)..................................... 52,000 2008
September 30, 1994 (nine months)...................................... 529,000 2009
</TABLE>
The Company has not paid income taxes during the nine months ended September
30, 1994.
7. EMPLOYEE SAVINGS AND PROFIT-SHARING PLAN
The Company has an Employees' Savings and Profit-Sharing Plan (the Plan) for
eligible employees. An employee is eligible to participate in the Plan if the
employee is at least 21 years old and has been employed for at least six months.
Elective contributions may be made by participants in amounts equal to not
less than 2% nor more than the maximum percentage legally permissible of their
eligible compensation. RNFC may elect to match contributions up to 50% of the
participant's elective contributions to a maximum of 3% of the participant's
eligible compensation. RNFC has made no contributions for the period ended
September 30, 1994.
8. COMMITMENTS
The Company has entered into noncancelable operating leases for office space
and equipment. Lease expense for the nine months ended September 30, 1994 was
$158,073. Future rental payments required under the operating leases are
$198,458 for 1995 and $102,166 for 1996.
9. AFFILIATE TRANSACTIONS
In July 1993, Rural Mutual sold its subsidiary, Rural Security Insurance
Company (Rural Security), to Farm Bureau. Farm Bureau subsequently purchased 50%
of the stock of the parent of RNFC from Rural Mutual. Farm Bureau currently
provides a $10,000,000 line of credit to RNFC, as previously discussed in Note
5.
RNFC transacts significant business with Rural Mutual and Rural Security.
Rural Mutual held $13,199,916 of loan participations at September 30, 1994.
Rural Security held $18,528,216 of loan participations at September 30, 1994. As
of September 30, 1994, RNFC owed Rural Mutual $549,751 in connection with their
servicing agreement. RNFC owed Rural Security $654,237 as of September 30, 1994,
in connection with their servicing agreement. These amounts due Rural Mutual and
Rural Security have been repaid in the normal course of business by January
1995.
10. SUBSEQUENT EVENT
In October 1994, the Company's parent entered into an agreement with the
stockholders of State Financial Acceptance Corp. (SFAC), a previously unrelated
entity, whereby the Company's parent exchanged its common stock in the Company
for common and preferred stock of a newly formed corporation, RAC Financial
Group, Inc. (RAC). At the same time, the stockholders of SFAC exchanged their
common and preferred stock for common and preferred stock of RAC. Effective
October 1, 1994, the Company and SFAC became subsidiaries of RAC, with the
former stockholders of SFAC controlling the voting shares of RAC.
F-25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
First Security Mortgage Corporation
We have audited the accompanying balance sheet of First Security Mortgage
Corporation (the "Company") as of December 31, 1994 and the related statements
of operations, changes in shareholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of First Security Mortgage
Corporation as of December 31, 1994, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
Scott & Holloway, LLP
Columbia, South Carolina
February 17, 1995
F-26
<PAGE>
FIRST SECURITY MORTGAGE CORPORATION
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, NOVEMBER 30,
1994 1995
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................... $ 423,853 $ 144,256
Certificate of deposit...................................................... 50,428 51,247
Residential mortgages held for sale......................................... 6,553,894 9,338,753
Accounts receivable:
Fees receivable from investors............................................ 91,501 224,791
Other..................................................................... 13,878 51,398
Refundable income taxes..................................................... 68,440 --
Notes receivable from shareholders.......................................... 10,000 --
Prepaid expenses and other current assets................................... 13,283 31,331
------------ -------------
Total current assets.......................................................... 7,225,277 9,841,776
Furniture and equipment, net.................................................. 302,876 302,348
Goodwill, net of accumulated amortization of $1,378........................... 122,721 115,137
Other assets.................................................................. -- 15,335
------------ -------------
$7,650,874 $ 10,274,596
------------ -------------
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit payable..................................................... $ 135,000 $ 130,270
Mortgage warehouse lines of credit.......................................... 6,518,377 9,319,938
Current portion of long-term debt........................................... 97,848 54,167
Accounts payable............................................................ 71,970 94,235
Accrued expenses............................................................ 297,489 268,903
------------ -------------
Total current liabilities..................................................... 7,120,684 9,867,513
Long-term debt................................................................ 57,063 27,103
Deferred income taxes......................................................... 21,680 21,680
------------ -------------
Total liabilities............................................................. 7,199,427 9,916,296
------------ -------------
Shareholders' equity:
Common stock, $1 par value; authorized 1,000,000 shares; issued 259,475
shares..................................................................... 259,475 176,975
Additional paid-in capital.................................................. 167,975 61,975
Retained earnings........................................................... 23,997 119,350
------------ -------------
Total shareholders' equity.................................................... 451,447 358,300
------------ -------------
$7,650,874 $ 10,274,596
------------ -------------
------------ -------------
</TABLE>
See accompanying notes.
F-27
<PAGE>
FIRST SECURITY MORTGAGE CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
YEAR ENDED ELEVEN MONTHS ELEVEN MONTHS
DECEMBER 31, ENDED NOVEMBER ENDED NOVEMBER
1994 30, 1994 30, 1995
------------ -------------- --------------
<S> <C> <C> <C>
Revenues:
Loan origination fees and discounts........................ $1,479,180 $ 1,310,607 $ 1,882,415
Loan service release premiums.............................. 718,550 689,405 1,346,198
Miscellaneous fee income................................... 30,961 26,974 55,282
Other income............................................... 92,346 54,013 127,682
------------ -------------- --------------
2,321,037 2,080,999 3,411,577
------------ -------------- --------------
Operating expenses:
Salaries and related expenses.............................. 1,802,416 1,649,459 2,491,832
Commissions paid to non-employees.......................... 56,925 56,151 68,587
Occupancy and supplies..................................... 376,739 312,192 414,666
Business development and travel............................ 106,629 97,743 130,748
Temporary help............................................. 29,500 25,689 41,872
Depreciation and amortization.............................. 44,564 40,850 60,812
Other expense.............................................. 155,845 98,705 99,213
------------ -------------- --------------
2,572,618 2,280,789 3,307,730
------------ -------------- --------------
(Loss) income from operations................................ (251,581) (199,790) 103,847
------------ -------------- --------------
Other income (expense):
Interest income............................................ 49,779 44,253 56,499
Interest expense........................................... (31,958) (27,874) (47,860)
------------ -------------- --------------
(Loss) income before provision for income taxes.............. (233,760) (183,411) 112,486
Benefit (provision) for income taxes......................... 60,133 47,181 (17,133)
------------ -------------- --------------
Net (loss) income............................................ $ (173,627) $ (136,230) $ 95,353
------------ -------------- --------------
------------ -------------- --------------
</TABLE>
See accompanying notes.
F-28
<PAGE>
FIRST SECURITY MORTGAGE CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON ADDITIONAL
SHARES PAID-IN RETAINED
ISSUED CAPITAL EARNINGS TOTAL
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1993.................................... $ 150,000 $ 5,000 $ 197,624 $ 352,624
Stock repurchased under agreements to repurchase.............. (50,000) -- -- (50,000)
Stock issued unconditionally.................................. 159,475 162,975 -- 322,450
Net (loss) income............................................. -- -- (173,627) (173,627)
---------- ----------- ----------- -----------
Balance, December 31, 1994.................................... 259,475 167,975 23,997 451,447
---------- ----------- ----------- -----------
Stock repurchased under agreements to repurchase
(unaudited).................................................. (82,500) (106,000) -- (188,500)
Net income (unaudited)........................................ -- -- 95,353 95,353
---------- ----------- ----------- -----------
Balance, November 30, 1995 (unaudited)........................ $ 176,975 $ 61,975 $ 119,350 $ 358,300
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>
See accompanying notes.
F-29
<PAGE>
FIRST SECURITY MORTGAGE CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
YEAR ENDED ELEVEN MONTHS ELEVEN MONTHS
DECEMBER 31, ENDED NOVEMBER ENDED NOVEMBER
1994 30, 1994 30, 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income.................................................. $ (173,627) $ (136,230) $ 95,353
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation and amortization.................................... 44,564 40,850 60,812
Proceeds from sales of residential mortgages..................... 115,153,459 102,759,967 117,989,216
Disbursements to acquire residential mortgages held for sale..... (117,829,409) (106,577,689) (120,774,075)
Deferred income taxes............................................ 8,307 -- --
Loss on sale of fixed assets..................................... -- -- 1,144
(Increase) decrease in operating assets:
Accounts receivable............................................ (32,787) (15,365) (133,290)
Employee advances, prepaid expenses, and other................. 31,397 36,811 (55,568)
Refundable income taxes........................................ (66,969) (45,710) 68,440
Shareholder notes receivable................................... 50,000 60,000 10,000
Increase (decrease) in operating liabilities:
Accounts payable............................................... 19,900 (34,172) 22,265
Accrued expenses............................................... (43,557) (108,374) (28,586)
--------------- --------------- ---------------
Net cash used by operating activities.............................. (2,838,722) (4,019,912) (2,744,289)
--------------- --------------- ---------------
INVESTING ACTIVITIES:
Business combination............................................... (124,099) (124,099) --
Other, net......................................................... 24,693 3,534 5,781
Maturities of certificate of deposit............................... 38,420 38,420 --
Purchases of furniture and equipment............................... (214,045) (194,918) (44,420)
--------------- --------------- ---------------
Net cash used by investing activities.............................. (275,031) (277,063) (38,639)
--------------- --------------- ---------------
FINANCING ACTIVITIES:
Proceeds from borrowing............................................ 123,286,361 104,395,480 126,579,243
Repayments of borrowing............................................ (120,611,383) (100,577,602) (123,777,682)
Proceeds from sales of common stock................................ 302,450 20,000 --
Payments for repurchases of common stock........................... (50,000) (50,000) (188,500)
Proceeds (Payments) on long-term debt, net......................... 287,734 267,491 (109,730)
--------------- --------------- ---------------
Net cash provided by financing activities.......................... 3,215,162 4,055,369 2,503,331
--------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents............... 101,409 (241,606) (279,597)
Cash and cash equivalents, beginning of period..................... 322,444 322,444 423,853
--------------- --------------- ---------------
Cash and cash equivalents, end of period........................... $ 423,853 $ 80,838 $ 144,256
--------------- --------------- ---------------
--------------- --------------- ---------------
Cash paid during the period:
Interest......................................................... $ 31,958 $ 27,874 $ 47,860
--------------- --------------- ---------------
--------------- --------------- ---------------
Income taxes..................................................... $ 5,783 $ 5,783 $ 5,000
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
See accompanying notes.
F-30
<PAGE>
FIRST SECURITY MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO NOVEMBER 30, 1995
AND FOR THE ELEVEN MONTHS THEN ENDED IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
First Security Mortgage Corporation's (the "Company") principal sources of
revenue are generated from its mortgage banking operations located in South
Carolina and North Carolina. The Company originates one-to-four family
residential mortgage loans for sale into the secondary markets. The Company
maintains various loan correspondent agreements with financial institutions for
sale of mortgage loans. The correspondent agreements typically provide that the
Company release its servicing rights in the mortgage loans to the financial
institution for a fee.
INTERIM FINANCIAL STATEMENTS
The interim financial statements as of November 30, 1995 and the eleven
month periods ended November 30, 1994 and 1995 are unaudited. In the opinion of
management, such statements reflect all adjustments (consisting of normal and
recurring adjustments) necessary for fair presentation of the results of
operations and cash flows.
FURNITURE AND EQUIPMENT
Furniture and equipment is recorded at cost. Depreciation is provided using
the straight-line method. The cost of repairs and maintenance is expensed as
incurred. Betterments and replacements are capitalized. As assets are retired or
sold, the cost and accumulated depreciation is removed from the accounts and any
gain or loss is recognized.
INCOME TAXES
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), as of January 1,
1993. Under the liability method specified by SFAS 109, deferred tax assets and
liabilities are based on the difference between the financial statement and tax
bases of assets and liabilities as measured by the enacted tax rates which are
anticipated to be in effect when these differences reverse. The deferred tax
(benefit) provision is the result of the net change in the deferred tax assets
and liabilities. A valuation allowance is established when it is necessary to
reduce deferred tax assets to amounts expected to be realized.
RECOGNITION OF INCOME
LOAN ORIGINATION FEES AND DISCOUNTS includes fees for services performed in
arranging mortgage financing. LOAN SERVICE RELEASE PREMIUMS includes gains on
sales of mortgage loans which are based on the servicing value of the related
mortgage loan sold. MISCELLANEOUS FEE INCOME includes fees to reimburse the
Company for costs of processing mortgage applications, net of underwriting and
administrative fees paid to investors. Income is recognized when the loan is
closed.
RESIDENTIAL MORTGAGES HELD FOR SALE
Residential mortgages held for sale consist of mortgage loans made to
individuals that are collateralized by residential one-to-four family dwellings,
and are generally located in the Company's primary marketplace.
CASH AND CASH EQUIVALENTS
The Company considers all demand deposits and highly liquid investments
having a maturity of less than three months to be cash equivalents. A
certificate of deposit included in cash and cash equivalents and having a
carrying value of approximately $25,000 at December 31, 1994, has been pledged
as collateral under a secured credit agreement with a financial institution.
Amounts on deposit at December 31, 1994 in excess of federal insurance limits
total approximately $482,000.
F-31
<PAGE>
FIRST SECURITY MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO NOVEMBER 30, 1995
AND FOR THE ELEVEN MONTHS THEN ENDED IS UNAUDITED)
2. BUSINESS COMBINATION
On October 28, 1994, the Company acquired the fixed assets and a $6.5
million mortgage loan pipeline of the fifth largest company in Columbia, South
Carolina, (the "Acquiree") for $150,000, consisting of $75,000 in cash at
closing, $75,000 paid quarterly over one year in the form of a promissory note,
and the assumption of an operating lease obligation on office equipment of
approximately $16,000. In addition, the Company issued 10,000 shares of its
common stock to the previous owner of the Acquiree.
The excess of the cost of the Acquiree over the fixed assets acquired of
$124,099 is being amortized over fifteen years. The acquisition has been
accounted for as a purchase, and the results of the Acquiree have been included
in the accompanying financial statements since the date of the acquisition.
On February 17, 1995, the Company commenced operating a wholly owned
subsidiary, First Security Financial Corporation, an originator of home
improvement loans. In consolidation, all significant intercompany accounts are
eliminated.
3. FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, NOVEMBER 30,
1994 1995
------------ ------------
<S> <C> <C>
Furniture and fixtures........................................... $ 87,854 $ 99,360
Equipment........................................................ 277,556 317,227
Leasehold improvements........................................... 8,175 8,175
------------ ------------
373,585 424,762
Less, accumulated depreciation and amortization.................. (70,709) (122,414)
------------ ------------
$ 302,876 $ 302,348
------------ ------------
------------ ------------
</TABLE>
4. OPERATING LEASES
The Company leases office space under the terms of operating leases which
expire at various dates through April 1999. Rental expense for the year ended
December 31, 1994 was approximately $133,000. A majority of the leases contain
escalation clauses which provide for increases in rents to cover future
operating costs. The schedule of approximate future minimum rental payments
under existing leases is as follows:
<TABLE>
<S> <C>
1995...................................................... $ 188,500
1996...................................................... 160,400
1997...................................................... 125,000
1998...................................................... 34,300
1999...................................................... 12,000
</TABLE>
5. OPERATING LINES OF CREDIT
The Company has two operating line of credit agreements with a financial
institution. These agreements are collateralized by certificates of deposits
totaling $75,000 at December 31, 1994. Borrowings under the agreements bear
interest at 1% above the bank's prime lending rate. The maximum credit available
to the Company under the agreements are $200,000. At December 31, 1994, $135,000
of the available credit had been drawn by the Company and $65,000 remained
available. The lines of credit mature through April 1995. At November 30, 1995,
the Company's operating lines are collateralized with certificates of deposit
totalling $50,000. At November 30, 1995, the Company has drawn $130,000 on the
lines and $70,000 is available to be drawn.
F-32
<PAGE>
FIRST SECURITY MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO NOVEMBER 30, 1995
AND FOR THE ELEVEN MONTHS THEN ENDED IS UNAUDITED)
6. WAREHOUSE LINE OF CREDIT
The Company has warehouse lines of credit agreements ("warehouse
agreements") with several financial institutions for funding residential
mortgage loans. The agreements expire at various dates through May 1995.
Borrowings under the agreements are collateralized by a security interest in the
respective mortgage loans. At December 31, 1994, the aggregate credit limit
available to the Company under these agreements was $19,500,000, of which
$13,464,000 was available. At November 30, 1995, the aggregate credit limit
available to the Company under these agreements is $14,000,000, of which
$4,680,000 is available. Borrowings under the agreements bear interest at
various rates. Management expects that as the various lines of credit expire,
they will be renewed on substantially the same terms.
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, NOVEMBER 30,
1994 1995
------------ ------------
<S> <C> <C>
Note for acquisition of a mortgage company, quarterly
installments of $18,750......................................... $ 75,000 $ 18,750
Note to Carolina First Bank at 7.25%, monthly payments of $918,
maturing March 1999, collateralized by equipment and personal
guarantee of the president of the Company....................... 40,758 33,198
Capitalized lease obligations.................................... 39,153 29,322
------------ ------------
154,911 81,270
Less, current portion............................................ 97,848 54,167
------------ ------------
$ 57,063 $ 27,103
------------ ------------
------------ ------------
</TABLE>
8. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
1994 1995
--------- -----------
<S> <C> <C>
Current:
Federal............................................................. $ 68,440 $ (17,133)
State............................................................... -- --
--------- -----------
68,440 (17,133)
--------- -----------
Change in deferred income taxes:
Federal............................................................. (7,503) --
State............................................................... (804) --
--------- -----------
(8,307) --
--------- -----------
Benefit (provision) for income taxes:................................. $ 60,133 $ (17,133)
--------- -----------
--------- -----------
</TABLE>
F-33
<PAGE>
FIRST SECURITY MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO NOVEMBER 30, 1995
AND FOR THE ELEVEN MONTHS THEN ENDED IS UNAUDITED)
8. INCOME TAXES (CONTINUED)
Deferred income taxes result from temporary differences in the recognition
of certain items of income and expense for tax and financial reporting purposes,
primarily accumulated depreciation. The Company's deferred income tax accounts
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Deferred tax assets............................................................. $ 3,179
Deferred tax liabilities........................................................ (24,859)
------------
$ (21,680)
------------
------------
</TABLE>
9. SHAREHOLDERS' EQUITY
In 1994, fifty thousand shares of the Company's common stock were
repurchased by the Company under a mandatory repurchase agreement. In 1995,
eighty-two thousand five hundred shares were repurchased by the Company. The
repurchased shares were cancelled by the Company.
10. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) profit sharing plan covering substantially all
full-time employees. Under the terms of the plan, employees may elect to defer
from 1% to 20% of their compensation. The Company is permitted to make
discretionary matches of employee contributions up to 5% of the participant's
compensation as well as other discretionary contributions. Employees are
immediately vested in their contributions. After two years of employment with
the Company, employees are vested 20% in employer contributions and vesting
percentages increase 20% for each additional year of service. Employees with six
years of service are fully vested. For the year ended December 31, 1994, the
Company elected not to match employee contributions, as is permitted by the
terms of the plan. The Company's policy is to fund amounts accrued.
The Company does not provide post-employment or post-retirement benefits
other than the profit sharing plan.
11. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company may, from time to time,
become a party to legal claims and disputes. At December 31, 1994, management
and its legal counsel are not aware of any pending or threatened litigation, or
unasserted claims that could result in losses, if any, that would be material to
the financial statements.
At December 31, 1994, the Company had approximately $24,000,000 in
commitments to extend credit and make mortgage loans on residential dwellings.
The Company was administering approximately $12,400,000 of residential
construction loans to be sold by the Company to a financial institution. The
ultimate risk of loss on the residential construction loans is shared by the
Company and the financial institution in the event of future loan defaults.
Through the Company's various correspondent agreements with financial
institutions, the Company may be required to repurchase mortgage loans sold to
the financial institution if significant defects in the loan origination are
subsequently discovered by the financial institution.
12. EVENT (UNAUDITED) SUBSEQUENT TO THE DATE
OF THE INDEPENDENT AUDITORS REPORT
On November 30, 1995 all of the Company's shares of common stock were
acquired by RAC Financial Group, Inc. for approximately $700,000 in a cash
transaction. Upon merging, the Company will operate as a wholly-owned subsidiary
of RAC Financial Group, Inc.
F-34
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
Prospectus Summary........................................ 1
Risk Factors.............................................. 8
Use of Proceeds........................................... 17
Capitalization............................................ 18
Price Range of Common Stock and Dividend Policy........... 19
Selected Financial Data................................... 19
Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 21
Business.................................................. 36
Management................................................ 53
Certain Relationships and Related Party Transactions...... 63
Principal Stockholders.................................... 66
Description of the Notes.................................. 67
Description of Capital Stock.............................. 80
Certain Tax Considerations................................ 82
Selling Holders........................................... 86
Plan of Distribution...................................... 88
Legal Matters............................................. 90
Experts................................................... 91
Available Information..................................... 91
Index to Financial Statements............................. F-1
------------
NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH
THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION
OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD
BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
RAC
FINANCIAL
GROUP, INC.
$100,000,000 7.25% CONVERTIBLE
SUBORDINATED NOTES DUE 2003
3,067,485 SHARES OF COMMON STOCK
------------
PROSPECTUS
------------
OCTOBER , 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses and costs expected to be
incurred in connection with the issuance and distribution of the securities
registered hereby:
Securities and Exchange Commission registration fee....... $30,304
Printing and engraving cost............................... *
Legal fees and expenses................................... *
Accounting fees and expense............................... *
Blue Sky fees and expenses................................ *
Registrar and Transfer Agent's fees....................... *
Miscellaneous............................................. *
-------
Total............................................ *
-------
-------
- ------------
* To be provided by amendment.
The Company will pay all of the expenses to be incurred in connection
with the issuance and distribution of the securities registered hereby,
including on behalf of the Selling Holders as required by agreement with the
Initial Purchasers, as defined below.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS; LIMITATION OF LIABILITY FOR
MONETARY DAMAGES
(a) The Articles of Incorporation of the Registrant, together with its
bylaws, provide that the Registrant shall indemnify officers and directors,
and may indemnify its other employees and agents, to the fullest extent
permitted by law. The laws of the State of Nevada permit, and in some cases
require, corporations to indemnify officers, directors, agents and employees
who are or have been a party to or are threatened to be made a party to
litigation against judgments, fines, settlements and reasonable expenses
under certain circumstances.
(b) The Registrant has also adopted provisions in its Articles of
Incorporation that limit the liability of its directors and officers to the
fullest extent permitted by the laws of the State of Nevada. Under the
Registrant's Articles of Incorporation, and as permitted by the laws of the
State of Nevada, a director or officer is not liable to the Registrant or its
stockholders for damages for breach of fiduciary duty. Such limitation of
liability does not affect liability for (i) acts or omissions which involve
intentional misconduct, fraud or a knowing violation of the law, or (ii) the
payment of any unlawful distribution.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth information regarding all sales of unregistered
securities of the Registrant during the past three years. In connection with
each of these transactions, the shares were sold to a limited number of
persons, such persons were provided access to all relevant information
regarding the Registrant and/or represented to the Registrant that they were
"sophisticated" investors, and such persons represented to the Registrant
that the shares were purchased for investment purposes only and not with a
view toward distribution.
On October 4, 1994, the Company issued 2,345,000 shares of Common Stock
to Ronald M. Mankoff and 2,345,000 shares of Common Stock to the Daniel T.
Phillips Children's Trust in connection with the reorganization of the
Company into a holding company with SFA: State Financial Acceptance
Corporation ("SFAC") and Remodelers National Funding Corporation ("RNFC")
operating as subsidiaries of RAC Financial Group, Inc. See "Business --
Combination" in the Prospectus. Such shares were not registered under the
Securities Act of 1933, as amended (the "Securities Act"), in reliance on the
exemption provided under Section 4(2) thereof.
II-1
<PAGE>
On October 4, 1994, the Company issued 150,000 shares of its Series A
Cumulative Preferred Stock, par value $1.00 per share (the "Series A
Preferred Stock"), to the Mankoff Childrens Trust in consideration of
150,000 shares of preferred stock of SFAC and 150,000 shares of its Series A
Preferred Stock to Phillips Partners, Ltd. in consideration of 150,000 shares
of preferred stock of SFAC. Such shares were not registered under the
Securities Act in reliance on the exemption provided by Section 4(2) thereof.
On October 4, 1994, the Company issued 2,300,000 shares of its Series B
Cumulative Preferred Stock, par value $1.00 per share (the "Series B
Preferred Stock"), and 2,010,000 shares of Common Stock to Farm Bureau Life
Insurance Company ("Farm Bureau") in consideration of 600 shares of common
stock of RNFC. Such shares were not registered under the Securities Act in
reliance on the exemption provided by Section 4(2) thereof.
On March 31, 1995, the Company issued $5,000,000 in principal amount of
its 12% subordinated notes due March 31, 2000 (the "Subordinated Notes") to
Banc One Capital Partners II, Limited Partnership ("BOCP II") and $1,350,000
in principal amount of the Subordinated Notes to Farm Bureau. In connection
with such issuances and in further consideration of the agreement of BOCP II
and Farm Bureau to provide such financing evidenced by the Subordinated
Notes, the Company also issued (i) warrants (the "BOCP II Warrants") to
purchase 1,055,116 shares of the Company's Non-Voting Common Stock, par value
$.01 per share (the "Non-Voting Common Stock"), to BOCP II; (ii) warrants
(the "Farm Bureau Warrants") to purchase 284,884 shares of Non-Voting Common
Stock to Farm Bureau, and (iii) a warrant (the "BOCP II Warrant") to purchase
893,311 shares of Non-Voting Common Stock to BOCP II. Such securities were
not registered under the Securities Act in reliance on the exemption provided
under Section 4(2) thereof.
On April 1, 1995, BOCP II exercised in full the BOCP II Warrant and
received 893,311 shares of Non-Voting Common Stock from the Company. In
consideration therefor, BOCP II paid the Company an aggregate of $450,000. On
April 12, 1995, the Company issued additional warrants to Farm Bureau to
purchase an aggregate of 296,207 shares of Non-Voting Common Stock. Such
warrants were issued in consideration of Farm Bureau's agreement to waive
certain redemption rights with respect to the Series B Cumulative Preferred
Stock held by Farm Bureau and such warrants were exercised in full prior to
the Offering. Such securities were not registered under the Securities Act in
reliance on the exemption provided under Section 4(2) thereof.
On July 16, 1995, the Company and BOCP V agreed to amend the terms of
$700,000 in interim financing, which resulted in the issuance by the Company
of a $700,000 in principal amount of the Subordinated Notes to BOCP V. In
addition, the Company issued BOCP V warrants (the "BOCP V Warrants") to
purchase 145,390 shares of Non-Voting Common Stock. Such securities were not
registered under the Securities Act in reliance on the exemption provided
under Section 4(2) thereof.
On February 30, 1996, in consideration of the renegotiation of the RFC
Warehouse Facility and the RFC Term Line, the Company issued to RFC warrants
to purchase 250,000 shares of Common Stock at $14.00 per share.
On June 3, 1996, the Company issued an aggregate of 800,000 shares of
Common Stock to eight individuals trusts and other entities in connection
with the acquisition of FIRSTPLUS West. Such securities were not registered
under the Securities Act in reliance on the exemption provided under Section
4(2) thereof.
On August 14, 1996, the Company issued $100,000,000 aggregate principal
amount of its 7.25% Convertible Subordinated Notes Due 2003 (the "Notes").
The Notes were sold to Bear, Stearns & Co. Inc., Prudential Securities
Incorporated and Keefe, Bruyette & Woods, Inc. (the "Initial Purchasers").
The Initial Purchasers received discounts and commissions equal to 3%. Such
Notes were not registered under the Securities Act in reliance on the
exemption provided by Rule 144A, Regulation D and Regulation S thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
1 Purchase Agreement, dated August 14, 1996, among the Registrant and
the Initial Purchasers named therein
3.1 ** Amended and Restated Articles of Incorporation of the Registrant
(Exhibit 3.1)
3.2 ** Amended and Restated Bylaws of the Registrant (Exhibit 3.2)
4.1 ** Specimen certificate for Common Stock of the Registrant (Exhibit 4)
II-2
<PAGE>
4.2 Indenture, dated August 20, 1996, between the Registrant and Bank
One, Columbus, N.A., as trustee thereunder.
4.3 Note Resale Registration Rights Agreement, dated August 20, 1996,
among the Registrant and the Initial Purchasers named therein.
4.4 Form of Definitive 7.25% Convertible Subordinated Note Due 2003 of
the Registrant.
4.5 Form of Restricted Global 7.25% Convertible Subordinated Note Due
2003 of the Registrant.
4.6 Form of Regulation S Global 7.25% Convertible Subordinated Note Due
2003 of the Registrant.
5 * Opinion of Jenkens & Gilchrist, a Professional Corporation, with
respect to the legality of the securities being registered
10.1 ** Form of Home Improvement Buy-Sell Agreement (Exhibit 10.1)
10.2 ** Form of Continuous Purchase FHA Title I Loan Correspondent Agreement
(Exhibit 10.2)
10.3 ** Form of Continuous Purchase Conventional Direct Loan Broker
Agreement (Exhibit 10.3)
10.4 ** 1995 Employee Stock Option Plan for RAC Financial Group, Inc.
(Exhibit 10.4)
10.5 ** Non-Employee Director Stock Option Plan for RAC Financial Group,
Inc. (Exhibit 10.5)
10.6 ** RAC Financial Group, Inc. Employee Stock Purchase Plan
(Exhibit 10.6)
10.7 ** Description of Officer Bonus Program (Exhibit 10.7)
10.8 ** Credit Agreement among RAC Financial Group, Inc., Remodelers
National Funding Corporation, and Bank One, Texas, National
Association, dated as of March 17, 1995, as amended by First
Amendment to Credit Agreement dated as of May 12, 1995 and by
Second Amendment to Credit Agreement dated as of June 6, 1995
(Exhibit 10.8)
10.9 ** Promissory Note, dated as of June 6, 1995, from Remodelers National
Funding Corporation, as maker, to Bank One, Texas, National
Association (Exhibit 10.9)
10.10 ** Security Agreement, dated as of March 17, 1995, among Remodelers
National Funding Corporation and Bank One, Texas, National
Association (Exhibit 10.10)
10.11 ** Guaranty, dated as of March 17, 1995, from RAC Financial Group, Inc.
to Bank One, Texas, National Association (Exhibit 10.11)
10.12 ** Warehousing Credit, Term Loan and Security Agreement, dated as of
June 15, 1995, among Remodelers National Funding Corporation, RAC
Financial Group, Inc., and Residential Funding Corporation, as
amended by First Amendment to The Warehouse Credit, Term Loan and
Security Agreement, dated August 25, 1995 (Exhibit 10.12)
10.13 ** Promissory Note, dated as of June 15, 1995, from Remodelers National
Funding Corporation, as maker, to Residential Funding Corporation
(Exhibit 10.13)
10.14 ** Promissory Note, dated as of June 29, 1995, from Remodelers National
Funding Corporation, as maker, to Residential Funding Corporation
(Exhibit 10.14)
10.15 ** Guaranty, dated as of June 15, 1995, from RAC Financial Group, Inc.
to Residential Funding Corporation (Exhibit 10.15)
10.16 ** Custodian Agreement, dated as of June 15, 1995, among Remodelers
National Funding Corporation, RAC Financial Group, Inc.,
Residential Funding Corporation and First Trust National
Association (Exhibit 10.16)
10.17 ** Senior Subordinated Note and Warrant Purchase Agreement, dated as
of March 31, 1995, among RAC Financial Group, Inc., Remodelers
National Funding Corporation, SFA: State Financial Acceptance
Corporation, Banc One Capital Partners II, Limited Partnership and
Farm Bureau Life Insurance Company (Exhibit 10.17)
10.18 ** Senior Subordinated Note, dated as of March 31, 1995, from RAC
Financial Group, Inc., Remodelers National Funding Corporation and
SFA: State Financial Acceptance Corporation, as makers, to Farm
Bureau Life Insurance Company (Exhibit 10.18)
10.19 ** Senior Subordinated Note, dated as of March 31, 1995, from RAC
Financial Group, Inc., Remodelers National Funding Corporation and
SFA: State Financial Acceptance Corporation, as makers, to Banc One
Capital Partners II, Limited Partnership (Exhibit 10.19)
10.20 ** RAC Financial Group, Inc. Warrant Certificate, dated as of April 12,
1995, for Farm Bureau Life Insurance Corporation (including
registration rights agreement) (Exhibit 10.20)
10.21 ** RAC Financial Group, Inc. Warrant Certificate, dated as of March 31,
1995, for Banc One Capital Partners II, Limited Partnership
(including registration rights agreement) (Exhibit 10.21)
10.22 ** Subordinated Security Agreement, dated as of March 31, 1995, among
RAC Financial Group, Inc., Remodelers National Funding Corporation,
SFA: State Financial Acceptance Corporation, Banc Once Capital
Partners II, Limited Partnership and Farm Bureau Life Insurance
Company (Exhibit 10.22)
II-3
<PAGE>
10.23 ** Security Agreement -- Assignment of Servicing Agreements, dated as
of March 31, 1995, among RAC Financial Group, Inc., Remodelers
National Funding Corporation, SFA: State Financial Acceptance
Corporation and Banc Once Capital Partners II, Limited Partnership,
as agent for Banc One Capital Partners II, Limited Partnership and
Farm Bureau Life Insurance Company (Exhibit 10.23)
10.24 ** Security Agreement -- Pledge of Common Stock, dated as of March 31,
1995, among RAC Financial Group, Inc. and Banc One Capital
Partners II, Limited Partnership, as agent for Banc One Capital
Partners II, Limited Partnership and Farm Bureau Life Insurance
Company (Exhibit 10.24)
10.25 ** Employment Agreement by and between RAC Financial Group, Inc. and
Ronald M. Mankoff (Exhibit 10.25)
10.26 ** Employment Agreement by and between RAC Financial Group, Inc. and
Daniel T. Phillips (Exhibit 10.26)
10.27 ** Employment Agreement by and between RAC Financial Group, Inc. and
Eric C. Green (Exhibit 10.27)
10.28 ** Employment Agreement by and between RAC Financial Group, Inc. and
James H. Poythress (Exhibit 10.28)
10.29 ** Loan Commitment from Bank One, Texas, N.A., to RAC Financial Group,
Inc. (Exhibit 10.29)
10.30 ** Form of Continuous Purchase Home Improvement Broker Agreement
(Exhibit 10.30)
10.31 ** Form of Pass-Through Home Improvement Financing Agreement
(Exhibit 10.31)
10.32 ** Form of Dealer/Contractor Application (Exhibit 10.32)
10.33 ** Form of Broker/Correspondent Application (Exhibit 10.33)
10.34 ** Promissory Note, dated December 29, 1995, from RAC Financial Group,
Inc., Remodelers National Funding Corporation and State Financial
Acceptance Corporation, as makers, to Farm Bureau Life Insurance
Company (Exhibit 10.34)
10.35 ** Loan Commitment from Residential Funding Corporation to Remodelers
National Funding Corporation and RAC Financial Group, Inc.
(Exhibit 10.35)
10.36 ** Stock Purchase and Sale Agreement, dated as of November 30, 1995, by
and among RAC Financial Group, Inc., FIRSTPLUS East Mortgage
Corporation and its shareholders (Exhibit 10.36)
10.37 ** First Amendment to Credit Agreement and Note, dated as of June 21,
1995, by and among Remodelers National Funding Corporation, SFA:
State Financial Acceptance Corporation, RAC Financial Group, Inc.
and Banc One Capital Partners V, Ltd. (Exhibit 10.37)
10.38 ** Senior Subordinated Note, dated November 1, 1995, from RAC Financial
Group, Inc., Remodelers National Funding Corporation and State
Financial Acceptance Corporation, as makers, to Banc One Capital
Partners II, Limited Partnership (Exhibit 10.38)
10.39 ** Senior Subordinated Note, dated November 16, 1995, from RAC
Financial Group, Inc., Remodelers National Funding Corporation and
State Financial Acceptance Corporation, as makers, to and Banc One
Capital Partners II, Limited Partnership (Exhibit 10.39)
10.40 ** Senior Subordinated Note, dated September 27, 1995, from RAC
Financial Group, Inc., Remodelers National Funding Corporation and
State Financial Acceptance Corporation, as makers, to Farm Bureau
Life Insurance Company (Exhibit 10.40)
10.41 ** Senior Subordinated Note, dated September 27, 1995, from RAC
Financial Group, Inc., Remodelers National Funding Corporation and
State Financial Acceptance Corporation, as makers, to Farm Bureau
Life Insurance Company (Exhibit 10.41)
10.42 ** Senior Subordinated Note and Warrant Purchase Agreement, amended and
restated as of July 16, 1995, among RAC Financial Group, Inc.,
Remodelers National Funding Corporation and SFA: State Financial
Acceptance Corporation, as sellers, and Banc One Capital
Partners II, Limited Partnership, Farm Bureau Life Insurance
Company and Banc One Capital Partners V, Ltd., as purchasers
(Exhibit 10.42)
10.43 ** RAC Financial Group, Inc. Warrant Certificate, dated as of July 16,
1995, for Banc One Capital Partners V, Ltd. (Exhibit 10.43)
10.44 ** Second Amended and Restated Subordinated Security Agreement, amended
and restated as of September 27, 1995, made by RAC Financial Group,
Inc., Remodelers National Funding Corporation and SFA: State
Financial Acceptance Corporation for the benefit of Banc One
Capital Partners II, Limited Partnership, Farm Bureau Life Insurance
Company and Banc One Capital Partners V, Ltd. (Exhibit 10.44)
10.45 ** Second Amended and Restated Security Agreement -- Pledge of Common
Stock, amended and restated as of September 27, 1995, made by RAC
Financial Group, Inc., for the benefit of Banc One Capital
Partners II, Limited Partnership, Farm Bureau Life Insurance
Company and Banc One Capital Partners V, Ltd. (Exhibit 10.45)
10.46 ** Second Amended and Restated Security Agreement -- Assignment of
Servicing Agreements, amended and restated as of September 27,
1995, made by RAC Financial Group, Inc., for the benefit of Banc One
Capital Partners II, Limited Partnership, Farm Bureau Life Insurance
Company and Banc One Capital Partners V, Ltd. (Exhibit 10.46)
II-4
<PAGE>
10.47 ** Second Amendment to the Warehouse Credit, Term Loan and Security
Agreement, dated as of September 15, 1995, by and among Remodelers
National Funding Corp., RAC Financial Group, Inc. and Residential
Funding Corporation (Exhibit 10.47)
10.48 ** Form of Letter Agreement, dated January 29, 1996, by and between
RAC Financial Group, Inc. and Residential Funding Corporation,
regarding the Warehouse Credit, Term Loan and Security Agreement,
dated June 15, 1995 (Exhibit 10.48)
10.49 ** Form of Letter Agreement, dated January 29, 1996, by and between
RAC Financial Group, Inc. and Banc One, Texas, National Association,
regarding the Credit Agreement, dated as of March 17, 1995
(Exhibit 10.49)
10.50 ** Form of Letter Agreement, dated January 29, 1996, by and among RAC
Financial Group, Inc., Banc One Capital Partners II, Limited
Partnership, Farm Bureau Life Insurance Company and Banc One
Capital Partners V, Ltd., regarding the Senior Subordinated Note
and Warrant Purchase Agreement, dated as of March 31, 1995
(Exhibit 10.50)
10.51 ** Third Amendment to the Warehouse Credit, Term Loan and Security
Agreement, dated as of January 22, 1996, by and among Remodelers
National Funding Corp., RAC Financial Group, Inc. and Residential
Funding Corporation (Exhibit 10.51)
10.52 ** Subordinated Loan Agreement, dated as of September 27, 1995, by and
among RAC Financial Group, Inc., Remodelers National Funding
Corporation and SFA: State Financial Acceptance Corp., as borrowers,
and Banc One Capital Partners II, Limited Partnership and Farm
Bureau Life Insurance Company, as lenders, as amended by First
Amendment to Subordinated Loan Agreement (Exhibit 10.52)
10.53 ** Letter Agreement, dated June 7, 1995, between Banc One Capital
Corporation and RAC Financial Group, Inc. regarding financial
advisory and consultation services (Exhibit 10.53)
10.54 ** Registration Rights Agreement, dated as of March 31, 1996, by and
among RAC Financial Group, Inc. and the shareholders of Mortgage
Plus Incorporated (Exhibit 10.2)
10.55 *** Agreement and Plan of Merger, dated as of May 22, 1996, among RAC
Financial Corporation, Inc., FIRSTPLUS West, Inc. and Mortgage Plus
Incorporated and the shareholders (Exhibit 10.1)
10.56 **** Master Repurchase Agreement, dated as of May 10, 1996, by and
between FIRSTPLUS Financial, Inc. and Bear Stearns Home Equity
Trust 1996-1 (Exhibit 10.1)
10.57 **** Custody Agreement, dated May 10, 1996, among FIRSTPLUS Financial,
Inc., Bear Stearns Home Equity Trust 1996-1, and Bank One Texas,
N.A. (Exhibit 10.2)
10.58 **** Fifth Amendment to Credit Agreement, dated June 20, 1996, by and
among FIRSTPLUS Financial, Inc., RAC Financial Group, Inc. and
Bank One, Texas, National Association (Exhibit 10.3)
10.59**** Promissory Note, dated June 30, 1996, between FIRSTPLUS
Financial, Inc. and Bank One, Texas, National Association
(Exhibit 10.4)
21* Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of Scott & Holloway, L.L.P.
23.3* Consent of Jenkens & Gilchrist, a Professional Corporation (included
in Exhibit 5)
24 Power of Attorney (included on II-7)
25 Statement of Eligibility of Trustee
- ------------
* To be filed by amendment.
** Incorporated by reference from exhibit shown in parenthesis contained in
the Company's Registration Statement on Form S-1, dated February 1, 1996,
filed by the Company with the Commission.
*** Incorporated by reference from exhibit shown in parenthesis contained in
the Company's current report on Form 8-K, filed by the Company with the
Commission on June 14, 1996.
**** Incorporated by reference from exhibit shown in parenthesis contained in
the Company's Form 10-Q for the quarterly period ended June 30, 1996,
filed by the Company with the Commission on August 6, 1996.
(B) FINANCIAL STATEMENT SCHEDULES
Not applicable.
II-5
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period which offers or sales are being made,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration
statement or any material change in such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
(5) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4), or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(6) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on the 15th day of October 1996.
RAC FINANCIAL GROUP, INC.
By: /s/ Daniel T. Phillips
------------------------------------
Daniel T. Phillips,
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Each individual whose signature appears below hereby designates and
appoints Ronald M. Mankoff, Daniel T. Phillips and Eric C. Green, and each of
them, any one of whom may act without the joinder of the other, as such
person's true and lawful attorney-in-fact and agents (the
"Attorneys-in-Fact") with full power of substitution and resubstitution, for
such person and in such person's name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, which amendments may make such
changes in this Registration Statement as either Attorney-in-Fact deems
appropriate, and any registration statement relating to the same offering
filed pursuant to Rule 462(b) under the Securities Act of 1933 and requests
to accelerate the effectiveness of such registration statements, and to file
each such amendment with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting
unto such Attorneys-in-Fact and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as such
person might or could do in person, hereby ratifying and confirming all that
such Attorneys-in-Fact or either of them, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this amended Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Daniel T. Phillips Chairman of the Board, President October 14, 1996
- --------------------------- and Chief Executive Officer
Daniel T. Phillips (Principal Executive Officer)
/s/ Ronald M. Mankoff General Counsel and Director October 14, 1996
- ---------------------------
Ronald M. Mankoff
/s/ Eric C. Green Executive Vice President and October 14, 1996
- --------------------------- Chief Financial Officer
Eric C. Green (Principal Financial and
Accounting officer)
/s/ Gene O'Bryan Executive Vice President and October 14, 1996
- --------------------------- Chief Production Officer
Gene O'Bryan
/s/ John Fitzgerald Director October 14, 1996
- ---------------------------
John Fitzgerald
/s/ Dan Jesse Director October 14, 1996
- ---------------------------
Dan Jessee
/s/ Paul Seegers Director October 14, 1996
- ---------------------------
Paul Seegers
/s/ Sheldon I. Stein Director October 14, 1996
- ---------------------------
Sheldon I. Stein
II-7
<PAGE>
INDEX TO EXHIBITS
1 Purchase Agreement, dated August 14, 1996, among the Registrant and
the Initial Purchasers named therein
3.1 ** Amended and Restated Articles of Incorporation of the Registrant
(Exhibit 3.1)
3.2 ** Amended and Restated Bylaws of the Registrant (Exhibit 3.2)
4.1 ** Specimen certificate for Common Stock of the Registrant (Exhibit 4)
4.2 Indenture, dated August 20, 1996, between the Registrant and Bank
One, Columbus, N.A., as trustee thereunder.
4.3 Note Resale Registration Rights Agreement, dated August 20, 1996,
among the Registrant and the Initial Purchasers named therein.
4.4 Form of Definitive 7.25% Convertible Subordinated Note Due 2003 of
the Registrant.
4.5 Form of Restricted Global 7.25% Convertible Subordinated Note Due
2003 of the Registrant.
4.6 Form of Regulation S Global 7.25% Convertible Subordinated Note Due
2003 of the Registrant.
5 * Opinion of Jenkens & Gilchrist, a Professional Corporation, with
respect to the legality of the securities being registered
10.1 ** Form of Home Improvement Buy-Sell Agreement (Exhibit 10.1)
10.2 ** Form of Continuous Purchase FHA Title I Loan Correspondent Agreement
(Exhibit 10.2)
10.3 ** Form of Continuous Purchase Conventional Direct Loan Broker
Agreement (Exhibit 10.3)
10.4 ** 1995 Employee Stock Option Plan for RAC Financial Group, Inc.
(Exhibit 10.4)
10.5 ** Non-Employee Director Stock Option Plan for RAC Financial Group,
Inc. (Exhibit 10.5)
10.6 ** RAC Financial Group, Inc. Employee Stock Purchase Plan
(Exhibit 10.6)
10.7 ** Description of Officer Bonus Program (Exhibit 10.7)
10.8 ** Credit Agreement among RAC Financial Group, Inc., Remodelers
National Funding Corporation, and Bank One, Texas, National
Association, dated as of March 17, 1995, as amended by First
Amendment to Credit Agreement dated as of May 12, 1995 and by
Second Amendment to Credit Agreement dated as of June 6, 1995
(Exhibit 10.8)
10.9 ** Promissory Note, dated as of June 6, 1995, from Remodelers National
Funding Corporation, as maker, to Bank One, Texas, National
Association (Exhibit 10.9)
10.10 ** Security Agreement, dated as of March 17, 1995, among Remodelers
National Funding Corporation and Bank One, Texas, National
Association (Exhibit 10.10)
10.11 ** Guaranty, dated as of March 17, 1995, from RAC Financial Group, Inc.
to Bank One, Texas, National Association (Exhibit 10.11)
10.12 ** Warehousing Credit, Term Loan and Security Agreement, dated as of
June 15, 1995, among Remodelers National Funding Corporation, RAC
Financial Group, Inc., and Residential Funding Corporation, as
amended by First Amendment to The Warehouse Credit, Term Loan and
Security Agreement, dated August 25, 1995 (Exhibit 10.12)
10.13 ** Promissory Note, dated as of June 15, 1995, from Remodelers National
Funding Corporation, as maker, to Residential Funding Corporation
(Exhibit 10.13)
10.14 ** Promissory Note, dated as of June 29, 1995, from Remodelers National
Funding Corporation, as maker, to Residential Funding Corporation
(Exhibit 10.14)
10.15 ** Guaranty, dated as of June 15, 1995, from RAC Financial Group, Inc.
to Residential Funding Corporation (Exhibit 10.15)
10.16 ** Custodian Agreement, dated as of June 15, 1995, among Remodelers
National Funding Corporation, RAC Financial Group, Inc.,
Residential Funding Corporation and First Trust National
Association (Exhibit 10.16)
10.17 ** Senior Subordinated Note and Warrant Purchase Agreement, dated as
of March 31, 1995, among RAC Financial Group, Inc., Remodelers
National Funding Corporation, SFA: State Financial Acceptance
Corporation, Banc One Capital Partners II, Limited Partnership and
Farm Bureau Life Insurance Company (Exhibit 10.17)
10.18 ** Senior Subordinated Note, dated as of March 31, 1995, from RAC
Financial Group, Inc., Remodelers National Funding Corporation and
SFA: State Financial Acceptance Corporation, as makers, to Farm
Bureau Life Insurance Company (Exhibit 10.18)
10.19 ** Senior Subordinated Note, dated as of March 31, 1995, from RAC
Financial Group, Inc., Remodelers National Funding Corporation and
SFA: State Financial Acceptance Corporation, as makers, to Banc One
Capital Partners II, Limited Partnership (Exhibit 10.19)
10.20 ** RAC Financial Group, Inc. Warrant Certificate, dated as of April 12,
1995, for Farm Bureau Life Insurance Corporation (including
registration rights agreement) (Exhibit 10.20)
10.21 ** RAC Financial Group, Inc. Warrant Certificate, dated as of March 31,
1995, for Banc One Capital Partners II, Limited Partnership
(including registration rights agreement) (Exhibit 10.21)
10.22 ** Subordinated Security Agreement, dated as of March 31, 1995, among
RAC Financial Group, Inc., Remodelers National Funding Corporation,
SFA: State Financial Acceptance Corporation, Banc Once Capital
Partners II, Limited Partnership and Farm Bureau Life Insurance
Company (Exhibit 10.22)
10.23 ** Security Agreement -- Assignment of Servicing Agreements, dated as
of March 31, 1995, among RAC Financial Group, Inc., Remodelers
National Funding Corporation, SFA: State Financial Acceptance
Corporation and Banc Once Capital Partners II, Limited Partnership,
as agent for Banc One Capital Partners II, Limited Partnership and
Farm Bureau Life Insurance Company (Exhibit 10.23)
10.24 ** Security Agreement -- Pledge of Common Stock, dated as of March 31,
1995, among RAC Financial Group, Inc. and Banc One Capital
Partners II, Limited Partnership, as agent for Banc One Capital
Partners II, Limited Partnership and Farm Bureau Life Insurance
Company (Exhibit 10.24)
10.25 ** Employment Agreement by and between RAC Financial Group, Inc. and
Ronald M. Mankoff (Exhibit 10.25)
10.26 ** Employment Agreement by and between RAC Financial Group, Inc. and
Daniel T. Phillips (Exhibit 10.26)
10.27 ** Employment Agreement by and between RAC Financial Group, Inc. and
Eric C. Green (Exhibit 10.27)
10.28 ** Employment Agreement by and between RAC Financial Group, Inc. and
James H. Poythress (Exhibit 10.28)
10.29 ** Loan Commitment from Bank One, Texas, N.A., to RAC Financial Group,
Inc. (Exhibit 10.29)
10.30 ** Form of Continuous Purchase Home Improvement Broker Agreement
(Exhibit 10.30)
10.31 ** Form of Pass-Through Home Improvement Financing Agreement
(Exhibit 10.31)
10.32 ** Form of Dealer/Contractor Application (Exhibit 10.32)
10.33 ** Form of Broker/Correspondent Application (Exhibit 10.33)
10.34 ** Promissory Note, dated December 29, 1995, from RAC Financial Group,
Inc., Remodelers National Funding Corporation and State Financial
Acceptance Corporation, as makers, to Farm Bureau Life Insurance
Company (Exhibit 10.34)
10.35 ** Loan Commitment from Residential Funding Corporation to Remodelers
National Funding Corporation and RAC Financial Group, Inc.
(Exhibit 10.35)
10.36 ** Stock Purchase and Sale Agreement, dated as of November 30, 1995, by
and among RAC Financial Group, Inc., FIRSTPLUS East Mortgage
Corporation and its shareholders (Exhibit 10.36)
10.37 ** First Amendment to Credit Agreement and Note, dated as of June 21,
1995, by and among Remodelers National Funding Corporation, SFA:
State Financial Acceptance Corporation, RAC Financial Group, Inc.
and Banc One Capital Partners V, Ltd. (Exhibit 10.37)
10.38 ** Senior Subordinated Note, dated November 1, 1995, from RAC Financial
Group, Inc., Remodelers National Funding Corporation and State
Financial Acceptance Corporation, as makers, to Banc One Capital
Partners II, Limited Partnership (Exhibit 10.38)
10.39 ** Senior Subordinated Note, dated November 16, 1995, from RAC
Financial Group, Inc., Remodelers National Funding Corporation and
State Financial Acceptance Corporation, as makers, to and Banc One
Capital Partners II, Limited Partnership (Exhibit 10.39)
10.40 ** Senior Subordinated Note, dated September 27, 1995, from RAC
Financial Group, Inc., Remodelers National Funding Corporation and
State Financial Acceptance Corporation, as makers, to Farm Bureau
Life Insurance Company (Exhibit 10.40)
10.41 ** Senior Subordinated Note, dated September 27, 1995, from RAC
Financial Group, Inc., Remodelers National Funding Corporation and
State Financial Acceptance Corporation, as makers, to Farm Bureau
Life Insurance Company (Exhibit 10.41)
10.42 ** Senior Subordinated Note and Warrant Purchase Agreement, amended and
restated as of July 16, 1995, among RAC Financial Group, Inc.,
Remodelers National Funding Corporation and SFA: State Financial
Acceptance Corporation, as sellers, and Banc One Capital
Partners II, Limited Partnership, Farm Bureau Life Insurance
Company and Banc One Capital Partners V, Ltd., as purchasers
(Exhibit 10.42)
10.43 ** RAC Financial Group, Inc. Warrant Certificate, dated as of July 16,
1995, for Banc One Capital Partners V, Ltd. (Exhibit 10.43)
10.44 ** Second Amended and Restated Subordinated Security Agreement, amended
and restated as of September 27, 1995, made by RAC Financial Group,
Inc., Remodelers National Funding Corporation and SFA: State
Financial Acceptance Corporation for the benefit of Banc One
Capital Partners II, Limited Partnership, Farm Bureau Life Insurance
Company and Banc One Capital Partners V, Ltd. (Exhibit 10.44)
10.45 ** Second Amended and Restated Security Agreement -- Pledge of Common
Stock, amended and restated as of September 27, 1995, made by RAC
Financial Group, Inc., for the benefit of Banc One Capital
Partners II, Limited Partnership, Farm Bureau Life Insurance
Company and Banc One Capital Partners V, Ltd. (Exhibit 10.45)
10.46 ** Second Amended and Restated Security Agreement -- Assignment of
Servicing Agreements, amended and restated as of September 27,
1995, made by RAC Financial Group, Inc., for the benefit of Banc One
Capital Partners II, Limited Partnership, Farm Bureau Life Insurance
Company and Banc One Capital Partners V, Ltd. (Exhibit 10.46)
10.47 ** Second Amendment to the Warehouse Credit, Term Loan and Security
Agreement, dated as of September 15, 1995, by and among Remodelers
National Funding Corp., RAC Financial Group, Inc. and Residential
Funding Corporation (Exhibit 10.47)
10.48 ** Form of Letter Agreement, dated January 29, 1996, by and between
RAC Financial Group, Inc. and Residential Funding Corporation,
regarding the Warehouse Credit, Term Loan and Security Agreement,
dated June 15, 1995 (Exhibit 10.48)
10.49 ** Form of Letter Agreement, dated January 29, 1996, by and between
RAC Financial Group, Inc. and Banc One, Texas, National Association,
regarding the Credit Agreement, dated as of March 17, 1995
(Exhibit 10.49)
10.50 ** Form of Letter Agreement, dated January 29, 1996, by and among RAC
Financial Group, Inc., Banc One Capital Partners II, Limited
Partnership, Farm Bureau Life Insurance Company and Banc One
Capital Partners V, Ltd., regarding the Senior Subordinated Note
and Warrant Purchase Agreement, dated as of March 31, 1995
(Exhibit 10.50)
10.51 ** Third Amendment to the Warehouse Credit, Term Loan and Security
Agreement, dated as of January 22, 1996, by and among Remodelers
National Funding Corp., RAC Financial Group, Inc. and Residential
Funding Corporation (Exhibit 10.51)
10.52 ** Subordinated Loan Agreement, dated as of September 27, 1995, by and
among RAC Financial Group, Inc., Remodelers National Funding
Corporation and SFA: State Financial Acceptance Corp., as borrowers,
and Banc One Capital Partners II, Limited Partnership and Farm
Bureau Life Insurance Company, as lenders, as amended by First
Amendment to Subordinated Loan Agreement (Exhibit 10.52)
10.53 ** Letter Agreement, dated June 7, 1995, between Banc One Capital
Corporation and RAC Financial Group, Inc. regarding financial
advisory and consultation services (Exhibit 10.53)
10.54 ** Registration Rights Agreement, dated as of March 31, 1996, by and
among RAC Financial Group, Inc. and the shareholders of Mortgage
Plus Incorporated (Exhibit 10.2)
10.55 *** Agreement and Plan of Merger, dated as of May 22, 1996, among RAC
Financial Corporation, Inc., FIRSTPLUS West, Inc. and Mortgage Plus
Incorporated and the shareholders (Exhibit 10.1)
10.56 **** Master Repurchase Agreement, dated as of May 10, 1996, by and
between FIRSTPLUS Financial, Inc. and Bear Stearns Home Equity
Trust 1996-1 (Exhibit 10.1)
10.57 **** Custody Agreement, dated May 10, 1996, among FIRSTPLUS Financial,
Inc., Bear Stearns Home Equity Trust 1996-1, and Bank One Texas,
N.A. (Exhibit 10.2)
10.58 **** Fifth Amendment to Credit Agreement, dated June 20, 1996, by and
among FIRSTPLUS Financial, Inc., RAC Financial Group, Inc. and
Bank One, Texas, National Association (Exhibit 10.3)
10.59**** Promissory Note, dated June 30, 1996, between FIRSTPLUS
Financial, Inc. and Bank One, Texas, National Association
(Exhibit 10.4)
21* Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of Scott & Holloway, L.L.P.
23.3* Consent of Jenkens & Gilchrist, a Professional Corporation (included
in Exhibit 5)
24 Power of Attorney (included on II-7)
25 Statement of Eligibility of Trustee
- ------------
* To be filed by amendment.
** Incorporated by reference from exhibit shown in parenthesis contained in
the Company's Registration Statement on Form S-1, dated February 1, 1996,
filed by the Company with the Commission.
*** Incorporated by reference from exhibit shown in parenthesis contained in
the Company's current report on Form 8-K, filed by the Company with the
Commission on June 14, 1996.
**** Incorporated by reference from exhibit shown in parenthesis contained in
the Company's Form 10-Q for the quarterly period ended June 30, 1996,
filed by the Company with the Commission on August 6, 1996.
<PAGE>
EXHIBIT 1
$100,000,000 of 7.25% Convertible Subordinated Notes Due 2003
RAC FINANCIAL GROUP, INC.
PURCHASE AGREEMENT
August 14, 1996
BEAR, STEARNS & CO. INC.
as Representative of the
several Initial Purchasers named in
Schedule I hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, N.Y. 10167
Dear Sirs:
RAC Financial Group, Inc., a corporation organized and existing
under the laws of Nevada (the "Company"), proposes, subject to the terms and
conditions stated herein, to issue and sell to Bear, Stearns & Co. Inc.,
("Bear Stearns" or the "Representative"), Prudential Securities Incorporated
and Keefe Bruyette & Woods, Inc. (collectively, the "Initial Purchasers") an
aggregate of $100,000,000 of its 7.25% Convertible Subordinated Notes Due
2003 (the "Firm Notes"). In addition, the Company proposes to grant to the
Initial Purchasers an option, for the sole purpose of covering
over-allotments in connection with the sale of the Firm Notes, to purchase up
to an additional $15,000,000 of Notes (the "Optional Notes") as provided in
Section 2 below. The Firm Notes and any Optional Notes purchased by the
Initial Purchasers are referred to herein as the "Notes".
The Notes are to be issued pursuant to an indenture to be dated as
of August 20, 1996 (the "Indenture") between the Company and Bank One, Texas,
N.A., as trustee (the "Trustee"), and will be convertible into shares of the
Company's common
-1-
<PAGE>
stock, par value $0.01 per share (the "Common Stock"), on the terms set forth
therein. The holders of the Notes will be entitled to certain registration
rights provided under a Note Resale Registration Rights Agreement to be dated
as of August 20, 1996 (the "Registration Rights Agreement") between the
Company and the Initial Purchasers.
The Company has prepared a preliminary offering circular dated
August 5, 1996 (the "Preliminary Offering Circular") and a final offering
circular dated August 14, 1996 (as supplemented from time to time with the
written consent of the Company and Bear Stearns, the "Offering Circular")
with respect to the offering of the Notes contemplated by this Agreement (the
"Offering").
The Notes have not been registered under the Securities Act of
1933, as amended (the "Securities Act"), and are being sold in reliance on
exemptions from or in transactions not subject to the registration
requirements of the Securities Act, including sales (i) made in the United
States to (a) "qualified institutional buyers" as defined in, and in reliance
on, Rule 144A under the Securities Act ("Rule 144A") and (b) to institutional
"accredited investors" as defined in Rule 501(a)(1), (2), (3) and (7) of
Regulation D under the Securities Act ("Regulation D")and (ii) made outside
the United States in reliance on Regulation S under the Securities Act
("Regulation S").
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and agrees with, the Representative and each of
the Initial Purchasers that:
(a) The Offering Circular, as of the date hereof, and as of the
Closing Date (as hereinafter defined) and as of any Additional Closing Date
(as hereinafter defined), if any, is and will be accurate in all material
respects, does not and will not contain an untrue statement of a material
fact and does not and will not omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading. The
Preliminary Offering Circular, as of the date thereof, was accurate in all
material respects, did not contain an untrue statement of a material fact and
did not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein in light of the
circumstances under which they were made not misleading. No representation
and warranty is made in this Section 1(a), however, with respect to any
information contained in or omitted
-2-
<PAGE>
from the Preliminary Offering Circular or the Offering Circular or any
amendment thereof or supplement thereto in reliance upon and in conformity
with information furnished in writing to the Company by Bear Stearns
expressly for use in connection with the preparation thereof.
(b) Ernst & Young LLP ("E&Y"), who have certified (i) the
consolidated balance sheets of the Company as of September 30, 1994 and 1995
and June 30, 1996, the related consolidated statements of income and cash
flows for each of the three years in the period ended September 30, 1995 and
each of the nine month periods ended June 30, 1995 and 1996, and the related
consolidated statements of stockholders' equity for each of the three years
in the period ended September 30, 1995 and the nine month period ended June
30, 1996, and (ii) the balance sheet of FirstPlus Financial, Inc., formerly
Remodelers National Funding Corp., a corporation organized and existing under
the laws of Texas ("FPF"), as of September 30, 1994, and the related
statements of operations, stockholders' equity and cash flows for the
nine-month period then ended, in each case included in the Offering Circular,
are independent public accountants as required by the Securities Act of 1933,
as amended (the "Act") and the Rules and Regulations of the Securities and
Exchange Commission (the "Commission") promulgated under the Act (the
"Regulations"). Scott & Holloway, LLP ("S&H"), who have certified the
balance sheet of First Security Mortgage Corporation, a corporation organized
and existing under the laws of South Carolina ("FSMC"), as of December 31,
1994 and the related statements of operations, changes in shareholders'
equity and cash flows of FSMC for the year then ended, included in the
Offering Circular, are independent public accountants as required by the Act
and the Regulations.
(c) Subsequent to the respective dates as of which information is
given in the Offering Circular, except as set forth in the Offering Circular,
there has been no material adverse change, nor any development involving a
prospective material adverse change, in the business, prospects, properties,
operations, condition (financial or otherwise) or results of operations of
the Company and its subsidiaries taken as a whole, whether or not arising
from transactions in the ordinary course of business, and since the date of
the latest balance sheet presented in the Offering Circular, neither the
Company nor any of its subsidiaries has incurred or undertaken any
liabilities or obligations, direct or contingent, that are material to the
Company and its subsidiaries taken as a whole, except for liabilities or
obligations that are disclosed in the Offering Circular.
-3-
<PAGE>
(d) This Agreement and the transactions contemplated herein have
been duly and validly authorized by the Company. This Agreement has been
duly and validly executed and delivered by the Company and constitutes the
legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, except, in the case of enforceability,
as limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other laws now or hereafter in effect relating to or affecting creditors'
rights generally or by general principles of equity relating to the
availability of remedies and except as rights to indemnity and contribution
may be limited by federal or state securities laws or the public policy
underlying such laws. This Agreement conforms in all material respects to the
description hereof contained in the Offering Circular.
(e) The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under this Agreement, the
Indenture, the Notes and the Registration Rights Agreement (collectively, the
"Transaction Agreements"), and to consummate the transactions contemplated
hereby and thereby, including (without limitation) (i) the issuance, sale and
delivery of the Notes hereunder and (ii) the filing of the Registration
Statement and consummation of the Exchange Offer under and as defined in the
Registration Rights Agreement.
(f) The execution, delivery, and performance of this Agreement and
the other Transaction Agreements and the consummation of the transactions
contemplated hereby and thereby do not and will not (i) conflict with or
result in a breach of any of the terms and provisions of, or constitute a
default (or an event which with notice or lapse of time, or both, would
constitute a default) under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or any
of its subsidiaries pursuant to, any agreement, instrument, franchise,
license or permit to which the Company or any of its subsidiaries is a party
or by which any of such corporations or their respective properties or assets
may be bound, (ii) violate or conflict with any provision of the certificate
of incorporation or bylaws of the Company or any of its subsidiaries or any
judgment, decree, order, statute, rule or regulation of any court or any
public, governmental or regulatory agency or body having jurisdiction over
the Company or any of its subsidiaries or any of their respective properties
or assets or (iii) require any consent, approval, authorization, order,
registration, filing, qualification, license or permit of or with any court
or any public, governmental or regulatory agency or body having jurisdiction
over the Company or any of its subsidiaries or any of their respective
properties or assets
-4-
<PAGE>
(collectively, "Licenses"), except, in the case of clause (iii), for any such
consents, approvals, authorizations, orders, registrations, filings,
qualifications, licenses and permits as have been obtained or as may be
required under state securities or Blue Sky laws or the securities laws of
any jurisdiction outside the United States in connection with the purchase
and distribution of the Notes by the Initial Purchasers.
(g) All of the outstanding shares of capital stock of the Company
have been duly and validly authorized and issued, are fully paid and
nonassessable and were not issued and are not now in violation of or subject
to any preemptive rights. The Company had, at June 30, 1996, an authorized
and outstanding capitalization as set forth in the Offering Circular. The
capital stock of the Company conforms in all material respects to the
descriptions thereof contained in the Offering Circular.
(h) Each of the Company and its subsidiaries (i) has been duly
organized and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation, (ii) is duly qualified and in good
standing as a foreign corporation in each jurisdiction in which the character
or location of its properties (owned, leased or licensed) or the nature or
conduct of its business makes such qualification necessary, except for those
failures to be so qualified or in good standing that will not have a material
adverse effect, singly or in the aggregate, on the business, prospects,
properties, operations, condition (financial or other), or results of
operations of the Company and its subsidiaries taken as a whole (a "Material
Adverse Effect") and (iii) has all requisite power and authority, and all
necessary Licenses, to own, lease and operate its properties and conduct its
business as now being conducted and as described in the Offering Circular,
except in such case where the failure to have such Licenses will not have a
Material Adverse Effect, and no such License contains a materially burdensome
restriction not adequately disclosed in the Offering Circular. Neither the
Company nor any of its subsidiaries has received any written notice of
proceedings relating to the revocation or modification of any such License
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would have resulted in a Material Adverse Effect, except
as described in or contemplated by the Prospectus.
(i) The issued shares of capital stock of each of the Company's
subsidiaries have been duly authorized and validly issued, are fully paid and
non-assessable, were not issued and are not now in violation of or subject to
any preemptive rights
-5-
<PAGE>
and are owned of record and beneficially, directly or indirectly, by the
Company free and clear of any security interest (other than the security
interest in such capital stock held by BOCP II, Limited Liability Company
("BOCP II"), Banc One Capital Partners V, Ltd. ("BOCP V") and Farm Bureau
Life Insurance Company ("FBLIC") pursuant to the Security Agreement-Pledge of
Common Stock dated as of March 31, 1995), lien, claim, encumbrance, security
interest, restriction on transfer, shareholders' agreement, voting trust or
other preferential arrangement or defect of title whatsoever.
(j) Except as described in the Offering Circular, there is no
litigation or governmental proceeding to which the Company or any of its
subsidiaries is a party or to which any property of the Company or any of its
subsidiaries is subject or which is pending or, to the knowledge of the
Company, threatened against the Company or any of its subsidiaries that (i)
would have a Material Adverse Effect or would result in any development
involving a Material Adverse Effect or (ii) is required to be disclosed in
the Offering Circular.
(k) Neither the Company nor any of its subsidiaries, nor any of
their respective officers or directors has taken and none of them will take,
directly or indirectly, any action designed to cause or result in, or which
constitutes or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the Notes or the Common Stock
to facilitate the sale or resale of the Notes or the Common Stock.
(l) The financial statements, including the notes thereto,
included in the Offering Circular, present fairly the financial position of
the Company, FPF and FSMC, respectively, as of the dates indicated and the
results of their respective operations for the periods specified, all in
conformity with generally accepted accounting principles ("GAAP") applied on
a consistent basis throughout the entire periods presented, except as
otherwise disclosed therein. The selected financial data for the Company set
forth under the captions "Summary--Summary Financial Information" and
Selected Financial Data" in the Offering Circular have been prepared on a
basis consistent with the financial statements of the Company. No other
financial statements of the Company or any other entity are required by the
Act or the Rules and Regulations to be included in the Offering Circular.
The pro forma financial information included in the Offering Circular has
been prepared in accordance with the applicable requirements of Rule 3-05 and
Article 11 of Regulation S-X, and the assumptions used in the preparation
thereof are, in the opinion of the Company, reasonable.
-6-
<PAGE>
(m) The Company is not, and upon consummation of the transactions
contemplated hereby will not be, subject to registration as an "investment
company" under the Investment Company Act of 1940, as amended.
(n) No labor dispute with the employees of the Company or any of
its subsidiaries exists or, to the Company's knowledge, is threatened or
imminent that would have a Material Adverse Effect, except as described in or
contemplated by the Offering Circular.
(o) The Company and its subsidiaries own or possess, or can
acquire on reasonable terms, all material trademarks, service marks, trade
names, licenses, copyrights and proprietary or other confidential
information, including, but not limited to, "FIRSTPLUS FINANCIAL", "Buster
Plus", "Debt Buster", and "You don't need equity, you just need a phone",
currently employed by them in connection with their respective businesses,
and neither the Company nor any such subsidiary has received any written
notice of infringement of or conflict with asserted rights of any third party
with respect to any of the foregoing which, singly or in the aggregate, if
the subject of an unfavorable decision, ruling or finding, would have a
Material Adverse Effect, except as described in or contemplated by the
Offering Circular.
(p) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as are customary in the businesses in which they are
engaged; and neither the Company nor any such subsidiary has any reason to
believe that it will not be able to renew its existing insurance coverage as
and when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that would
not have a Material Adverse Effect, except as described in or contemplated by
the Offering Circular.
(q) No subsidiary of the Company is currently prohibited, directly
or indirectly, from paying any dividends to the Company, from making any
other distribution on such subsidiary's capital stock, from repaying to the
Company any loans or advances to such subsidiary from the Company or from
transferring any of such subsidiary's property or assets to the Company or
any other subsidiary of the Company, except as described in or contemplated
by the Offering Circular.
(r) The Company has filed all foreign, federal, state and local
tax returns that are required to be filed or has
-7-
<PAGE>
requested extensions thereof (except in any case in which the failure so to
file would not have a Material Adverse Effect) and has paid all taxes
required to be paid by it and any other assessment, fine or penalty levied
against it, to the extent that any of the foregoing is due and payable,
except for any such assessment, fine or penalty that is currently being
contested in good faith or as described in or contemplated by the Offering
Circular.
(s) Neither the Company nor any of its subsidiaries is in
violation of any federal or state law or regulation relating to their
respective lending activities, including, without limitation, rules and
regulations of the Federal Housing Authority and applicable banking laws,
rules and regulations, except for any such violation of law or regulation
which would not have a Material Adverse Effect or which is described in or
contemplated by the Offering Circular.
(t) Except for the shares of capital stock of each of the
subsidiaries owned by the Company and its other subsidiaries, neither the
Company nor any such subsidiary owns any shares of stock or any other equity
securities of any corporation or has any equity interest in any firm,
partnership, association or other entity, except as described in or
contemplated by the Offering Circular.
(u) No event has occurred that will (i) conflict with or result in
a breach of any of the terms and provisions of, or constitute a default (or
an event which with notice or lapse of time, or both, would constitute a
default) under, or result in the creation or imposition of any lien, charge
or encumbrance upon any property or assets of the Company or any of its
subsidiaries pursuant to, any agreement, instrument, franchise, License or
permit to which the Company or any of its subsidiaries is a party or by which
any of such corporations or their respective properties or assets may be
bound, except for such conflicts, breaches or defaults which would not have a
Material Adverse Effect, or (ii) violate or conflict with any provision of
the certificate of incorporation or bylaws of the Company or any of its
subsidiaries or any judgment, decree, order, statute, rule or regulation of
any court or any public, governmental or regulatory agency or body having
jurisdiction over the Company or any of its subsidiaries or any of their
respective properties or assets.
(v) Each certificate signed by any officer of the Company and
delivered to the Initial Purchasers or counsel for the Initial Purchasers
shall be deemed to be a representation and
-8-
<PAGE>
warranty by the Company, and not by such officer in an individual capacity,
to each Initial Purchasers as to the matters covered thereby.
(w) The Indenture has been duly and validly authorized by the
Company and, when executed and delivered by the Company and the Trustee, will
have been duly and validly executed and delivered and will constitute the
legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, except, in the case of enforceability,
as limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other laws now or hereafter in effect relating to or affecting creditors'
rights generally or by general principles of equity relating to the
availability of remedies. The Indenture conforms in all material respects to
the description thereof contained in the Offering Circular.
(x) The Notes have been duly and validly authorized by the Company
and, when authenticated by the Trustee and issued, sold and delivered in
accordance with this Agreement and the Indenture, will have been duly and
validly executed, authenticated, issued and delivered and will constitute the
legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with their terms, except, in the case of
enforceability, as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws now or hereafter in effect relating
to or affecting creditors' rights generally or by general principles of
equity relating to the availability of remedies. The Notes conform in all
material respects to the description thereof contained in the Offering
Circular.
(y) The Registration Rights Agreement and the transactions
contemplated therein have been duly and validly authorized by the Company.
The Registration Rights Agreement, when executed and delivered by the Company
and the Initial Purchaser, will have been duly and validly executed and
delivered by the Company and will constitute the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, except, in the case of enforceability, as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws now or
hereafter in effect relating to or affecting creditors' rights generally or
by general principles of equity relating to the availability of remedies and
except as rights to indemnity and contribution may be limited by federal or
state securities laws or the public policy underlying such laws. The
Registration Rights Agreement conforms in all material
-9-
<PAGE>
respects to the description thereof contained in the Offering Circular.
(z) The Company and its subsidiaries are in compliance, and have
complied at all times during the past five (5) years, and all transactions
involving the issuance, offer, placement and sale, pursuant to the terms of
the Transaction Agreements, of the Notes comply, in all material respects,
with all applicable federal, state and local statutes, codes, ordinances,
rules and regulations of the United States (the "Laws") to the extent
applicable. Neither the Company nor any of its subsidiaries has received
notice within the past five (5) years of any violations of any Laws that
would have a Material Adverse Effect or would result in any development
involving a Material Adverse Effect.
(aa) The Notes, when issued, delivered and sold in accordance with
this Agreement, will be fully paid and nonassessable, will not have been
issued in violation of or be subject to any preemptive or similar rights and,
except as otherwise set forth in the Offering Circular and Article XV
(Subordination) of the Indenture, will rank PARI PASSU in right of payment
with all of the Company's other unsecured and unsubordinated indebtedness for
borrowed money. No event has occurred nor has any circumstance arisen which,
had the Notes already been issued, would constitute a default or Event of
Default (as such terms are defined in the Indenture).
(bb) (i) None of the Company, any of its affiliates (as defined in
Rule 501(b) under the Securities Act) nor any person acting on behalf of any
such person (excluding the Initial Purchasers and their respective
affiliates, as to which no representation is made) has engaged in any
directed selling efforts (as such term is defined in Regulation S) in the
United States with respect to the Notes and (ii) each of the Company, its
affiliates and each person acting on behalf of any of them (other than the
Initial Purchasers and their respective affiliates, as to which no
representation made) has complied with the offering restrictions requirement
of Regulation S.
(cc) None of the Company, any of its affiliates, nor any person
acting on behalf of any of them (excluding the Initial Purchasers and their
respective affiliates, as to which no representation is made) has sold,
offered for sale, solicited offers to buy or otherwise negotiated in respect
of any security (as such term is defined in the Securities Act) that is or
may be integrated with the sale of the Notes in a manner that would require
registration under the Securities Act.
-10-
<PAGE>
(dd) The Notes are eligible for resale pursuant to Rule 144A and,
when issued, will not be of the same class as any securities listed on a
national securities exchange registered under section 6 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or quoted in a U.S.
automated inter-dealer quotation system.
(ee) The Company is subject to Section 13 or 15(d) of the Exchange
Act and is in compliance with the provisions of such Section.
(ff) Subject to compliance by the Initial Purchasers with the
procedures set forth in Section 3 hereof, it is not necessary, in connection
with the offer, sale and delivery of the Notes to the Initial Purchasers in
the manner contemplated by this Agreement and the Offering Circular, to
register the Notes under the Securities Act or to qualify the Indenture under
the Trust Indenture Act of 1939, as amended.
(gg) The shares of Common Stock issuable upon conversion of the
Notes have been duly authorized and, when issued in accordance with the terms
of the Notes and the Indenture, will be validly issued, fully paid and
nonassessable, will conform in all material respects to the description
thereof contained in the Offering Circular and will not have been issued in
violation of or be subject to any preemptive rights. The shares of Common
Stock issuable on conversion of the Notes at the initial conversion price set
forth in the Indenture have been reserved for issuance and no further
approval or authority of the stockholders or the Board of Directors of the
Company will be required for such issuance of Common Stock.
2. PURCHASE, SALE AND DELIVERY OF THE NOTES.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein
set forth, the Company agrees to sell to the Initial Purchasers, and the
Initial Purchasers, severally and not jointly, agree to purchase from the
Company, the principal amount of the Notes set forth opposite their
respective names in Schedule I hereto at a purchase price equal to 97% of
such principal amount. Payment of the purchase price for, and delivery of,
the Notes will be made at the offices of Bear Stearns, 245 Park Avenue, New
York, NY 10167 at 9:30 a.m. (New York City time) on August 20, 1996, unless
postponed in accordance with Section 9 hereof, or such other time and date as
may be mutually agreed in writing between you and the Company
-11-
<PAGE>
(the time and date of such payment and delivery being herein called the
"Closing Date").
(b) In addition, on the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants to the Initial
Purchasers the option to purchase, severally and not jointly, up to U.S.
$15,000,000 in principal amount of Optional Notes, for the sole purpose of
covering over-allotments in the sale of Firm Notes by the Initial Purchaser,
at the same purchase price to be paid by the Initial Purchasers to the
Company for the Firm Notes as set forth in Section 2(a). This option may be
exercised at any time, in whole or in part, on or before the 30th day
following the date of the Offering Circular, by written notice by Bear
Stearns on behalf of the Initial Purchasers to the Company. Such notice
shall set forth the aggregate principal amount of Optional Notes to be
purchased pursuant to the option and the date and time, as reasonably
determined by Bear Stearns, when the Optional Notes are to be delivered (such
date and time being herein sometimes referred to as the "Additional Closing
Date"); PROVIDED that the Additional Closing Date shall not be earlier than
(x) the Closing Date or (y) the second full business day after the date on
which the option shall have been exercised, nor later than the eighth full
business day after the date on which the option shall have been exercised
(unless such date and time are postponed in accordance with Section 9
hereof). The principal amount of the Optional Notes to be sold to each
Initial Purchasers shall be that principal amount which bears the same ratio
to the aggregate principal amount of Optional Notes being purchased as the
principal amount of Firm Notes set forth opposite the name of such Initial
Purchasers in Schedule I hereto (or such number increased as set forth in
Section 9 hereof) bears to the aggregate principal amount of Firm Notes,
subject to such adjustments to eliminate fractional amounts as Bear Stearns
in its sole discretion may make.
(c) At or prior to the Closing Date and any Additional Closing
Date hereunder, the Company shall execute and deliver to the Trustee for
authentication (i) the Notes to be purchased and sold on such date and shall
deposit such Notes with the Trustee as custodian for the Depositary Trust
Company ("DTC") for the account or accounts of participants in DTC (including
Euroclear and CEDEL, as the case may be) purchasing beneficial interests
therein and/or (ii) one or more certificates in global or definitive form in
such denominations and registered in such names as the Initial Purchasers
request upon notice to the Company at least two business days prior to such
date. Against
-12-
<PAGE>
delivery of the Notes to DTC and Bear Stearns for the respective accounts of
the Initial Purchasers, the Initial Purchasers shall pay or cause to be paid
to the Company the purchase price for such Notes by certified or official
bank check or checks, in New York Clearing House or similar same day funds,
payable to the order of the Company. Certificates evidencing the Notes shall
be registered in such name or names and in such authorized denominations as
Bear Stearns may request in writing at least two full business days prior to
the Closing Date or applicable Additional Closing Date, as the case may be,
the name of Cede & Co. as nominee for DTC. The Company will permit you to
inspect such certificates at the offices of Bear Stearns, 245 Park Avenue,
New York, NY 10167 at least one full business day prior to the Closing Date
and each Additional Closing Date.
3. SUBSEQUENT OFFERS AND RESALES OF THE NOTES. The Initial Purchasers
and the Company hereby establish and agree to observe the following
procedures in connection with the offer and sale of the Notes:
(a) Each Initial Purchaser has advised the Company and Bear
Stearns that it proposes to offer the Notes for resale upon the terms and
conditions set forth in this Agreement and the Offering Circular. The Notes
have not been and will not be registered under the Securities Act. Each
Initial Purchaser agrees that it will not take, and acknowledges that the
Company has not taken, any action that would permit a public offering of the
Notes in any jurisdiction and further agrees that, with respect to the offer
or sale of any Notes or the delivery or distribution of any Offering
Circular, it will comply with applicable laws and regulations in such
jurisdictions or to which it is otherwise subject.
(b) Each Initial Purchaser represents and warrants that (i) it is
a "qualified institutional buyer" within the meaning of Rule 144A or an
"accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7)
under the Securities Act and (ii) that neither it nor any of its affiliates
nor any person acting on behalf of any such person has engaged in any general
solicitation or general advertising, as such terms are defined in Rule 502(c)
under the Securities Act, in connection with the offer or sale of the Notes.
(c) In connection with sales outside the United States, each
Initial Purchaser agrees that it will not offer, sell or deliver Notes (i) as
part of the distribution thereof at any time or (ii) otherwise until 40 days
after completion of the distribution, as determined by Bear Stearns, to or
for the
-13-
<PAGE>
account or benefit of U.S. persons (as defined in Regulation S). Each Initial
Purchaser confirms that neither it nor its affiliates nor any person acting
on behalf of any such person has engaged in any "directed selling efforts"
(as such term is defined in Regulation S) with respect to the Notes and that
it and each such other person has complied with the offering restrictions
requirement of Regulation S with respect to the Notes.
(d) Each of the Initial Purchasers acknowledges and agrees that it
has not and will not offer, sell or deliver the Notes in the United States or
to or for the account of any U.S. Person other than (i) distributors (as
defined in Regulation S), (ii) institutional buyers that are reasonably
believed to be "qualified institutional buyers" (as defined in Rule 144A) and
(iii) investors that are reasonably believed to be "accredited investors" (as
defined in Rule 501(a) (1), (2), (3) or (7) under the Securities Act.
(e) Each of the Initial Purchasers has advised the Company and
Bear Stearns that, prior to the confirmation of sale of any Notes, it will
have sent to each dealer, distributor or person receiving a selling
concession fee or other remuneration that purchases any Notes from it during
the restricted period a confirmation or notice substantially to the following
effect:
"The Notes have not been registered under the Securities Act of 1933,
as amended (the "Securities Act"), and may not be offered and sold
within the United States or to, or for the account or benefit of U.S.
persons (i) as part of their distribution at any time or (ii)
otherwise until 40 days after the later of the completion of the
distribution of the Notes, as determined by Bear Stearns & Co. Inc.,
except in accordance with Regulation S or Rule 144A or Regulation D
under the Securities Act."
(f) Each Initial Purchaser represents, warrants and agrees that
(i) it has not offered or sold and prior to the expiration of six months from
the Closing Date will not offer or sell Notes to persons in the United
Kingdom, other than to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (whether as
principal or agent) for the purposes of their business or otherwise in
circumstances which will not result in an offer to the public within the
meaning of the Public Offers of Securities Regulations 1995; (ii) it has
complied and will comply with all applicable provisions of the Public Offers
of Securities
-14-
<PAGE>
Regulations and the Financial Services Act of 1986 with respect to anything
done by it in relation to the Notes in, from, or otherwise involving the
United Kingdom, and (iii) it has only issued or passed on and will only issue
or pass on, to any person in the United Kingdom any documents received by it
in connection with the issue of the Notes if the person is of a kind
described in Article 11(c) of the Financial Services Act of 1986 (Investment
Advertisements) (Exemptions) Order 1995 or is a person to whom the documents
may otherwise lawfully be issued or passed on.
(g) Each Initial Purchaser represents, warrants and agrees that
it has not offered or sold and will not offer or sell any Notes directly or
indirectly (i) in Japan or to any resident of Japan except (A) pursuant to an
exemption from the registration requirements of the Securities and Exchange
Law of Japan and (B) in compliance with any applicable requirements of
Japanese law or (ii) in any province of Canada except in compliance with all
requirements of applicable Canadian securities laws.
4. COVENANTS OF THE COMPANY. The Company covenants and agrees with
the Representative and each of the Initial Purchasers that:
(a) If at any time prior to the Closing Date or any Additional
Closing Date any event shall have occurred as a result of which the Offering
Circular as then amended or supplemented would in the judgment of any of the
Initial Purchasers or the Company include an untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, the Company will notify the
Representative promptly and prepare and deliver to the Representative on
behalf of the Initial Purchasers an amendment or supplement (in form and
substance satisfactory to you) which will correct such statement or omission.
(b) The Company will promptly deliver to the Representative on
behalf of the Initial Purchasers such number of copies of the Offering
Circular and all amendments of and supplements thereto as the Representative
on behalf of the Initial Purchasers may reasonably request.
(c) The Company will endeavor in good faith, in cooperation with
the Representative to qualify the Notes for offering and sale under the
securities and legal investment laws relating to the offering or sale of the
Notes of such jurisdictions as you may designate and to maintain such
qualification in effect for so
-15-
<PAGE>
long as required for the distribution thereof; except that in no event shall
the Company be obligated in connection therewith to qualify as a foreign
corporation or to execute a general consent to service of process.
(d) During the period of 90 days from the date of the Agreement,
the Company will not, without the prior written consent of the
Representative, issue, sell, offer or agree to sell, grant any option for the
sale of, or otherwise dispose of, directly or indirectly, any capital stock
of the Company (or any securities convertible into, exercisable for or
exchangeable for capital stock of the Company) or any rights to acquire
capital stock of the Company, other than (i) the Company's sale of Notes
hereunder, (ii) the Company's issuance of capital stock upon the (a) exercise
of presently outstanding stock options or warrants or (b) conversion of Notes
and (iii) in respect of investments in, acquisitions of, or mergers or
combinations with other companies, up to a maximum of 1,000,000 shares of
Common Stock. The Company will cause each of its executive officers and
directors and such of its shareholders as have been heretofore designated by
you and listed on Schedule II attached hereto to agree with you that, during
the period from 90 days from the date of the Agreement (and one year with
respect 1.2 million shares of Common Stock owned by Farm Bureau Life
Insurance Company), they will not engage in any of the aforementioned
transactions on their own behalf other than exercises of outstanding stock
options.
(e) During the period from the Closing Date until three years
after the Closing Date, the Company and its subsidiaries will not, and will
not permit any of their "affiliates" (as defined in Rule 144 under the
Securities Act) to, resell any of the Notes that have been reacquired by
them, except for Notes purchased by the Company and its subsidiaries or any
of their affiliates and resold in a transaction registered under the
Securities Act.
(f) The Company will apply the proceeds from the sale of the Notes
as set forth under "Use of Proceeds" in the Offering Circular.
(g) The Company will use its best efforts to cause (i) the Notes
to be approved for quotation in the Private Offerings, Resales and Trading
through Automated Linkage ("PORTAL") market in accordance with the rules and
regulations of the National Association of Securities Dealers, Inc. relating
to trading in the PORTAL market, and (ii) within 60 days from the latest date
of original issuance of the Notes, the Common Stock issuable upon
-16-
<PAGE>
conversion thereof to be listed for quotation on the Nasdaq National Market.
(h) None of the Company, its subsidiaries or affiliates or any
person acting on their behalf (other than the Initial Purchasers and their
respective affiliates, as to which no representation is made) will solicit
any offer to buy or offer or sell the Notes by means of any form of general
solicitation or general advertising (as those terms are used in Regulation D
under the Securities Act) or in any manner involving a public offering within
the meaning of Section 4(2) of the Securities Act.
(i) None of the Company, its subsidiaries or affiliates or any
person acting on their behalf (other than the Initial Purchasers and their
respective affiliates, as to which no representation is made) will offer,
sell or solicit offers to buy or otherwise negotiate in respect of any
security (as defined in the Securities Act) which will be integrated with the
sale of the Notes in a manner that would require the registration of the
Notes under the Securities Act.
(j) None of the Company, its subsidiaries or affiliates or any
person acting on their behalf (other than the Initial Purchasers and their
respective affiliates, as to which no representation is made) will engage in
any directed selling efforts (as that term is defined in Regulation S) with
respect to the Notes sold pursuant to Regulation S, and the Company and their
affiliates and each person acting on their behalf (other than the Initial
Purchasers and their respective affiliates, as to which no representation is
made) will comply with the offering restrictions of Regulation S with respect
to those Notes sold pursuant thereto.
(k) The Company will cooperate with the Initial Purchasers in
arranging for the Notes to be accepted for clearance and settlement through
Euroclear, CEDEL and DTC.
(l) Each of the Notes will bear the legend contained in "Transfer
Restrictions" in the Offering Circular for the time period and upon the other
terms stated therein, except after the Notes are resold pursuant to a
registration statement effective under the Securities Act.
(m) The Company will not at any time, directly or indirectly, take
any action intended, or which might reasonably be expected, to cause or
result in, or which will constitute,
-17-
<PAGE>
stabilization of the price of the Notes or the shares of Common Stock to
facilitate the sale or resale of any of the Notes.
5. PAYMENT OF EXPENSES. Whether or not the transactions
contemplated in this Agreement are consummated or this Agreement is
terminated, the Company hereby agrees to pay all costs and expenses incident
to the performance of the obligations of the Company hereunder, including
those in connection with (i) preparing, printing, duplicating, filing and
distributing the Preliminary Offering Circular, the Offering Circular and any
amendments or supplements thereto (including, without limitation, fees and
expenses of the Company's accountants and counsel), the underwriting
documents (including this Agreement and the other Transaction Agreements and
any related agreement among underwriters, intersyndicate agreement and the
selling agreement) and all other documents related to the offering of the
Notes (including those supplied to the Initial Purchasers in quantities
provided for herein), (ii) the issuance, transfer and delivery of the Notes
to the Initial Purchasers, including any transfer or other taxes payable
thereon, (iii) the qualification of the Notes under state or foreign legal
investment, securities or Blue Sky laws, including the costs of printing and
mailing a preliminary and final "Blue Sky Survey" and the fees of Stroock &
Stroock & Lavan ("Counsel for the Initial Purchasers") and such counsel's
disbursements in relation thereto, (iv) the cost of printing the Notes, (v)
the cost and charges of any transfer agent, registrar, trustee or fiscal
paying agent and (vii) the costs and charges of DTC, Euroclear and CEDEL.
6. CONDITIONS OF INITIAL PURCHASERS' OBLIGATIONS. The obligations
of the Initial Purchasers to purchase and pay for the Firm Notes and the
Optional Notes, as provided herein, shall be subject to the accuracy of the
representations and warranties of the Company herein contained, as of the
date hereof and as of the Closing Date (for purposes of this Section 6
"Closing Date" shall refer to the Closing Date and any Additional Closing
Date, if different), to the absence from any certificates, opinions, written
statements or letters furnished to you or to Counsel for the Initial
Purchasers pursuant to this Section 6 of any misstatement or omission, to the
performance by the Company of its obligations hereunder, and to the following
additional conditions:
(a) At the Closing Date you shall have received the opinion of
Jenkens & Gilchrist, a professional corporation, counsel for the Company,
dated the Closing Date addressed to the Initial Purchasers and in form and
substance satisfactory to Counsel for the Initial Purchasers, to the effect
that:
-18-
<PAGE>
(i) Each of the Company and its subsidiaries (A) has been
duly incorporated and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation; (B) is
duly qualified and in good standing as a foreign corporation in each
jurisdiction where the Company has certified to such counsel that it
owns, leases or licenses properties, maintains employees or conducts
business, except for those failures to be so qualified or in good
standing which will not in the aggregate have a material adverse effect
on the Company and its subsidiaries taken as a whole; and (C) has all
requisite power and authority to own, lease, license and operate its
properties and conduct its business as now being conducted and as
described in the Offering Circular. All of the issued and outstanding
capital stock of each subsidiary of the Company has been duly and
validly issued and is fully paid and nonassessable and was not issued in
violation of any statutory preemptive rights or, to such counsel's
knowledge, contractual preemptive rights and is owned directly or
indirectly by the Company, free and clear of any lien, encumbrance,
security interest (other than the security interest in such capital
stock held by BOCP II, BOCP V and FBLIC pursuant to the Security
Agreement-Pledge of Common Stock dated as of March 31, 1995), or, to
such counsel's knowledge, any claim, restriction on transfer,
shareholders' agreement, voting trust agreement or other defect of title
whatsoever.
(ii) The authorized capital stock of the Company is as set
forth in the Offering Circular. All of the outstanding shares of Common
Stock are duly and validly authorized and issued, are fully paid and
nonassessable and were not issued in violation of or subject to any
statutory preemptive rights or, to such counsel's knowledge, contractual
preemptive rights. The shares of Common Stock issuable upon conversion
of the Notes have been duly authorized by the Company and, when issued
and delivered upon such conversion in accordance with the terms and
provisions of the Notes and the Indenture (assuming payment for and
delivery of the Notes in accordance with the Purchase Agreement), will
be validly issued, fully paid and nonassessable and will not have been
issued in violation of or subject to any statutory preemptive rights or,
to such counsel's knowledge, contractual preemptive rights. The shares
of Common Stock issuable on conversion of the Notes at the initial
conversion price set forth therein and in the Indenture have been
reserved for issuance and no further approval or authority of the
stockholders or the Board of
-19-
<PAGE>
Directors of the Company will be required for such issuance of
Common Stock.
(iii) To such counsel's knowledge, there is no legal or
governmental suit or proceeding or investigation before any court or
before or by any public, regulatory or governmental agency or body
pending or threatened against the Company or any of its subsidiaries or
their business or properties, which is of a character required to be
disclosed in the Offering Circular that has not been properly disclosed
therein.
(iv) The Company has all requisite corporate power and
authority to execute, deliver and perform its obligations under this
Agreement, the Indenture, the Notes and the Registration Rights
Agreement, and to consummate the transactions contemplated hereby and
thereby, including (without limitation) (A) the issuance, sale and
delivery of the Notes hereunder and (B) the filing of the Registration
Statement and Consummation of the Exchange Offer under and as defined in
the Registration Rights Agreement.
(v) This Agreement and each of the other Transaction
Agreements, and the transactions contemplated herein and therein, have
been duly and validly authorized by the Company. This Agreement and each
of the other Transaction Agreements have been duly and validly executed
and delivered by the Company.
(vi) The execution, delivery, and performance of this
Agreement and the other Transaction Agreements and the consummation of
the transactions contemplated hereby and thereby do not and will not (A)
conflict with or result in a breach of any of the terms and provisions
of, or constitute a default (or an event which with notice or lapse of
time, or both, would constitute a default) under, or result in the
creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of its subsidiaries pursuant
to, any material agreement, instrument, franchise, license or permit
certified to such counsel by an officer of the Company to which the
Company or any of its subsidiaries is a party or by which any of such
corporations or their respective properties or assets may be bound, (B)
violate or conflict with any provision of the certificate of
incorporation or bylaws of the Company or any of its subsidiaries or any
statute, rule or regulation of any court or any public, governmental or
regulatory agency or body having jurisdiction over the Company or any of
its subsidiaries or any of their respective properties or assets or, to
the knowledge of such counsel, any judgment, decree or order of any
court or any public, governmental or regulatory agency or body having
jurisdiction over the Company or any of its
-20-
<PAGE>
subsidiaries or any of their respective properties or assets, or (C) to
such counsel's knowledge, require any consent, approval, authorization,
order, registration, filing, qualification, license or permit of or with
any court or any public, governmental or regulatory agency or body
having jurisdiction over the Company or any of its subsidiaries or any
of their respective properties or assets, except (in the case of clause
(C) above) for any such consents, approvals, authorizations, orders,
registrations, filings, qualifications, licenses and permits as have
been made or obtained in as may be required under state securities or
Blue Sky laws or the securities laws of any jurisdiction outside the
United States in connection with the purchase and distribution of the
Notes by the Initial Purchasers (as to which such counsel need express
no opinion).
(vii) The Notes have been duly and validly authorized and,
when delivered by the Company in accordance with this Agreement, will be
duly and validly issued, fully paid and nonassessable and will not have
been issued in violation of or subject to any statutory preemptive
rights and, to such counsel's knowledge, contractual preemptive rights,
except as otherwise set forth in the Offering Circular and Article XV
(Subordination) of the Indenture, will rank PARI PASSU in right of
payment with all of the Company's other unsecured and unsubordinated
indebtedness for borrowed money.
(viii) The information in the Offering Circular under the
headings "Description of the Notes" and "Description of Capital Stock",
to the extent that it constitutes matters of law, summaries of legal
matters, documents or proceedings, or legal conclusions, has been
reviewed by such counsel and is a correct summary in all material
respects.
(ix) The information in the Offering Circular under the
heading "Certain Tax Considerations" to the extent that it constitutes
matters of law, summaries of legal matters, documents or proceedings, or
legal conclusions, has been reviewed by such counsel and is a correct
summary in all material respects.
-21-
<PAGE>
(x) The information in the Offering Circular under the
heading "Transfer Restrictions", insofar as it purports to summarize
matters of United States federal law, is a correct summary in all
material respects.
(xi) Based, in part, upon the representations, warranties
and covenants of the Initial Purchasers contained herein and upon the
letters delivered by accredited investors in the form of Annex A to the
Offering Circular, it is not necessary in connection with (a) the offer,
sale and delivery of the Notes to the Initial Purchasers in the manner
contemplated by the Purchase Agreement and the Offering Circular or (b)
the initial resale of the Notes by the Initial Purchasers in the manner
contemplated in the Purchase Agreement and the Offering Circular to (i)
register the Notes under the Securities Act, it being understood that no
opinion need be expressed as to any subsequent resale of any Note, or
(ii) qualify the Indenture under the Trust Indenture Act of 1939, as
amended.
(xii) To such counsel's knowledge, other than as disclosed in
the Offering Circular, no holders of securities of the Company have
rights which have not been satisfied or waived to the registration of
shares of capital stock or other securities of the Company because of
the filing of the Shelf Registration Statement or the New Notes
Registration Statement (as such terms are defined in the Offering
Circular) by the Company or the respective offerings contemplated
thereby.
In addition, such counsel shall also state that such counsel
has participated in conferences with officers and representatives of the
Company, representatives of the independent public accountants for the
Company and the Initial Purchasers at which the contents of the Offering
Circular and related matters were discussed and, although such counsel
is not passing upon and does not assume any responsibility for and has
not verified the accuracy, completeness or fairness of the statements
contained in the Offering Circular, and has not made any independent
check or verification thereof, on the basis of the foregoing (relying as
to materiality to a large extent upon facts provided by officers and
other representatives of the Company), no facts have come to the
attention of such counsel that lead such counsel to believe that the
Offering Circular contained an untrue statement of a material fact or
omitted to state any material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
-22-
<PAGE>
misleading (it being understood that such counsel need express no belief
or opinion with respect to the financial statements and other financial
and statistical data included therein).
In rendering such opinion, such counsel may rely (x) as to matters involving
the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance reasonably satisfactory to Counsel
for the Initial Purchasers) of other counsel reasonably acceptable to Counsel
for the Initial Purchasers, familiar with the applicable laws; (y) as to
matters of fact, to the extent they deem proper, on certificates of
responsible officers of the Company and certificates or other written
statements of officers of departments of various jurisdictions having custody
of documents respecting the corporate existence or good standing of the
Company and its subsidiaries, provided that copies of any such statements or
certificates shall be delivered to Counsel for the Initial Purchasers. The
opinion of such counsel for the Company shall state that the opinion of any
such other counsel is in form satisfactory to such counsel and, in their
opinion, you and they are justified in relying thereon.
(b) All proceedings taken in connection with the sale of the Notes
as herein contemplated shall be reasonably satisfactory in form and substance
to you and to Counsel for the Initial Purchasers, and the Initial Purchasers
shall have received from said Counsel for the Initial Purchasers a favorable
opinion, dated as of the Closing Date with respect to the issuance and sale
of the Notes, the Offering Circular and such other related matters as you may
reasonably require, and the Company shall have furnished to Counsel for the
Initial Purchasers such documents as they request for the purpose of enabling
them to pass upon such matters.
(c) At the Closing Date you shall have received the opinion of
Ronald M. Mankoff, General Counsel to the Company, dated the Closing date
addressed to the Initial Purchasers and in form and substance satisfactory to
Counsel for the Initial Purchasers, to the effect that each of the Company
and its subsidiaries has obtained all Licenses as are necessary or required
for the ownership, leasing and operation of its properties and the conduct of
its business as now being conducted.
-23-
<PAGE>
(d) At the Closing Date you shall have received a certificate of
the Chief Executive Officer and Chief Financial Officer of the Company, dated
the Closing Date to the effect that (i) as of the date hereof and as of the
Closing Date, the representations and warranties of the Company set forth in
Section 1 hereof are accurate, (ii) as of the Closing Date, the obligations
of the Company to be performed hereunder on or prior thereto have been duly
performed and (iii) subsequent to the respective dates as of which
information is given in the Offering Circular, the Company and its
subsidiaries have not sustained any material loss or interference with their
respective businesses or properties from fire, flood, hurricane, accident or
other calamity, whether or not covered by insurance, or from any labor
dispute or any legal or governmental proceeding, and there has not been any
material adverse change, or any development involving a material adverse
change, in the business, prospects, properties, operations, condition
(financial or other), or results of operations of the Company and its
subsidiaries taken as a whole, except in each case as disclosed in the
Offering Circular.
(e) At the time this Agreement is executed, you shall have
received a letter from E&Y, independent public accountants for the Company
and RNFC, dated as of the date of this Agreement (the "Original Letter")
addressed to the Initial Purchasers and in form and substance satisfactory to
you, to the effect that: (i) they are independent auditors with respect to
the Company and RNFC under Rule 101 of the American Independent Certified
Public Accountants Code of Professional Conduct (the "AICPA CPR"), and its
interpretations and rulings; (ii) on the basis of procedures, not
constituting an examination in accordance with generally accepted auditing
standards, set forth in detail in the Original Letter, a reading of the
minutes of meetings and consents of the shareholders and boards of directors
of the Company and the committees of such board subsequent to June 30, 1996,
inquiries of officers and other employees of the Company who have
responsibility for financial and accounting matters of the Company with
respect to transactions and events subsequent to June 30, 1996 and other
procedures and inquiries as may be specified in the Original Letter to a date
not more than five days prior to the date of the Original Letter, nothing has
come to their attention that would cause them to believe that: (A) the
unaudited pro forma financial statements included in the Prospectus do not
comply as to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations or the pro forma
adjustments have not been properly applied to the historical amounts in the
compilation of those statements; (B) there have been any changes in the
capital
-24-
<PAGE>
stock, warehouse financing facilities, term line, notes payable, subordinated
notes payable to affiliates or other debt or indebtedness of the Company or
decreases in total assets, excess servicing receivable or stockholders'
equity of the Company, in each case as compared with the amounts shown in the
most recent balance sheet presented in the Offering Circular, except for
changes or decreases which the Offering Circular disclose have occurred or
may occur or which are set forth in the Original Letter; and (C) for the
periods from the date of the latest financial statements included in the
Prospectus to a date not more than five days prior to the date of the
Original Letter, there were any decreases, as compared with the corresponding
period in the prior fiscal year, in gain on sale of loans, net, total
revenues, or total or per share net income, except for decreases which the
Offering Circular disclose have occurred or may occur or which are set forth
in the Original Letter; and (iii) stating that they have compared specific
dollar amounts, numbers of shares, percentages of revenues and earnings, and
other financial information pertaining to the Company and its subsidiaries
set forth in the Offering Circular, which have been specified by you prior to
the date of this Agreement, to the extent that such amounts, numbers,
percentages, and information may be derived from the general accounting,
financial or other records of the Company and its subsidiaries or from
schedules furnished by the Company, and excluding any questions requiring an
interpretation by legal counsel, with the results obtained from the
application of specified readings, inquiries, and other appropriate
procedures specified by you set forth in such letter, and found them to be in
agreement. At the Closing Date and, as to the Optional Notes, the Additional
Closing Date, E&Y shall have furnished to you a letter, dated the date of its
delivery, which shall confirm, on the basis of a review in accordance with
the procedures set forth in the Original Letter, that nothing has come to
their attention during the period from the date of the Original Letter
referred to in the prior sentence to a date (specified in the letter) not
more than five days prior to the Closing Date or the Additional Closing Date,
as the case may be, which would require any change in the Original Letter if
it were required to be dated and delivered at the Closing Date or the
Additional Closing Date, as the case may be.
(f) At the time this Agreement is executed, you shall have
received a letter from S&H, independent public accountants for FSMC, dated as
of the date of this Agreement (the "Original S&H Letter") addressed to the
Initial Purchasers and in form and substance satisfactory to you, to the
effect that: (i) they are independent certified public accountants with
respect to under Rule 101 of the AICPA CPR, and its interpretations and
rulings;
-25-
<PAGE>
(ii) stating that, in their opinion, the financial statements of FSMC,
included in the Offering Circular and covered by their opinion therein,
comply as to form in all material respects with the applicable accounting
requirements of the Act and the applicable published rules and regulations of
the Commission thereunder; (iii) on the basis of procedures, not constituting
an examination in accordance with generally accepted auditing standards, set
forth in detail in the Original S&H Letter, including the procedures
specified by the American Institute of Certified Public Accounts as described
in SAS 71, INTERIM FINANCIAL INFORMATION, and other procedures and inquiries
as may be specified in the Original S&H Letter, nothing has come to their
attention that would cause them to believe that the unaudited financial
statements included in the Offering Circular do not comply as to form in all
material respects with the applicable accounting requirements of the Act and
the Rules or are not fairly presented in conformity with GAAP applied on a
basis substantially consistent with that of the audited financial statements
included in the Offering Circular; and (iv) stating that they have compared
specific dollar amounts, numbers of shares, percentages of revenues and
earnings, and other financial information pertaining to FSMC and its
subsidiary set forth in the Offering Circular, which have been specified by
you prior to the date of this Agreement, to the extent that such amounts,
numbers, percentages, and information may be derived from the general
accounting, financial or other records of FSMC and its subsidiary or from
schedules furnished by FSMC, and excluding any questions requiring an
interpretation by legal counsel, with the results obtained from the
application of specified readings, inquiries, and other appropriate
procedures specified by you set forth in such letter, and found them to be in
agreement. At the Closing Date and, as to the Optional Notes, the Additional
Closing Date, S&H shall have furnished to you a letter, dated the date of its
delivery, which shall confirm, on the basis of a review in accordance with
the procedures set forth in the Original S&H Letter, that nothing has come to
their attention during the period from the date of the Original S&H Letter
referred to in the prior sentence to a date (specified in the letter) not
more than five days prior to the Closing Date or the Additional Closing Date,
as the case may be, which would require any change in the Original Letter if
it were required to be dated and delivered at the Closing Date or the Option
Closing Date, as the case may be.
(g) At the time this Agreement is executed, you shall have
received a letter from McGladrey & Pullen ("M&P"), independent public
accountants for FPF, dated as of the date of this Agreement (the "Original
M&P Letter") addressed to the
-26-
<PAGE>
Initial Purchasers and in form and substance satisfactory to you, to the
effect that: (i) they are independent certified public accountants with
respect to FPF, within the meaning of the Act and the Regulations; and (ii)
stating that they have compared specific dollar amounts, numbers of shares,
percentages of revenues and earnings, and other financial information
pertaining to FPF set forth in the Offering Circular, which have been
specified by you prior to the date of this Agreement, to the extent that such
amounts, numbers, percentages, and information may be derived from the
general accounting, financial or other records of FPF or from schedules
furnished by FPF, and excluding any questions requiring an interpretation by
legal counsel, with the results obtained from the application of specified
readings, inquiries, and other appropriate procedures specified by you set
forth in such letter, and found them to be in agreement.
(h) Prior to the Closing Date the Company shall have furnished
to the Initial Purchasers such further information, certificates and
documents as the Initial Purchasers may reasonably request.
(i) You shall have received from each person who is a director
or executive officer of the Company or the shareholders of the Company listed
on Schedule II hereto an agreement to the effect that such person will not,
directly or indirectly, without your prior written consent, offer, sell,
offer or agree to sell, grant any option to purchase or otherwise dispose (or
announce any offer, sale, grant of an option to purchase or other
disposition) of any shares of capital stock of the Company (or any securities
convertible into, exercisable for or exchangeable or exercisable for shares
of capital stock of the Company) for a period of 90 days (and one year with
respect 1.2 million shares of Common Stock owned by Farm Bureau Life
Insurance Company) after the date of the Agreement, except for the exercise
of outstanding options or warrants.
(j) At the Closing Date, the Notes shall have been approved for
quotation in the PORTAL market.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to you or to
Counsel for the Initial Purchasers pursuant to this Section 6 shall not be in
all material respects reasonably satisfactory in form and substance to Bear
Stearns and to Counsel for the Initial Purchasers, all obligations of the
Initial Purchasers hereunder may be canceled by you at, or at any time prior
to, the Closing Date and the
-27-
<PAGE>
obligations of the Initial Purchasers to purchase the Optional Notes may be
canceled by you at, or at any time prior to, the Additional Closing Date.
Notice of such cancellation shall be given to the Company in writing, or by
telephone, telex or telegraph, confirmed in writing.
7. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each Initial
Purchaser and each person, if any, who controls any Initial Purchaser within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act,
against any and all losses, liabilities, claims, damages and expenses
whatsoever as incurred (including but not limited to attorneys' fees and any
and all expenses whatsoever incurred in investigating, preparing or defending
against any litigation, commenced or threatened, or any claim whatsoever, and
any and all amounts paid in settlement of any claim or litigation), joint or
several, to which they or any of them may become subject under the Act, the
Exchange Act or otherwise, insofar as such losses, liabilities, claims,
damages or expenses (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of a material fact
contained in the Offering Circular or any related preliminary Offering
Circular or any amendment or supplement thereto or arise out of or are based
upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; PROVIDED, HOWEVER, that the Company will not be liable in any
such case to the extent but only to the extent that any such loss, liability,
claim, damage or expense arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made
therein in reliance upon and in conformity with written information furnished
to the Company by or on behalf of any Initial Purchaser through Bear Stearns
expressly for use therein; PROVIDED, FURTHER, that such indemnity with
respect to any preliminary Offering Circular shall not inure to the benefit
of any Initial Purchaser (or any person controlling such Initial Purchaser)
from whom the person asserting any such loss, claim, damage, liability or
action purchased the Notes which are the subject thereof to the extent that
any such loss, liability, claim, damage or expense (i) results from the fact
that such Initial Purchaser failed to send or give a copy of the Offering
Circular (as amended or supplemented) to such person at or prior to the
confirmation of the sale of such Notes to such person and (ii) arises out of
or is based upon an untrue statement or omission of a material fact contained
in such preliminary Offering Circular that was corrected in the Offering
Circular (or any amendment or
-28-
<PAGE>
supplement thereto), unless such failure to deliver the Offering Circular (as
amended or supplemented) was the result of noncompliance by the Company with
Section 4(a) or 4(b) hereof. This indemnity agreement will be in addition to
any liability which the Company may otherwise have including under this
Agreement.
(b) Each Initial Purchaser severally, and not jointly, agrees to
indemnify and hold harmless the Company, each of the directors of the
Company, each of the officers of the Company, and each other person, if any,
who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, against any losses, liabilities, claims,
damages and expenses whatsoever as incurred (including but not limited to
attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in
settlement of any claim or litigation), jointly or severally, to which they
or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or expenses
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in the
Offering Circular, or any related preliminary Offering Circular, or in any
amendment thereof or supplement thereto, or arise out of or are based upon
the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that any such loss,
liability, claim, damage or expense arises out of or is based upon any such
untrue statement or alleged untrue statement or omission or alleged omission
made therein in reliance upon and in conformity with written information
furnished to the Company by or on behalf of any Initial Purchaser through
Bear Stearns expressly for use therein; PROVIDED, HOWEVER, that in no case
shall any Initial Purchaser be liable or responsible for any amount in excess
of the discount or commission applicable to the Notes purchased by such
Initial Purchaser hereunder. This indemnity will be in addition to any
liability which any Initial Purchaser may otherwise have including under this
Agreement. The Company acknowledges that the statements set forth in the
last paragraph of the cover page, in the last paragraph of page iii and in
the second and seventh paragraphs under the caption "Plan of Distribution" in
the Offering Circular constitute the only information furnished in writing by
or on behalf of any Initial Purchaser through Bear Stearns expressly for use
in the Offering Circular, any
-29-
<PAGE>
Preliminary Offering Circular or in any amendment thereof or supplement
thereto, as the case may be.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against
the indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but
the failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7). In case any such action
is brought against any indemnified party, and it notifies an indemnifying
party of the commencement thereof, the indemnifying party will be entitled to
participate therein, and to the extent it may elect by written notice
delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with
counsel satisfactory to such indemnified party. Notwithstanding the
foregoing, the indemnified party or parties shall have the right to employ
its or their own counsel in any such case, but the fees and expenses of such
counsel shall be at the expense of such indemnified party or parties unless
(i) the employment of such counsel shall have been authorized in writing by
one of the indemnifying parties in connection with the defense of such
action, (ii) the indemnifying parties shall not have employed counsel to have
charge of the defense of such action within a reasonable time after notice of
commencement of the action, or (iii) such indemnified party or parties shall
have reasonably concluded that there may be defenses available to it or them
which are different from or additional to those available to one or all of
the indemnifying parties (in which case the indemnifying parties shall not
have the right to direct the defense of such action on behalf of the
indemnified party or parties), in any of which events such fees and expenses
shall be borne by the indemnifying parties. Anything in this subsection to
the contrary notwithstanding, an indemnifying party shall not be liable for
any settlement of any claim or action effected without its written consent;
PROVIDED, HOWEVER, that such consent was not unreasonably withheld.
8. CONTRIBUTION. In order to provide for contribution in
circumstances in which the indemnification provided for in Section 7 hereof
is for any reason held to be unavailable from any indemnifying party or is
insufficient to hold harmless a party indemnified thereunder, the Company and
the Initial Purchasers shall contribute to the aggregate losses, claims,
damages, liabilities and expenses of the nature contemplated by such
indemnification provision (including any investigation,
-30-
<PAGE>
legal and other expenses incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claims asserted, but
after deducting in the case of losses, claims, damages, liabilities and
expenses suffered by the Company any contribution received by the Company
from persons, other than the Initial Purchaser, who may also be liable for
contribution, including persons who control the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, and officers and
directors of the Company) as incurred to which the Company and one or more of
the Initial Purchasers may be subject, in such proportions as is appropriate
to reflect the relative benefits received by the Company and the Initial
Purchasers from the offering of the Notes or, if such allocation is not
permitted by applicable law or indemnification is not available as a result
of the indemnifying party not having received notice as provided in Section 7
hereof, in such proportion as is appropriate to reflect not only the relative
benefits referred to above but also the relative fault of the Company and the
Initial Purchasers in connection with the statements or omissions which
resulted in such losses, claims, damages, liabilities or expenses, as well as
any other relevant equitable considerations. The relative benefits received
by the Company and the Initial Purchasers shall be deemed to be in the same
proportion as (x) the total proceeds from the offering (net of discounts and
commissions but before deducting expenses) received by the Company and (y)
the discounts and commissions received by the Initial Purchasers
respectively. The relative fault of the Company and of the Initial
Purchasers shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company or the Initial Purchasers and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Initial Purchasers agree that it
would not be just and equitable if contribution pursuant to this Section 8
were determined by pro rata allocation (even if the Initial Purchasers were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to
above. Notwithstanding the provisions of this Section 8, (i) in no case
shall any Initial Purchaser be liable or responsible for any amount in excess
of the discount or commission applicable to the Notes purchased by such
Initial Purchaser hereunder, (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation and (iii) no Initial Purchaser shall be required
to contribute any amount in excess of the amount by which the total price at
which the Notes
-31-
<PAGE>
purchased by it and sold in the Offering were offered to subsequent
purchasers exceeds the amount of any damages that such Initial Purchaser has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. For purposes of this Section 8,
each person, if any, who controls an Initial Purchaser within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act shall have the
same rights to contribution as such Initial Purchaser, and each person, if
any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, each officer and each director of the
Company shall have the same rights to contribution as the Company, subject in
each case to clauses (i) and (ii) of this Section 8. Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim for
contribution may be made against another party or parties, notify each party
or parties from whom contribution may be sought, but the omission to so
notify such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have under this
Section 8 or otherwise. No party shall be liable for contribution with
respect to any action or claim settled without its consent; PROVIDED,
HOWEVER, that such consent was not unreasonably withheld.
9. DEFAULT BY AN INITIAL PURCHASER. If one or more of the Initial
Purchasers shall fail at the Closing Date to purchase the Notes which it is
obligated to purchase under this Agreement (the "Defaulted Notes"), the
non-defaulting Initial Purchaser(s) shall have the right, within 24 hours
thereafter, to make arrangements for it or any other Initial Purchaser(s) to
purchase all, but not less than all, of the Defaulted Notes in such amounts
as may be agreed upon and upon the terms herein set forth; if, however, the
non-defaulting Initial Purchaser(s) shall not have completed such
arrangements within such 24-hour period, then this Agreement shall terminate
without liability on the part of the non-defaulting Initial Purchaser(s).
No action taken pursuant to this Section shall relieve any defaulting
Initial Purchasers from liability in respect of its default.
In the event of any such default which does not result in a termination
of this Agreement, either the non-defaulting Initial Purchasers or the
Company shall have the right to postpone the Closing Date for a period not
exceeding seven days in order to effect any required changes in the Offering
Memorandum or in any other documents or arrangements.
-32-
<PAGE>
10. SURVIVAL OF REPRESENTATIONS AND AGREEMENTS. All
representations and warranties, covenants and agreements of the Initial
Purchasers and the Company contained in this Agreement, including the
agreements contained in Section 5, the indemnity agreements contained in
Section 7 and the contribution agreements contained in Section 8, shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of any Initial Purchasers or any agent, representative
or controlling person thereof or by or on behalf of the Company, any of its
officers and directors or any controlling person thereof, and shall survive
delivery of and payment for the Notes to and by the Initial Purchasers. The
representations contained in Section 1 and the agreements contained in
Sections 5, 7, 8 and 11(d) hereof shall survive the termination of this
Agreement, including termination pursuant to Section 9 or 11 hereof.
11. TERMINATION.
(a) Bear Stearns shall have the right to terminate this
Agreement at any time prior to the Closing Date or the obligations of the
Initial Purchasers to purchase the Optional Notes at any time prior to the
Additional Closing Date, as the case may be, if (A) any domestic or
international event or act or occurrence has materially disrupted, or in Bear
Stearns' opinion will in the immediate future materially disrupt, the United
States or international securities markets; or (B) if trading on the New York
Stock Exchange or Nasdaq National Market shall have been suspended, or
materially limited; or (C) if a banking moratorium has been declared by any
United States federal or New York State authority or if any new restriction
materially adversely affecting the distribution of the Notes or the Optional
Notes, as the case may be, shall have become effective; or (D) if any
downgrading in the rating of the Company's debt securities by any "nationally
recognized statistical rating organization" (as defined for purposes of Rule
436(g) under the Act); (E)(i) if the United States becomes engaged in
hostilities or there is an escalation of hostilities involving the United
States or there is a declaration of a national emergency or war by the United
States or (ii) if there shall have been such change in political, financial
or economic conditions if the effect of any such event in (i) or (ii) in Bear
Stearns' judgment makes it impracticable or inadvisable to proceed with the
offering, sale and delivery of the Notes or the Optional Notes, as the case
may be, on the terms contemplated by the Offering Circular; or (F) if trading
in the Common Stock shall have been suspended by the Commission or the Nasdaq
National Market.
-33-
<PAGE>
(b) Any notice of termination pursuant to this Section 11
shall be by telephone, telex, or telegraph, confirmed in writing by letter.
(c) If this Agreement shall be terminated pursuant to any
of the provisions hereof (otherwise than pursuant to Section 9 or 11(a)
hereof), or if the sale of the Notes provided for herein is not consummated
because any condition to the obligations of the Initial Purchasers set forth
herein is not satisfied or because of any refusal, inability or failure on
the part of the Company to perform any agreement herein or comply with any
provision hereof, the Company will, subject to demand by you, reimburse the
Initial Purchasers for all out-of-pocket expenses (including the fees and
expenses of Counsel for the Initial Purchasers), incurred by the Initial
Purchasers in connection herewith.
12. NOTICE. All communications hereunder, except as may be
otherwise specifically provided herein, shall be in writing and, if sent to
any Initial Purchaser, shall be mailed, delivered, or telexed or telegraphed
and confirmed in writing, to it c/o Bear, Stearns & Co. Inc., 245 Park
Avenue, New York, New York 10167, Attention: Steven L. Begleiter; if sent to
the Company, shall be mailed, delivered, or telegraphed and confirmed in
writing to the Company, RAC Financial Group, Inc., 1250 West Mockingbird
Lane, Dallas, Texas 75247, Attention: General Counsel.
13. PARTIES. This Agreement shall inure solely to the benefit of,
and shall be binding upon, the Initial Purchasers and the Company and the
controlling persons, directors, officers, employees and agents referred to in
Section 7 and 8, and their respective successors and assigns, and no other
person shall have or be construed to have any legal or equitable right,
remedy or claim under or in respect of or by virtue of this Agreement or any
provision herein contained. The term "successors and assigns" shall not
include a purchaser, in its capacity as such, of Notes from any of the
Initial Purchasers.
14. GOVERNING LAW.
(a) THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE
STATE OF NEW YORK.
(b) THE COMPANY HEREBY IRREVOCABLY SUBMITS TO THE
NON-EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND THE
FEDERAL COURTS OF THE UNITED STATES OF AMERICA SITTING IN THE CITY OF NEW
YORK IN ANY ACTION PROCEEDING ARISING OUT OF OR
-34-
<PAGE>
RELATING TO THIS AGREEMENT AND IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT
OF SUCH ACTION OR PROCEEDING MAY BE HEARD IN ANY SUCH NEW YORK STATE OR
FEDERAL COURT. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY
DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION
OR PROCEEDING AND APPOINTS CT CORPORATION TRUST SYSTEM WITH AN OFFICE AT 1633
BROADWAY, NEW YORK, NEW YORK 10019 AS ITS AUTHORIZED AGENT UPON WHOM PROCESS
MAY BE SERVED IN ANY ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT WHICH
MAY BE INSTITUTED IN ANY SUCH COURT. THE COMPANY REPRESENTS AND WARRANTS
THAT SUCH AGENT HAS AGREED TO ACT AS ITS AGENT FOR SERVICE OF PROCESS AND
AGREES TO TAKE ANY AND ALL ACTIONS INCLUDING THE FILING OF ANY AND ALL
DOCUMENTS OR INSTRUMENTS (INCLUDING THE APPOINTMENT OF ANY SUCCESSOR AGENT,
AS NECESSARY) THAT MAY BE NECESSARY TO CONTINUE SUCH APPOINTMENT IN EFFECT.
NOTHING HEREIN SHALL BE CONSTRUED TO PREVENT OR IMPAIR THE RIGHT OF ANY
INITIAL PURCHASER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO
BRING ANY ACTION, SUIT OR PROCEEDING IN ANY OTHER JURISDICTION.
-35-
<PAGE>
If the foregoing correctly sets forth the understanding between you and the
Company, please so indicate in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement among us.
Very truly yours,
RAC FINANCIAL GROUP, INC.
By ________________________
Name:
Title:
Accepted as of the date first above written
BEAR, STEARNS & CO. INC.
By ____________________________
Name:
Title:
On behalf of itself and the other
Initial Purchasers named in Schedule I hereto.
-36-
<PAGE>
SCHEDULE I
Number of Firm
Name of Initial Purchaser Notes to be Purchased
- ------------------------- ---------------------
Bear, Stearns & Co. Inc. .............................. $45,000,000
Prudential Securities Incorporated..................... 45,000,000
Keefe Bruyette & Woods................................. 10,000,000
Total.................... $100,000,000
-37-
<PAGE>
SCHEDULE II
LOCK-UP AGREEMENTS
Ronald M. Mankoff
Mankoff Generation Trust
RJM Properties, Ltd.
Mankoff Irrevocable Trust
SFA Mortgage Company
Daniel T. Phillips
Phillips Partnership
Lenox Investment Corporation
Eric C. Green
G.B. Kline Residuary Trust
Gene O'Bryan
John Fitzgerald
Daniel J. Jessee
Paul Seegers
Sheldon I. Stein
Donald Rubin Children's Trust
Banc One Capital Holdings Corporation
Farm Bureau Life Insurance Company
-38-
<PAGE>
EXHIBIT 4.2
===============================================================================
RAC FINANCIAL GROUP, INC.
Issuer
AND
BANK ONE, COLUMBUS, N.A.
Trustee
INDENTURE
Dated as of August 20, 1996
7.25% Convertible Subordinated Notes Due 2003
===============================================================================
<PAGE>
INDENTURE, dated as of August 20, 1996, by and between RAC FINANCIAL
GROUP, INC., a Nevada corporation (the "Company"), and BANK ONE, COLUMBUS, N.A.,
a national banking association (the "Trustee").
W I T N E S S E T H :
WHEREAS, for its lawful corporate purposes, the Company has duly
authorized the issuance of its 7.25% Convertible Subordinated Notes Due 2003
(the "Notes"), in an aggregate principal amount not to exceed $115,000,000, and,
to provide the terms and conditions upon which the Notes are to be
authenticated, issued and delivered, the Company has duly authorized the
execution and delivery of this Indenture; and
WHEREAS, the Notes, the certificate of authentication to be borne by
the Notes, a form of assignment, a form of option to require repurchase by the
Company upon a Change of Control (as hereinafter defined), a form of conversion
notice and a certificate of transfer to be borne by the Notes are to be
substantially in the forms hereinafter provided for; and
WHEREAS, all acts and things necessary to make the Notes, when
executed by the Company and authenticated and delivered by the Trustee or a duly
authorized authenticating agent, as in this Indenture provided, the valid,
binding and legal obligations of the Company, and to constitute these presents a
valid agreement according to its terms, have been done and performed, and the
execution of this Indenture and the issuance hereunder of the Notes have in all
respects been duly authorized.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
That in order to declare the terms and conditions upon which the Notes
are, and are to be, authenticated, issued and delivered, and in consideration of
the premises and of the purchase and acceptance of the Notes by the holders
thereof, the Company covenants and agrees with the Trustee for the equal and
proportionate benefit of the respective holders from time to time of the Notes
(except as otherwise provided below) as follows:
-1-
<PAGE>
ARTICLE I.
DEFINITIONS
Section 1. DEFINITIONS. The terms defined in this Section 1.1
(except as herein otherwise expressly provided or unless the context
otherwise requires) for all purposes of this Indenture and of any indenture
supplemental hereto shall have the respective meanings specified in this
Section 1.1. The words "herein," "hereof," "hereunder" and words of similar
import refer to this Indenture as a whole and not to any particular Article
or Section.
ACCREDITED INVESTOR: The term "Accredited Investor" shall have the
meaning specified in Rule 501(a) under the Securities Act.
ACQUISITION PRICE: The term "Acquisition Price" shall mean the
weighted average price paid by the person or group in acquiring the Voting
Stock.
AFFILIATE: An "Affiliate" of any specified person shall mean an
"affiliate" as defined in Rule 144(a) as promulgated under the Securities Act.
BOARD OF DIRECTORS: The term "Board of Directors" shall mean the
Board of Directors of the Company or a committee of such Board of Directors duly
authorized to act for it hereunder.
BOARD RESOLUTION: The term "Board Resolution" shall mean a copy of a
resolution certified by the Secretary or an Assistant Secretary of the Company
to have been duly adopted by the Board of Directors and to be in full force and
effect on the date of such certification, and delivered to the Trustee.
BUSINESS DAY: The term "Business Day" shall mean a day, other than a
Saturday, a Sunday or a day on which the banking institutions in the State and
City of New York are authorized or obligated by law or executive order to close
or a day that is declared a national or New York state holiday.
CAPITAL STOCK: The term "Capital Stock" of any person shall mean any
and all shares, interests, participations or other equivalents (however
designated) of such person's corporate stock or any and all equivalent ownership
interests in a person (other than a corporation) whether now outstanding or
issued after the date hereof.
-2-
<PAGE>
CEDEL: The term "Cedel" shall mean Cedel Bank societe anonyme.
CHANGE OF CONTROL: The term "Change of Control" shall have the
meaning specified in Section 3.5(d).
CLOSING DATE: The term "Closing Date" shall mean August 20, 1996.
COMMISSION: The term "Commission" shall mean the Securities and
Exchange Commission, as from time to time constituted, created under the
Exchange Act or, if at any time after the execution of this instrument such
Commission is not existing and performing the duties now assigned to it under
the Trust Indenture Act, the body performing such duties at such time.
COMMON STOCK: The term "Common Stock" shall mean any stock of any
class of the Company that does not have a preference in respect of dividends or
of amounts payable in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company and that is not subject to redemption
by the Company. Subject to the provisions of Section 14.6, however, shares
issuable on conversion of Notes shall include only shares of the class
designated as common stock of the Company at the date of this Indenture or
shares of any class or classes resulting from any reclassification or
reclassifications thereof and that do not have a preference in respect of
dividends or of amounts payable in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company and that are not subject
to redemption by the Company; provided that if at any time there shall be more
than one such resulting class, the shares of each such class then so issuable
shall be substantially in the proportion that the total number of shares of such
class resulting from all such reclassification bears to the total number of
shares of all such classes resulting from all such reclassifications.
COMPANY: The term "Company" shall mean RAC Financial Group, Inc., a
Nevada corporation, and subject to the provisions of Article XI, shall include
its successors and assigns.
CONVERSION PRICE: The term "Conversion Price" shall have the meaning
specified in Section 14.4.
CORPORATE TRUST OFFICE OF THE TRUSTEE: The term "Corporate Trust
Office of the Trustee," or other similar term, shall mean the office of the
Trustee at which at any particular time its corporate trust business shall be
principally administered, which office is, at the date as of which this
Indenture is
-3-
<PAGE>
dated, located at 100 East Broad Street, 8th Floor, Columbus, Ohio 43272-0181
Attention: Corporate Trust Administration.
CREDIT FACILITIES: The term "Credit Facilities" means, collectively,
(i) that certain credit agreement dated March 17, 1995 among FirstPlus
Financial, Inc. (formerly known as Remodelers National Funding Corp., "FPF"),
the Company and Bank One, Texas, N.A., (ii) that certain Amended and Restated
Warehousing Credit, Term Loan and Security Agreement dated February 1, 1996
among Residential Funding Corporation, the Company and FPF, (iii) that certain
Senior Subordinated Note and Warrant Purchase Agreement, dated as of March 31,
1995, amended and restated as of July 16, 1995 and September 27, 1996, among the
Company, FPF, SFA: State Financial Acceptance Corporation, Banc One Capital
Partners II, Limited Partnership and Farm Bureau Life Insurance Company, and
(iv) that certain Mortgage Warehouse Loan and Security Agreement between FSMC
and Leader Federal Bank for Savings, dated June 1, 1995, as amended, in each
case including any related notes, guaranties, collateral documents, instruments
and agreements executed in connection therewith, and in each case as amended,
modified, renewed, refunded, replaced, restated or refined from time to time.
CUSTODIAN: The term "Custodian" shall mean Bank One, Columbus, N.A.,
as custodian with respect to the Notes in global form, or any successor entity
thereto.
DEFAULT: The term "default" shall mean any event that is, or after
notice or passage of time, or both, would be, an Event of Default.
DEFINITIVE NOTES; IN DEFINITIVE FORM: The term "definitive Notes"
shall have the meaning specified in Section 2.2, any reference to Notes "in
definitive form" shall mean definitive Notes, and any reference to securities
"in definitive form" shall mean definitive Notes or Common Stock as the context
requires.
DEPOSITARY: The term "Depositary" shall mean, with respect to the
Notes issuable or issued in whole or in part in global form, the person
specified in Section 2.5(d) as the Depositary with respect to the Notes, until a
successor shall have been appointed and become such pursuant to the applicable
provisions of this Indenture, and thereafter, "Depositary" shall mean or include
such successor.
DWAC: The term "DWAC" shall mean Deposit and Withdrawal at Custodian
Service.
-4-
<PAGE>
EUROCLEAR: The term "Euroclear" shall mean Morgan Guaranty Trust
Company of New York, Brussels office, as operator of the Euroclear System.
EVENT OF DEFAULT: The term "Event of Default" shall mean any event
specified in Section 6.1(a) through (g).
EXCHANGE ACT: The term "Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended, and the rules and regulations promulgated
thereunder.
GLOBAL NOTE: The term "global Note" shall mean any and all notes in
global form.
INDENTURE: The term "Indenture" shall mean this instrument as
originally executed or, if amended or supplemented as herein provided, as so
amended or supplemented.
NOTE OR NOTES: The terms "Note" or "Notes" shall mean any Note or
Notes, as the case may be, authenticated and delivered under this Indenture.
NOTEHOLDER; HOLDER: The terms "Noteholder" or "holder" as applied to
any Note, or other similar terms (but excluding the term "beneficial holder"),
shall mean any person in whose name at the time a particular Note is registered
on the Note registrar's books.
NOTE REGISTER: The term "Note register" shall have the meaning
specified in Section 2.5(a).
OFFICERS' CERTIFICATE: The term "Officers' Certificate," when used
with respect to the Company, shall mean a certificate signed by the President,
the Chief Executive Officer, the Chief Operating Officer, the Chief Financial
Officer and any Treasurer or Secretary or any Assistant Secretary of the
Company, that is delivered to the Trustee. Each such certificate shall include
the statements provided for in Section 16.7 if and to the extent required by the
provisions of such Section.
OPINION OF COUNSEL: The term "Opinion of Counsel" shall mean an
opinion in writing signed by legal counsel, who may be an employee of or counsel
to the Company or other counsel acceptable to the Trustee, that is delivered to
the Trustee. Each such opinion shall include the statements provided for in
Section 16.7 if and to the extent required by the provisions of such Section.
-5-
<PAGE>
OUTSTANDING: The term "outstanding" with reference to Notes as of any
particular time shall mean, subject to the provisions of Section 8.4, all Notes
authenticated and delivered by the Trustee under this Indenture, except
(a) Notes theretofore canceled by the Trustee or delivered
to the Trustee for cancellation;
(b) Notes, or portions thereof, for which monies in the
necessary amount shall have been deposited in trust with the
Trustee for payment or redemption; provided that if such Notes are
to be redeemed prior to the maturity thereof, notice of such
redemption shall have been given pursuant to Article III or
provision satisfactory to the Trustee shall have been made for
giving such notice;
(c) Notes paid pursuant to Section 2.6 hereof or Notes
in lieu of or in substitution for which other Notes shall have been
authenticated and delivered pursuant to the terms of Section 2.6
unless proof satisfactory to the Trustee is presented that any such
Notes are held by BONA FIDE holders in due course; and
(d) Notes converted into Common Stock pursuant to
Article XIV and Notes not deemed outstanding pursuant to
Section 3.2.
PERSON: The term "person" shall mean a corporation, an association, a
partnership, an individual, a joint venture, a joint stock company, a trust, an
unincorporated organization or a government or an agency or a political
subdivision thereof.
PORTAL MARKET: The term "PORTAL Market" shall mean the Private
Offerings, Resales and Trading through Automated Linkages Market operated by the
National Association of Securities Dealers, Inc. or any successor thereto.
PREDECESSOR NOTE: The term "Predecessor Note" of any particular Note
shall mean every previous Note evidencing all or a portion of the same debt as
that evidenced by such particular Note; and, for the purposes of this
definition, any Note authenticated and delivered under Section 2.6 in lieu of a
lost, destroyed or stolen Note shall be deemed to evidence the same debt as the
lost, destroyed or stolen Note.
QIB: The term "QIB" shall mean a "qualified institutional buyer" as
defined in Rule 144A.
-6-
<PAGE>
REGULATION S: The term "Regulation S" shall mean Regulation S under
the Securities Act and any successor regulation thereto.
REGULATION S GLOBAL NOTE: The term "Regulation S Global Note" shall
have the meaning specified in Section 2.2.
RESPONSIBLE OFFICER: The term "Responsible Officer" with respect to
the Trustee, shall mean an officer of the Trustee assigned and duly authorized
by the Trustee to administer its corporate trust matters.
RESTRICTED GLOBAL NOTE: The term "Restricted Global Note" shall have
the meaning specified in Section 2.2.
RESTRICTED PERIOD: The term "Restricted Period" shall have the
meaning specified in Section 2.2.
RESTRICTED SECURITIES: The term "Restricted Securities" shall have
the meaning specified in Section 2.5(d).
RULE 144A: The term "Rule 144A" shall mean Rule 144A as promulgated
under the Securities Act.
SECURITIES ACT: The term "Securities Act" shall mean the Securities
Act of 1933, as amended, and the rules and regulations promulgated thereunder.
SENIOR INDEBTEDNESS: The term "Senior Indebtedness" shall have the
meaning specified in Section 15.2(2).
SUBSIDIARY: The term "subsidiary" of any specified person shall mean
(i) a corporation a majority of whose capital stock with voting power under
ordinary circumstances to elect directors is at the time directly or indirectly
owned by such person or (ii) any other person (other than a corporation) in
which such person or such person and a subsidiary or subsidiaries of such person
or a subsidiary or subsidiaries of such person directly or indirectly, at the
date of determination thereof, has at least majority ownership.
SUCCESSOR COMPANY: The term "Successor Company" shall have the
meaning specified in Section 11.1.
TRUST INDENTURE ACT: The term "Trust Indenture Act" shall mean the
Trust Indenture Act of 1939, as amended, as it was in force at the date of
execution of this Indenture, except as provided in Sections 10.3 and 14.6;
provided that in the event said Trust Indenture Act of 1939 is amended after the
date
-7-
<PAGE>
hereof, the term "Trust Indenture Act" shall mean, to the extent required
by such amendment, said Trust Indenture Act of 1939 as so amended.
TRUSTEE: The term "Trustee" shall mean Bank One, Columbus, N.A., its
successors and any corporation resulting from or surviving any consolidation or
merger to which it or its successors may be a party and any successor trustee at
the time serving as successor trustee hereunder.
U.S. GOVERNMENT OBLIGATIONS: The term "U.S. Government Obligations"
shall mean securities that are (i) direct obligations of the United States of
America for the payment of which its full faith and credit is pledged or (ii)
obligations of a person controlled or supervised by, and acting as an agency or
instrumentality of, the United States of America the timely payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America, which, in either case, are not callable or redeemable at the
option of the issuer thereof, and shall also include a depository receipt issued
by a bank (as defined in Section 3(a)(2) of the Securities Act) as custodian
with respect to any such U.S. Government Obligation or a specific payment of
principal or interest on any such U.S. Government Obligation held by such
custodian for the account of the holder of such depository receipt; provided
that (except as required by law) such custodian is not authorized to make any
deduction from the amount payable to the holder of such depository receipt from
any amount received by such custodian in respect of the U.S. Government
Obligation or the specific payment of principal of or interest on the U.S.
Government Obligation evidenced by such depository receipt.
VOTING STOCK: The term "Voting Stock" of any person shall mean stock
of the class or classes pursuant to which the holders thereof have the general
voting power under ordinary circumstances to elect at least a majority of the
board of directors, managers or trustees of such person (irrespective of whether
or not at the time stock of any other class or classes shall have or might have
voting power by reason of the happening of any contingency).
The definitions of certain other terms are as specified in Sections
2.3, 2.5, 3.5, 12.1, 14.5, 14.6, 15.2 and 15.4.
Section 2. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.
-8-
<PAGE>
Whenever this Indenture refers to a provision of the Trust Indenture
Act, the provision is incorporated by reference in and made a part of this
Indenture.
The following Trust Indenture Act terms used in this Indenture have
the following meanings:
"INDENTURE SECURITIES" means the Notes;
"INDENTURE SECURITY HOLDER" means a Holder of Notes;
"INDENTURE TO BE QUALIFIED" means this Indenture;
"INDENTURE TRUSTEE" or "INSTITUTIONAL TRUSTEE" means the Trustee;
"OBLIGOR" on the Notes means the Company and any successor obligor
upon the Trust Indenture Act.
All other terms used in this Indenture that are defined by the Trust
Indenture Act, defined by Trust Indenture Act reference to another statute or
defined by Commission rule under the Trust Indenture Act have the meanings so
assigned to them.
Section 3. RULES OF CONSTRUCTION.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the
meaning assigned to it in accordance with generally accepted
accounting principles;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and in the
plural include the singular; and
(5) provisions apply to successive events and transactions.
ARTICLE II.
ISSUE, DESCRIPTION, EXECUTION, REGISTRATION
AND EXCHANGE OF NOTES
Section 1. DESIGNATION, AMOUNT AND ISSUE OF NOTES. The Notes shall
be designated as "7.25% Convertible Subordinated
-9-
<PAGE>
Notes Due 2003." Notes not to exceed the aggregate principal amount of
$115,000,000 upon the execution of this Indenture, or from time to time
thereafter, may be executed by the Company and delivered to the Trustee for
authentication, and the Trustee shall thereupon authenticate and make
available for delivery said Notes upon the written order of the Company,
signed by its (a) Chief Executive Officer, President, Chief Operating Officer
or Chief Financial Officer, and (b) any Treasurer or Secretary or any
Assistant Secretary, without any further action by the Company hereunder.
Section 2. FORM OF NOTES. The Notes in definitive form
("definitive Notes") shall be substantially in the form of Exhibit A hereto,
with the legends in substantially the form indicated in Exhibit A hereto and
such other legends as may be applicable thereto, which definitive Notes shall
be registered in the name of the holders thereof, duly executed by the
Company and authenticated by the Trustee or the authenticating agent as
provided herein.
Unless issued in definitive form, Notes initially offered and sold in
reliance on Rule 144A shall be issued in the form of one or more permanent
global Notes (the "Restricted Global Note"), substantially in the form of
Exhibit B hereto, with the legends in substantially the form set forth in
Exhibit B hereto and such other legends as may be applicable thereto, which
Restricted Global Note shall be deposited on behalf of the holders of the Notes
represented thereby with the Trustee, as custodian for the Depositary, and
registered in the name of a nominee of the Depositary, duly executed by the
Company and authenticated by the Trustee or the authenticating agent as provided
herein.
Notes offered and sold outside the United States in reliance on
Regulation S may be evidenced in the form of one or more permanent global Notes
(the "Regulation S Global Note"), substantially in the form of Exhibit C hereto,
with the legends in substantially the form set forth in Exhibit C hereto and
such other legends as may be applicable thereto, which Regulation S Global Note
shall be deposited on behalf of the holders of the Notes represented thereby
with the Trustee, as custodian for the Depositary, and registered in the name of
a nominee of the Depositary, duly executed by the Company and authenticated by
the Trustee or an authenticating agent as provided herein, for credit to the
accounts of the respective depositaries for Euroclear and Cedel (or such other
accounts as they may direct). Prior to or on the 40th day after the later of
the commencement of the offering of the Notes and the Closing Date (the
"Restricted Period"), beneficial interests in the Regulation S Global Note
-10-
<PAGE>
may only be held through Morgan Guaranty Trust Company of New York, Brussels
office, as operator of Euroclear or Cedel or another agent member of
Euroclear and Cedel acting for and on behalf of them, unless delivery is made
through the Restricted Global Note in accordance with the certification
requirements hereof. During the Restricted Period, interests in the
Regulation S Global Note may be exchanged for interests in the Restricted
Global Note or for definitive Notes only in accordance with the certification
requirements described in Section 2.5 below.
Any of the Notes may have such letters, numbers or other marks of
identification and such notations, legends and endorsements as the officers
executing the same may approve (execution thereof to be conclusive evidence of
such approval) and as are not inconsistent with the provisions of this
Indenture, or as may be required to comply with any law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any stock
exchange on which the Notes may be listed, or to conform to usage.
Any global Note shall represent such of the outstanding Notes as shall
be specified therein and shall provide that it shall represent the aggregate
amount of outstanding Notes from time to time endorsed thereon and that the
aggregate amount of outstanding Notes represented thereby may from time to time
be increased or reduced to reflect transfers or exchanges permitted hereby. Any
endorsement of a global Note to reflect the amount of any increase or decrease
in the amount of outstanding Notes represented thereby shall be made by the
Trustee or the Custodian, at the direction of the Trustee, in such manner and
upon instructions given by the holder of such Notes in accordance with the
Indenture. Payment of principal of and interest and premium, if any, on any
global Note shall be made to the holder of such Note.
The terms and provisions contained in the forms of Notes attached as
Exhibits A, B and C hereto shall constitute, and are hereby expressly made, a
part of this Indenture and to the extent applicable, the Company and the
Trustee, by their execution and delivery of this Indenture, expressly agree to
such terms and provisions and to be bound thereby.
Section 3. DATE AND DENOMINATION OF NOTES; PAYMENTS OF INTEREST.
The Notes shall be issuable in registered form without coupons in
denominations of $1,000 principal amount and integral multiples thereof.
Every Note shall be dated the date of its authentication, shall bear interest
from the date of original issue and shall be payable semiannually on February
15 and August
-11-
<PAGE>
15, commencing February 15, 1997, as specified on the faces of
the forms of Notes, attached as Exhibits A, B and C hereto.
The person in whose name any Note (or its Predecessor Note) is
registered at the close of business on any record date with respect to any
interest payment date (including any Note that is converted after the record
date and on or before the interest payment date) shall be entitled to receive
the interest payable on such interest payment date notwithstanding the
cancellation of such Note upon any transfer, exchange or conversion
subsequent to the record date and prior to such interest payment date.
Interest may, at the option of the Company, be paid by check mailed to the
address of such person as it appears on the Note register; provided that,
with respect to any holder of Notes with an aggregate principal amount equal
to or in excess of $5,000,000, at the request (such request to include
appropriate wire instructions) of such holder in writing to the Trustee on or
before the record date preceding any interest payment date, interest on such
holder's Notes shall be paid by wire transfer in immediately available funds
(the cost of such wire transfer to be borne by the Company). The term
"record date" with respect to any interest payment date shall mean the
February 1st or August 1st preceding said February 15th or August 15th.
Interest on the Notes shall be computed on the basis of a 360-day year
composed of twelve 30-day months.
Any interest on any Note that is payable, but is not punctually paid
or duly provided for, on any said February 15 or August 15 (herein called
"Defaulted Interest") shall forthwith cease to be payable to the Noteholder on
the relevant record date by virtue of his having been such Noteholder; and such
Defaulted Interest shall be paid by the Company, at its election in each case,
as provided in clause (1) or (2) below:
(1) The Company may elect to make payment of any
Defaulted Interest to the persons in whose names the Notes (or
their respective Predecessor Notes) are registered at the close of
business on a special record date for the payment of such Defaulted
Interest, which shall be fixed in the following manner. The
Company shall notify the Trustee in writing of the amount of
Defaulted Interest to be paid on each Note and the date of the
payment (which shall be not less than 25 days after the receipt by
the Trustee of such notice, unless the Trustee shall consent to an
earlier date), and at the same time, the Company shall deposit with
the Trustee an amount of money equal to the aggregate amount to be
paid in respect of such Defaulted Interest or shall make
arrangements satisfactory to the Trustee for such
-12-
<PAGE>
deposit prior to the date of the proposed payment, such money when
deposited to be held in trust for the benefit of the persons
entitled to such Defaulted Interest as in this clause provided.
Thereupon, the Trustee shall fix a special record date for the
payment of such Defaulted Interest, which shall be not more than 15
days and not less than 10 days prior to the date of the payment and
not less than 10 days after the receipt by the Trustee of the
notice of the proposed payment. The Trustee shall promptly notify
the Company of such special record date and, in the name and at the
expense of the Company, shall cause notice of the payment of such
Defaulted Interest and the special record date therefor to be
mailed, first-class postage prepaid, to each Noteholder at his
address as it appears in the Note register, not less than 10 days
prior to such special record date. Notice of the proposed payment
of such Defaulted Interest and the special record date therefor
having been so mailed, such Defaulted Interest shall be paid to the
persons in whose names the Notes (or their respective Predecessor
Notes) were registered at the close of business on such special
record date and shall no longer be payable pursuant to the
following clause (2).
(2) The Company may make payment of any Defaulted
Interest in any other lawful manner not inconsistent with the
requirements of any securities exchange on which the Notes may be
listed, and upon such notice as may be required by such exchange,
if, after notice given by the Company to the Trustee of the
proposed payment pursuant to this clause, such manner of payment
shall be deemed practicable by the Trustee.
Section 4. EXECUTION OF NOTES. The Notes shall be signed in the
name and on behalf of the Company by the signature of its Chief Executive
Officer, President, Chief Operating Officer or Chief Financial Officer and
attested by the signature of its Treasurer, Secretary or any of its Assistant
Secretaries (any of which signatures may be printed, engraved or otherwise
reproduced thereon, by facsimile or otherwise). Only such Notes as shall
bear thereon a certificate of authentication substantially in the form set
forth on forms of Notes attached as Exhibits A, B and C hereto, manually
executed by the Trustee (or an authenticating agent appointed by the Trustee
as provided by Section 16.14), shall be entitled to the benefits of this
Indenture or be valid or obligatory for any purpose. Such certificate by the
Trustee (or such an authenticating agent) upon any Note executed by the
Company shall be conclusive evidence that the Note so authenticated has been
duly authenticated and delivered
-13-
<PAGE>
hereunder and that the holder is entitled to the benefits of this Indenture.
In case any officer of the Company who shall have signed any of the
Notes shall cease to be such officer before the Notes so signed shall have been
authenticated and delivered by the Trustee, or disposed of by the Company, such
Notes nevertheless may be authenticated and delivered or disposed of as though
the person who signed such Notes had not ceased to be such officer of the
Company; and any Note may be signed on behalf of the Company by such persons as,
at the actual date of the execution of such Note, shall be the proper officers
of the Company, although at the date of the execution of this Indenture any such
person was not such an officer.
Section 5. EXCHANGE AND REGISTRATION OF TRANSFER OF NOTES;
RESTRICTIONS ON TRANSFER; DEPOSITARY.
(a) The Company shall cause to be kept at the Corporate Trust
Office of the Trustee a register (the register maintained in such office and
in any other office or agency of the Company designated pursuant to Section
4.2 being herein sometimes collectively referred to as the "Note register")
in which, subject to such reasonable regulations as it may prescribe, the
Company shall provide for the registration of Notes and of transfers of
Notes. Such Note register shall be in written form or in any form capable of
being converted into written form within a reasonable period of time. The
Trustee is hereby appointed "Note registrar" for the purpose of registering
Notes and transfers of Notes as herein provided. The Company may appoint one
or more co-registrars.
Upon surrender for registration of transfer of any Note to the Note
registrar or any co-registrar and satisfaction of the requirements for such
transfer set forth in this Section 2.5, the Company shall execute, and the
Trustee shall authenticate and make available for delivery, in the name of the
designated transferee or transferees, one or more new Notes of any authorized
denominations and of a like aggregate principal amount and bearing such
restrictive legends as may be required by Section 2.5(d).
Notes may be exchanged for other Notes of any authorized denominations
and of a like aggregate principal amount, upon surrender of the Notes to be
exchanged at any such office or agency. Whenever any Notes are so surrendered
for exchange, the Company shall execute, and the Trustee shall authenticate and
make available for delivery, the Notes that the Noteholder making the exchange
is entitled to receive.
-14-
<PAGE>
All Notes presented or surrendered for registration of
transfer or for exchange shall (if so required by the Company, the Trustee,
the Note registrar or any co-registrar) be duly endorsed, or be accompanied
by a written instrument of transfer in form satisfactory to the Company,
executed by the Noteholder thereof or his attorney duly authorized in writing.
No service charge shall be charged to the Noteholder for any
exchange or registration of transfer of Notes, but the Company may require
payment of a sum sufficient to cover any tax, assessments or other
governmental charges that may be imposed in connection therewith.
None of the Company, the Trustee, the Note registrar or any
co-registrar shall be required to exchange or register a transfer of (a) any
Notes for a period of 15 days next preceding the mailing of a notice of
redemption, (b) any Notes called for redemption or, if a portion of any Note
is selected or called for redemption, such portion thereof selected or called
for redemption, (c) any Notes surrendered for conversion or, if a portion of
any Note is surrendered for conversion, such portion thereof surrendered for
conversion or (d) any Notes surrendered for redemption pursuant to Section
3.5 or, if a portion of any Note is surrendered for redemption pursuant to
Section 3.5, such portion thereof surrendered for redemption pursuant to
Section 3.5.
All Notes issued upon any transfer or exchange of Notes shall be
the valid obligations of the Company, evidencing the same debt and entitled
to the same benefits under this Indenture as the Notes surrendered upon such
registration of transfer or exchange.
(b) So long as the Notes are eligible for book-entry settlement
with the Depositary, or unless otherwise required by law, all Notes to be
traded on the PORTAL Market shall be represented by the Restricted Global
Note registered in the name of the Depositary or the nominee of the
Depositary. The transfer and exchange of beneficial interests in any global
Note that does not involve the issuance of a definitive Note or the transfer
of interests to another global Note shall be effected through the Depositary
(but not the Trustee or the Custodian) in accordance with this Indenture
(including the restrictions on transfer set forth herein) and the procedures
of the Depositary therefor. Neither the Trustee nor the Custodian (in such
respective capacities) shall have any responsibility for the transfer and
exchange of beneficial interests in such global Note that does not involve
the issuance of a definitive Note or the transfer of interests to another
global Note.
-15-
<PAGE>
At any time at the request of the beneficial holder of an interest
in a global Note, such beneficial holder shall be entitled to obtain a
definitive Note upon written request to the Trustee and the Custodian in
accordance with the standing instructions and procedures existing between the
Depositary and the Custodian for the issuance thereof. Upon receipt of any
such request, the Trustee or the Custodian, at the direction of the Trustee,
shall cause, in accordance with the standing instructions and procedures
existing between the Depositary and the Custodian, the aggregate principal
amount of the global Note to be reduced and, following such reduction, the
Company shall execute and the Trustee shall authenticate and make available
for delivery to such beneficial holder (or its nominee) a Note or Notes in
the appropriate aggregate principal amount in the name of such beneficial
holder (or its nominee) and bearing such restrictive legends as may be
required by this Indenture.
Any transfer of a beneficial interest in a global Note that cannot
be effected through book-entry settlement must be effected by the delivery to
the transferee (or its nominee) of a definitive Note or Notes registered in
the name of the transferee (or its nominee) on the books maintained by the
Trustee. With respect to any such transfer, the Trustee or the Custodian, at
the direction of the Trustee, shall cause, in accordance with the standing
instructions and procedures existing between the Depositary and the
Custodian, the aggregate principal amount of the global Note to be reduced
and, following such reduction, the Company shall execute and the Trustee
shall authenticate and make available for delivery to the transferee (or such
transferee's nominee, as the case may be), a definitive Note or Notes in the
appropriate aggregate principal amount in the name of such transferee (or its
nominee) and bearing such restrictive legends as may be required by this
Indenture. As a condition to such transfer, if such transfer is made to an
Accredited Investor, the Trustee or the Custodian, at the direction of the
Trustee, shall request such representations and agreements relating to the
restrictions on transfer of such Note or Notes from such transferee (or such
transferee's nominee) substantially in the form as set forth in Exhibit D
hereto and as the Trustee (or the Custodian) may otherwise reasonably require.
Any transfer of a definitive Note or Notes must be effected by the
delivery to the transferee (or its nominee) of a definitive Note or Notes
registered in the name of the transferee (or its nominee) on the books
maintained by the Trustee. With respect to any such transfer, the Company
shall execute and the Trustee shall authenticate and make available for
delivery to the transferee (or such transferee's nominee, as the case may
be), a definitive Note or Notes in the appropriate aggregate principal
-16-
<PAGE>
amount in the name of such transferee (or its nominee) and bearing such
restrictive legends as may be required by this Indenture. As a condition to
such transfer, if such transfer is made to an Accredited Investor, the
Trustee or the Custodian, at the direction of the Trustee, shall request such
representations and agreements relating to the restrictions on transfer of
such Note or Notes from such transferee (or such transferee's nominee)
substantially in the form as set forth in Exhibit D hereto and as the Trustee
(or the Custodian) shall otherwise reasonably require.
(c) So long as the Notes are eligible for book-entry settlement,
or unless otherwise required by law, upon any transfer of a definitive Note
to a QIB in accordance with Rule 144A, unless otherwise requested by the
transferor, and upon receipt of the definitive Note or Notes being so
transferred, together with a certificate in the form of Exhibit E hereto from
the transferor that the transferor reasonably believes the transferee is a
QIB and is obtaining such beneficial interest in a transaction meeting the
requirements of Rule 144A and any applicable securities laws of any state of
the United States or any other jurisdiction (or other evidence satisfactory
to the Trustee), the Trustee shall cancel such definitive Note or Notes and
cause, or direct the Custodian to cause, in accordance with the standing
instructions and procedures existing between the Depositary and the
Custodian, the aggregate principal amount of Notes represented by the
Restricted Global Note to be increased accordingly.
So long as the Notes are eligible for book-entry settlement, or
unless otherwise required by law, upon any transfer of a definitive Note in
accordance with Regulation S, if requested by the transferor, and upon
receipt of the definitive Note or Notes being so transferred, together with a
certificate in the form of Exhibit F hereto from the transferor that the
transfer was made in accordance with Rule 903 or 904 of Regulation S under
the Securities Act (or other evidence satisfactory to the Trustee), the
Trustee shall cancel such definitive Note or Notes and cause, or direct the
Custodian to cause, in accordance with the standing instructions and
procedures existing between the Depositary and the Custodian, the aggregate
principal amount of Notes represented by the Regulation S Global Note to be
increased accordingly.
If a holder of a beneficial interest in the Restricted Global Note
wishes at any time to exchange its interest in the Restricted Global Note for an
interest in the Regulation S Global Note, or to transfer its interest in the
Restricted Global Note to a person who wishes to take delivery thereof in the
form of an interest in the Regulation S Global Note, such holder may,
-17-
<PAGE>
subject to the rules and procedures of the Depositary and to the requirements
set forth in the following sentence, exchange or cause the exchange or
transfer or cause the transfer of such interest for an equivalent beneficial
interest in the Regulation S Global Note. Upon receipt by the Trustee, as
transfer agent, of (1) instructions given in accordance with the Depositary's
procedures from or on behalf of a holder of a beneficial interest in the
Restricted Global Note, directing the Trustee (via DWAC), as transfer agent,
to credit or cause to be credited a beneficial interest in the Regulation S
Global Note in an amount equal to the beneficial interest in the Restricted
Global Note to be exchanged or transferred, (2) a written order given in
accordance with the Depositary's procedures containing information regarding
the Euroclear or Cedel account to be credited with such increase and the name
of such account, and (3) a certificate in the form of Exhibit G given by the
holder of such beneficial interest stating that the exchange or transfer of
such interest has been made pursuant to and in accordance with Rule 903 or
Rule 904 of Regulation S under the Securities Act (or other evidence
satisfactory to the Trustee), the Trustee, as transfer agent, shall promptly
deliver appropriate instructions to the Depositary (via DWAC), its nominee,
or the custodian for the Depositary, as the case may be, to reduce or reflect
on its records a reduction of the Restricted Global Note by the aggregate
principal amount of the beneficial interest in such Restricted Global Note to
be so exchanged or transferred from the relevant participant, and the
Trustee, as transfer agent, shall promptly deliver appropriate instructions
(via DWAC) to the Depositary, its nominee, or the custodian for the
Depositary, as the case may be, concurrently with such reduction, to increase
or reflect on its records an increase of the principal amount of such
Regulation S Global Note by the aggregate principal amount of the beneficial
interest in such Restricted Global Note to be so exchanged or transferred,
and to credit or cause to be credited to the account of the person specified
in such instructions (who shall be Morgan Guaranty Trust Company of New York,
Brussels office, as operator of Euroclear or Cedel or another agent member of
Euroclear or Cedel, or both, as the case may be, acting for and on behalf of
them) a beneficial interest in such Regulation S Global Note equal to the
reduction in the principal amount of such Restricted Global Note.
If a holder of a beneficial interest in the Regulation S Global Note
wishes at any time to exchange its interest in the Regulation S Global Note for
an interest in the Restricted Global Note, or to transfer its interest in the
Regulation S Global Note to a person who wishes to take delivery thereof in the
form of an interest in the Restricted Global Note, such holder may, subject to
the rules and procedures of Euroclear or Cedel and the Depositary,
-18-
<PAGE>
as the case may be, and to the requirements set forth in the following
sentence, exchange or cause the exchange or transfer or cause the transfer of
such interest for an equivalent beneficial interest in such Restricted Global
Note. Upon receipt by the Trustee, as transfer agent, of (l) instructions
given in accordance with the procedures of Euroclear or Cedel and the
Depositary, as the case may be, from or on behalf of a beneficial owner of an
interest in the Regulation S Global Note directing the Trustee, as transfer
agent, to credit or cause to be credited a beneficial interest in the
Restricted Global Note in an amount equal to the beneficial interest in the
Regulation S Global Note to be exchanged or transferred, (2) a written order
given in accordance with the procedures of Euroclear or Cedel and the
Depositary, as the case may be, containing information regarding the account
with the Depositary to be credited with such increase and the name of such
account, and (3) prior to the expiration of the Restricted Period, a
certificate in the form of Exhibit H given by the holder of such beneficial
interest and stating that the person transferring such interest in such
Regulation S Global Note reasonably believes that the person acquiring such
interest in the Restricted Global Note is a QIB and is obtaining such
beneficial interest in a transaction meeting the requirements of Rule 144A
and any applicable securities laws of any state of the United States or any
other jurisdiction (or other evidence satisfactory to the Trustee), the
Trustee, as transfer agent, shall promptly deliver (via DWAC) appropriate
instructions to the Depositary, its nominee, or the custodian for the
Depositary, as the case may be, to reduce or reflect on its records a
reduction of the Regulation S Global Note by the aggregate principal amount
of the beneficial interest in such Regulation S Global Note to be exchanged
or transferred, and the Trustee, as transfer agent, shall promptly deliver
(via DWAC) appropriate instructions to the Depositary, its nominee, or the
custodian for the Depositary, as the case may be, concurrently with such
reduction, to increase or reflect on its records an increase of the principal
amount of the Restricted Global Note by the aggregate principal amount of the
beneficial interest in the Regulation S Global Note to be so exchanged or
transferred, and to credit or cause to be credited to the account of the
person specified in such instructions a beneficial interest in the Restricted
Global Note equal to the reduction in the principal amount of the Regulation
S Global Note. After the expiration of the Restricted Period, the
certification requirement set forth in clause (3) of the second sentence of
this paragraph shall no longer apply to such exchanges and transfers.
If a holder of a definitive Note wishes at any time to exchange its
Note for a beneficial interest in any global Note (or vice versa), or to
transfer its definitive Note to a person
-19-
<PAGE>
who wishes to take delivery thereof in the form of a beneficial interest in a
global Note (or vice versa), such Notes and beneficial interests may be
exchanged or transferred for one another only in accordance with such
procedures as are substantially consistent with the provisions of the two
preceding paragraphs (including the certification requirements intended to
ensure that such exchanges or transfers comply with Rule 144, Rule 144A or
Regulation S, as the case may be) and as may be from time to time adopted by
the Company and the Trustee.
Any beneficial interest in one of the global Notes that is
transferred to a person who takes delivery in the form of an interest in the
other global Note shall, upon transfer, cease to be an interest in such
global Note and become an interest in the other global Note and, accordingly,
shall thereafter be subject to all transfer restrictions and other procedures
applicable to beneficial interests in such other global Note for as long as
it remains such an interest.
Any global Note may be endorsed with or have incorporated in the
text thereof such legends or recitals or changes not inconsistent with the
provisions of this Indenture as may be required by the Custodian, the
Depositary or by the National Association of Securities Dealers, Inc. in
order for the Notes to be tradeable on the PORTAL Market or as may be
required for the Notes to be tradeable on any market developed for trading of
securities pursuant to Rule 144A or required to comply with any applicable
law or any regulation thereunder or with Regulation S or with the rules and
regulations of any securities exchange upon which the Notes may be listed or
traded or to conform with any usage with respect thereto, or to indicate any
special limitations or restrictions to which any particular Notes are subject.
(d) Every Note that bears or is required under this Section 2.5(d)
to bear the legend set forth in this Section 2.5(d) (together with any Common
Stock issued upon conversion of the Notes and required to bear the legend set
forth in Section 2.5(e), collectively, the "Restricted Securities") shall be
subject to the restrictions on transfer set forth in this Section 2.5(d),
unless such restrictions on transfer shall have been waived by the written
consent of the Company or removed in accordance with the provisions of
Section 2.5(f), and the holder of each such Restricted Security, by such
holder's acceptance thereof, agrees to be bound by such restrictions on
transfer. As used in this Section 2.5(d), the term "transfer" encompasses
any sale, pledge, transfer or other disposition of any Restricted Security.
-20-
<PAGE>
Until three years after the later of the original issuance date of
any Note and the last date on which the Company or an Affiliate of the
Company was the owner of such Note, any certificate evidencing such Note (and
all securities issued in exchange therefor or substitution thereof, other
than Common Stock, if any, issued upon conversion thereof, which shall bear
the legend set forth in Section 2.5(e), if applicable) shall bear a legend in
substantially the following form, unless otherwise agreed by the Company
(with notice thereof to the Trustee):
THE NOTE EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES
LAWS, AND MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR
THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE
FOLLOWING SENTENCE. BY ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT
(A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER
THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS
DEFINED IN RULE 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT)
("INSTITUTIONAL ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS
ACQUIRING THE NOTE EVIDENCED HEREBY IN AN OFFSHORE TRANSACTION; (2) AGREES
THAT IT WILL NOT PRIOR TO THE DATE THAT IS THREE YEARS AFTER THE LATER OF
THE ORIGINAL ISSUANCE OF THE NOTE EVIDENCED HEREBY AND THE LAST DATE ON
WHICH RAC FINANCIAL GROUP, INC. (THE "COMPANY") OR ANY "AFFILIATE" (AS
DEFINED IN RULE 144 UNDER THE SECURITIES ACT) OF THE COMPANY WAS THE OWNER
OF THE NOTE (THE "RESTRICTION TERMINATION DATE") RESELL OR OTHERWISE
TRANSFER THE NOTE EVIDENCED HEREBY OR THE COMMON STOCK ISSUABLE UPON
CONVERSION OF SUCH NOTE EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY
THEREOF, (B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE
144A UNDER THE SECURITIES ACT, (C) TO AN INSTITUTIONAL ACCREDITED INVESTOR
THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO BANK ONE, COLUMBUS, N.A., AS
TRUSTEE, A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS
RELATING TO THE RESTRICTIONS ON TRANSFER OF THE NOTE EVIDENCED HEREBY (THE
FORM OF WHICH LETTER CAN BE OBTAINED FROM SUCH TRUSTEE), (D) OUTSIDE THE
UNITED STATES IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E)
PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE
SECURITIES ACT (IF AVAILABLE) OR (F) PURSUANT TO A REGISTRATION STATEMENT
WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT; AND (3) AGREES
THAT IT WILL DELIVER TO EACH PERSON TO WHOM THE NOTE EVIDENCED HEREBY IS
TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN
CONNECTION WITH ANY TRANSFER OF THE NOTE EVIDENCED HEREBY BEFORE THE
RESTRICTION TERMINATION DATE, THE HOLDER MUST CHECK THE APPROPRIATE BOX SET
FORTH ON THE
-21-
<PAGE>
REVERSE HEREOF RELATING TO THE MANNER OF SUCH TRANSFER AND
SUBMIT THIS CERTIFICATE TO BANK ONE, COLUMBUS, N.A., AS TRUSTEE. IF THE
PROPOSED TRANSFER IS PURSUANT TO CLAUSE (C), (D) OR (E) ABOVE, THE HOLDER
MUST, PRIOR TO SUCH TRANSFER, FURNISH TO BANK ONE, COLUMBUS, N.A., AS
TRUSTEE, SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS THE
COMPANY MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE
PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THIS LEGEND WILL BE
REMOVED UPON THE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS
"OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS
GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
Any Note (or security issued in exchange or substitution therefor)
as to which such restrictions on transfer shall have expired in accordance
with their terms may, upon satisfaction of the requirements of Section 2.5(f)
and surrender of such Note for exchange to the Note registrar in accordance
with the provisions of this Section 2.5, be exchanged for a new Note or
Notes, of like tenor and aggregate principal amount, which shall not bear the
restrictive legend required by this Section 2.5(d).
Notwithstanding any other provisions of this Indenture (other than
the provisions set forth in this Section 2.5(d)), a global Note may not be
transferred as a whole except by the Depositary to a nominee of the
Depositary or by a nominee of the Depositary to the Depositary or another
nominee of the Depositary or by the Depositary or any such nominee to a
successor Depositary or a nominee of such successor Depositary.
The Depositary shall be a clearing agency registered under the
Exchange Act. The Company initially appoints The Depository Trust Company to
act as Depositary with respect to the global Notes. Initially, the global
Notes shall be issued to the Depositary, registered in the name of Cede &
Co., as the nominee of the Depositary, and deposited with the Trustee as
Custodian for Cede & Co.
If at any time the Depositary for the global Notes notifies the
Company that it is unwilling or unable to continue as Depositary for such Notes,
the Company may appoint a successor Depositary with respect to such Notes. If a
successor Depositary for the Notes is not appointed by the Company within 90
days after the Company receives such notice, the Company shall execute, and the
Trustee, upon receipt of an Officers' Certificate for the authentication and
delivery of Notes, shall authenticate
-22-
<PAGE>
and make available for delivery, Notes in definitive form, in an aggregate
principal amount equal to the principal amount of the global Notes in
exchange for such global Notes.
Definitive Notes issued in exchange for all or a part of a global
Note pursuant to this Section 2.5(d) shall be registered in such names and in
such authorized denominations as the Depositary, pursuant to instructions
from its direct or indirect participants or otherwise, shall instruct the
Trustee. Upon execution and authentication, the Trustee shall make available
for delivery such definitive Notes to the persons in whose names such
definitive Notes are so registered.
At such time as all interests in global Notes have been redeemed,
converted, repurchased or canceled, such global Notes shall be, upon receipt
thereof, canceled by the Trustee in accordance with standing procedures and
instructions existing between the Depositary and the Custodian. At any time
prior to such cancellation, if any interest in a global Note is exchanged for
definitive Notes, redeemed, converted, canceled or transferred to a
transferee who receives definitive Notes therefor or any definitive Note is
exchanged or transferred for part of a global Note, the principal amount of
such global Note shall, in accordance with the standing procedures and
instructions existing between the Depositary and the Custodian, be reduced or
increased, as the case may be, and an endorsement shall be made on such
global Note by the Trustee or the Custodian, at the direction of the Trustee,
to reflect such reduction or increase.
The Company and the Trustee may for all purposes, including the
making of payments due on the Notes, deal with the Depositary as the
authorized representative of the Noteholders for the purposes of exercising
the rights of Noteholders hereunder. The rights of the owner of any
beneficial interest in a global Note shall be limited to those established by
law and agreements between such owners and depository participants or
Euroclear and Cedel; provided that no such agreement shall give any rights to
any person against the Company or the Trustee without the written consent of
the parties so affected. Multiple requests and directions from and votes of,
the Depositary as holder of notes in book entry form with respect to any
particular matter shall not be deemed inconsistent to the extent they do not
represent an amount of notes in excess of those held in the name of the
Depositary or its nominee.
(e) Until three years after the later of the original issuance
date of any Note (other than any Note represented by the Regulation S Global
Note) and the last date on which the Company or an Affiliate of the Company
was the owner of such Note, any
-23-
<PAGE>
stock certificate representing Common Stock issued upon conversion of such
Note shall bear a legend in substantially the following form, unless
otherwise agreed by the Company (with written notice thereof to the Trustee
and any transfer agent for the Common Stock):
THE COMMON STOCK EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE U.S.
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR
TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN
THE FOLLOWING SENTENCE. THE HOLDER HEREOF AGREES THAT PRIOR TO THE DATE
THAT IS THREE YEARS AFTER THE LATER OF THE ORIGINAL ISSUANCE OF THE NOTE
UPON THE CONVERSION OF WHICH THE COMMON STOCK EVIDENCED HEREBY WAS ISSUED
AND THE LAST DATE ON WHICH RAC FINANCIAL GROUP, INC. (THE "COMPANY") OR ANY
"AFFILIATE" (AS DEFINED IN RULE 144 OF THE SECURITIES ACT) OF THE COMPANY
WAS THE OWNER OF THE NOTE UPON THE CONVERSION OF WHICH THE COMMON STOCK
EVIDENCED HEREBY WAS ISSUED OR THE COMMON STOCK EVIDENCED HEREBY (THE
"RESTRICTION TERMINATION DATE"), (1) IT WILL NOT RESELL OR OTHERWISE
TRANSFER THE COMMON STOCK EVIDENCED HEREBY EXCEPT (A) TO THE COMPANY OR ANY
SUBSIDIARY THEREOF, (B) TO A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN
RULE 144A UNDER THE SECURITIES ACT) IN COMPLIANCE WITH RULE 144A, (C) TO AN
INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1), (2), (3)
OR (7) UNDER THE SECURITIES ACT) THAT PRIOR TO SUCH TRANSFER, FURNISHES TO
KEYCORP SHAREHOLDER SERVICES, INC., AS TRANSFER AGENT, A SIGNED LETTER
CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE
RESTRICTIONS ON TRANSFER OF THE COMMON STOCK EVIDENCED HEREBY (THE FORM OF
WHICH LETTER CAN BE OBTAINED FROM SUCH TRANSFER AGENT), (D) OUTSIDE THE
UNITED STATES IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E)
PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE
SECURITIES ACT (IF AVAILABLE) OR (F) PURSUANT TO A REGISTRATION STATEMENT
WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT; (2) PRIOR TO
ANY SUCH TRANSFER PURSUANT TO CLAUSE (C), (D) OR (E) ABOVE, IT WILL FURNISH
TO KEYCORP SHAREHOLDER SERVICES, INC., AS TRANSFER AGENT, SUCH
CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS THE COMPANY MAY
REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO
AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT; AND (3) IT WILL DELIVER TO EACH PERSON
TO WHOM THE COMMON STOCK EVIDENCED HEREBY IS TRANSFERRED A NOTICE
SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED
UPON THE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS "UNITED
STATES" AND "U.S.
-24-
<PAGE>
PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE
SECURITIES ACT.
Any such Common Stock as to which such restrictions on transfer
shall have expired in accordance with their terms may, upon satisfaction of
the requirements of Section 2.5(f) and surrender of the certificates
representing such shares of Common Stock for exchange in accordance with the
procedures of the transfer agent for the Common Stock, be exchanged for a new
certificate or certificates for a like aggregate number of shares of Common
Stock, which shall not bear the restrictive legend required by this Section
2.5(e).
(f) Upon any sale or transfer of any Restricted Security
(including any interest in a global Note) (i) that is effected pursuant to an
effective registration statement under the Securities Act, (ii) that is
effected pursuant to Rule 144 as promulgated under the Securities Act as
determined by counsel to the Company or the Trustee or (iii) in connection
with which the Trustee (or transfer agent for the Common Stock, in the case
of shares of Common Stock) receives certificates and other information
(including an opinion of counsel, if requested) reasonably acceptable to the
Company and the Trustee (or such transfer agent, as the case may be) to the
effect that such security shall no longer be subject to the resale
restrictions under federal and state securities laws, then (A) in the case of
a Restricted Security in definitive form, the Note registrar or co-registrar
(or transfer agent, in the case of Common Stock) shall permit the holder
thereof to exchange such Restricted Security for a security that does not
bear the legends set forth in Section 2.5(d) or 2.5(e), as applicable, and
shall rescind any such restrictions on transfer and (B) in the case of
Restricted Securities represented by a global Note, such Note shall no longer
be subject to the restrictions contained in the legend set forth in Section
2.5(d) (but still subject to the other provisions hereof). In addition, any
Note (or security issued in exchange or substitution therefor) or shares of
Common Stock issued upon conversion of any Note, in either case, as to which
the restrictions on transfer described in the legends set forth in Section
2.5(d) and 2.5(e), respectively, have expired by their terms, may, upon
surrender thereof (in accordance with the terms of this Indenture in the case
of Notes) together with such certifications and other information (including
an opinion of counsel having substantial experience in practice under the
Securities Act and otherwise reasonably acceptable to the Company, addressed
to the Company and the Trustee and in a form acceptable to the Company, to
the effect that the transfer of such Restricted Security has been made in
compliance with Rule 144 or such successor provision) acceptable to the
Company and the Trustee (or transfer agent, as
-25-
<PAGE>
the case may be) as either of them may reasonably require, be exchanged for a
new Note or Notes of like tenor and aggregate principal amount (in the case
of Notes), or a new certificate or certificates for a like aggregate number
of shares of Common Stock (in the case of Common Stock), or a new certificate
or other instrument of like tenor and amount (in the case of securities
issued in exchange or substitution for Notes), which shall not bear the
restrictive legends set forth in Sections 2.5(d) and 2.5(e).
(g) Each holder of a Note agrees to indemnify the Company and the
Trustee against any liability that may result from the transfer, exchange or
assignment of such holder's Note in violation of any provision of this
Indenture and/or applicable U.S. federal or state securities law.
Section 6. MUTILATED, DESTROYED, LOST OR STOLEN NOTES. In case
any Note shall become mutilated or be destroyed, lost or stolen, the Company
in its discretion may execute, and upon its request, the Trustee or an
authenticating agent appointed by the Trustee shall authenticate and make
available for delivery a new Note bearing a number not contemporaneously
outstanding in exchange and substitution for the mutilated Note or in lieu of
and in substitution for the Note so destroyed, lost or stolen. The Company
may charge such applicant for the expenses of the Company in replacing a
Note. In every case the applicant for a substituted Note shall furnish to
the Company, to the Trustee and, if applicable, to such authenticating agent
such security or indemnity as may be required by them to save each of them
harmless from any loss, liability, cost or expense caused by or connected
with such substitution, and in every case of destruction, loss or theft, the
applicant shall also furnish to the Company, to the Trustee and, if
applicable, to such authenticating agent evidence to their satisfaction of
the destruction, loss or theft of such Note and of the ownership thereof.
The Trustee or such authenticating agent may authenticate any such
substituted Note and deliver the same upon the receipt of such security or
indemnity as the Trustee, the Company and, if applicable, such authenticating
agent may require. Upon the issuance of any substituted Note, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses connected therewith. In case any Note that has matured or is about
to mature or has been called for redemption or is about to be converted into
Common Stock shall become mutilated or be destroyed, lost or stolen, the
Company may, instead of issuing a substitute Note, pay or authorize the
payment of or convert or authorize the conversion of the same (without
surrender thereof,
-26-
<PAGE>
except in the case of a mutilated Note), as the case may be, if the applicant
for such payment or conversion shall furnish to the Company, to the Trustee
and, if applicable, to such authenticating agent such security or indemnity
as may be required by them to save each of them harmless from any loss,
liability, cost or expense caused by or connected with such substitution, and
in case of destruction, loss or theft, evidence satisfactory to the Company,
the Trustee and, if applicable, any paying agent or conversion agent of the
destruction, loss or theft of such Note and of the ownership thereof.
Every substitute Note issued pursuant to the provisions of this
Section 2.6 in lieu of any Note that is destroyed, lost or stolen shall
constitute an additional contractual obligation of the Company, whether or
not the destroyed, lost or stolen Note shall be enforceable by anyone, and
shall be entitled to all the benefits of (but shall be subject to all the
limitations set forth in) this Indenture equally and proportionately with any
and all other Notes duly issued hereunder. To the extent permitted by law,
all Notes shall be held and owned upon the express condition that the
foregoing provisions are exclusive with respect to the replacement or payment
or conversion of mutilated, destroyed, lost or stolen Notes and shall
preclude any and all other rights or remedies notwithstanding any law or
statute existing or hereafter enacted to the contrary with respect to the
replacement or payment or conversion of negotiable instruments or other
securities without their surrender.
Section 7. TEMPORARY NOTES. Pending the preparation of definitive
Notes, the Company may execute and the Trustee or an authenticating agent
appointed by the Trustee shall, upon written request of the Company,
authenticate and make available for delivery temporary Notes (printed or
lithographed). Temporary Notes shall be issuable in any authorized
denomination and shall be substantially in the form of the definitive Notes
but with such omissions, insertions and variations as may be appropriate for
temporary Notes, all as may be determined by the Company. Every such
temporary Note shall be executed by the Company and authenticated by the
Trustee or such authenticating agent upon the same conditions and in
substantially the same manner, and with the same effect, as the definitive
Notes. Without unreasonable delay the Company shall execute and deliver to
the Trustee or such authenticating agent definitive Notes (other than in the
case of Notes in global form) and thereupon any or all temporary Notes (other
than any such global Note) may be surrendered in exchange therefor, at each
office or agency maintained by the Company pursuant to Section 4.2 and the
Trustee or such authenticating agent shall authenticate and make available
for delivery in exchange for such temporary Notes an equal aggregate
principal
-27-
<PAGE>
amount of definitive Notes. Such exchange shall be made by the Company at
its own expense and without any charge therefor. Until so exchanged, the
temporary Notes shall in all respects be entitled to the same benefits and
subject to the same limitations under this Indenture as definitive Notes
authenticated and delivered hereunder.
Section 8. CANCELLATION OF NOTES PAID, ETC. All Notes surrendered
for the purpose of payment, redemption, conversion, exchange or registration
of transfer shall, if surrendered to the Company or any paying agent or any
Note registrar or any conversion agent, be surrendered to the Trustee and
promptly canceled by it or, if surrendered to the Trustee, shall be promptly
canceled by it and no Notes shall be issued in lieu thereof except as
expressly permitted by any of the provisions of this Indenture. If required
by the Company, the Trustee shall return canceled Notes to the Company. If
the Company shall acquire any of the Notes, such acquisition shall not
operate as a redemption or satisfaction of the indebtedness represented by
such Notes unless and until the same are delivered to the Trustee for
cancellation.
Section 9. CUSIP NUMBERS. The Company in issuing the Notes may
use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall
use CUSIP numbers in notices of redemption as a convenience to holders;
provided that any such notice may state that no representation is made as to
the correctness of such numbers either as printed on the Notes or as
contained in any notice of a redemption and that reliance may be placed only
on the other identification numbers printed on the Notes, and any such
redemption shall not be affected by any defect in or omission of such
numbers. The Company shall promptly notify the Trustee of any change in the
CUSIP numbers.
ARTICLE III
REDEMPTION OF NOTES
Section 1. REDEMPTION PRICES. The Notes are not redeemable at the
option of the Company prior to August 17, 1999. At any time on or after that
date, the Notes may be redeemed at the Company's option, upon notice as set
forth in Section 3.2, in whole at any time or in part from time to time, at
the optional redemption prices set forth below plus accrued and unpaid
interest thereon to the applicable redemption date if redeemed during the
period beginning:
-28-
<PAGE>
Redemption
Date Price
---- ----------
August 17, 1999. . . . . . . . . . . 103.63%
August 15, 2000. . . . . . . . . . . 102.42%
August 15, 2001. . . . . . . . . . . 101.21%
August 15, 2002 and thereafter . . . 100.00%
Section 2. NOTICE OF REDEMPTION; SELECTION OF NOTES. In case the
Company shall desire to exercise the right to redeem all or, as the case may
be, any part of the Notes pursuant to Section 3.1, it shall fix a date for
redemption and, in the case of any redemption pursuant to Section 3.1, it or,
at its request accompanied by the proposed form of notice of redemption
(which must be received by the Trustee at least ten days prior to the date
the Trustee is requested to give notice as described below, unless a shorter
period is agreed to by the Trustee), the Trustee in the name of and at the
expense of the Company, shall publish a notice in the Wall Street Journal and
mail or cause to be mailed a notice of such redemption at least 30 and not
more than 60 days prior to the date fixed for redemption to the holders of
Notes so to be redeemed as a whole or in part at their last addresses as the
same appear on the Note register, provided that if the Company shall give
such notice, it shall also give such notice, and notice of the Notes to be
redeemed, to the Trustee. Such mailing shall be by first class mail. The
notice, if mailed in the manner herein provided, shall be conclusively
presumed to have been duly given, whether or not the holder receives such
notice. In any case, failure to give such notice by mail or any defect in
the notice to the holder of any Note designated for redemption as a whole or
in part shall not affect the validity of the proceedings for the redemption
of any other Note.
Each such notice of redemption shall identify the Notes to be
redeemed (including CUSIP numbers), specify the aggregate principal amount of
Notes to be redeemed, the date fixed for redemption, the redemption price at
which Notes are to be redeemed, the place or places of payment, that payment
shall be made upon presentation and surrender of such Notes, that interest
accrued to the date fixed for redemption shall be paid as specified in said
notice and that on and after said date, interest thereon or on the portion
thereof to be redeemed shall cease to accrue. Such notice shall also state
the current Conversion Price and the date on which the right to convert such
Notes or portions thereof into Common Stock shall expire. If fewer than all
the Notes are to be redeemed, the notice of redemption shall identify the
Notes to be redeemed. In case any Note is to be redeemed in part only, the
notice of redemption shall state the portion of the principal amount thereof
to be redeemed and shall
-29-
<PAGE>
state that on and after the date fixed for redemption, upon surrender of such
Note, a new Note or Notes in principal amount equal to the unredeemed portion
thereof shall be issued.
On or prior to the Business Day prior to the redemption date
specified in the notice of redemption given as provided in this Section 3.2,
the Company shall deposit with the Trustee or with one or more paying agents
(or, if the Company is acting as its own paying agent, set aside, segregate
and hold in trust as provided in Section 4.4) an amount of money sufficient
to redeem on the redemption date all the Notes so called for redemption
(other than those theretofore surrendered for conversion into Common Stock)
at the appropriate redemption price, together with accrued interest to the
date fixed for redemption. If any Note called for redemption is converted
pursuant hereto, any money deposited with the Trustee or any paying agent or
so segregated and held in trust for the redemption of such Note shall be paid
to the Company upon its request or, if then held by the Company, shall be
discharged from such trust. If fewer than all the Notes are to be redeemed,
the Company shall give the Trustee written notice in the form of an Officers'
Certificate not fewer than 45 days (or such shorter period of time as may be
acceptable to the Trustee) prior to the redemption date as to the aggregate
principal amount of Notes to be redeemed.
If fewer than all the Notes are to be redeemed, the Trustee shall
select the Notes or portions thereof to be redeemed (in principal amounts of
$1,000 or integral multiples thereof), by lot or, in its discretion, on a PRO
RATA basis. If any Note selected for partial redemption is converted in part
after such selection, the converted portion of such Note shall be deemed (so
far as may be) to be the portion to be selected for redemption. The Notes
(or portions thereof) so selected shall be deemed duly selected for
redemption for all purposes hereof, notwithstanding that any such Note is
converted as a whole or in part before the mailing of the notice of
redemption.
Upon any redemption of less than all Notes, the Company and the
Trustee may treat as outstanding any Notes surrendered for conversion during
the period of 15 days next preceding the mailing of a notice of redemption
and need not treat as outstanding any Note authenticated and delivered during
such period in exchange for the unconverted portion of any Note converted in
part during such period.
Section 3. PAYMENT OF NOTES CALLED FOR REDEMPTION. If notice of
redemption has been given as above provided, the Notes or portion of Notes
with respect to which such notice has been
-30-
<PAGE>
given shall, unless converted into Common Stock pursuant to the terms hereof,
become due and payable on the date and at the place or places stated in such
notice at the applicable redemption price, together with interest thereon
accrued to the date fixed for redemption, and on and after said date (unless
the Company shall default in the payment of such Notes at the redemption
price, together with interest thereon accrued to said date), interest on the
Notes or portion of Notes so called for redemption shall cease to accrue, and
such Notes shall cease after the close of business on the Business Day next
preceding the date fixed for redemption to be convertible into Common Stock
and, except as provided in Sections 7.6 and 12.4, to be entitled to any
benefit or security under this Indenture, and the holders thereof shall have
no right in respect of such Notes except the right to receive the redemption
price thereof and unpaid interest thereon to the date fixed for redemption.
On presentation and surrender of such Notes at a place of payment in said
notice specified, the said Notes or the specified portions thereof shall be
paid and redeemed by the Company at the applicable redemption price, together
with interest accrued thereon to the date fixed for redemption; provided that
any semi-annual payment of interest becoming due on the date fixed for
redemption shall be payable to the holders of such Notes registered as such
on the relevant record date subject to the terms and provisions of Section
2.3 hereof.
Upon presentation of any Note redeemed in part only, the Company
shall execute and the Trustee shall authenticate and make available for
delivery to the holder thereof, at the expense of the Company, a new Note or
Notes, of authorized denominations, in principal amount equal to the
unredeemed portion of the Notes so presented.
If any Note called for redemption shall not be so paid upon
surrender thereof for redemption, the principal and premium, if any, shall,
until paid or duly provided for, bear interest from the date fixed for
redemption at the rate borne by the Note and such Note shall remain
convertible into Common Stock until the principal and premium, if any, shall
have been paid or duly provided for.
Section 4. CONVERSION ARRANGEMENT ON CALL FOR REDEMPTION. In
connection with any redemption of Notes, the Company may arrange for the
purchase and conversion of any Notes by an agreement with one or more
investment bankers or other purchasers to purchase such Notes by paying to
the Trustee in trust for the Noteholders, on or prior to the Business Day
prior to the date fixed for redemption, an amount not less than the
applicable redemption price, together with interest accrued to the date
-31-
<PAGE>
fixed for redemption, of such Notes. Notwithstanding anything to the contrary
contained in this Article III, the obligation of the Company to pay the
redemption price of such Notes, together with interest accrued to the date
fixed for redemption, shall be deemed to be satisfied and discharged to the
extent such amount is so paid by such purchasers. If such an agreement is
entered into, a copy of which shall be filed with the Trustee prior to the
date fixed for redemption, any Notes not duly surrendered for conversion by
the holders thereof may, at the option of the Company, be deemed, to the
fullest extent permitted by law, acquired by such purchasers from such
holders and (notwithstanding anything to the contrary contained in Article
XIV) surrendered by such purchasers for conversion, all as of the time
immediately prior to the close of business on the date fixed for redemption
(and the right to convert any such Notes shall be deemed to have been
extended through such time), subject to payment of the above amount as
aforesaid. At the direction of the Company, the Trustee shall hold and
dispose of any such amount paid to it in the same manner as it would monies
deposited with it by the Company for the redemption of Notes. Without the
Trustee's prior written consent, no arrangement between the Company and such
purchasers for the purchase and conversion of any Notes shall increase or
otherwise affect any of the powers, duties, responsibilities or obligations
of the Trustee as set forth in this Indenture, and the Company agrees to
indemnify the Trustee from, and hold it harmless against, any loss, liability
or expense arising out of or in connection with any such arrangement for the
purchase and conversion of any Notes between the Company and such purchasers
including the costs and expenses incurred by the Trustee in the defense of
any claim or liability arising out of or in connection with the exercise or
performance of any of its powers, duties, responsibilities or obligations
under this Indenture.
Section 5. PURCHASE OF NOTES UPON A CHANGE OF CONTROL.
(a) If a Change of Control shall occur at any time, then each
holder of Notes shall have the right to require that the Company repurchase
such holder's Notes in whole or in part in integral multiples of $1,000 at a
purchase price (the "Change of Control Purchase Price") in cash in an amount
equal to 101% of the principal amount of such Notes, plus accrued and unpaid
interest thereon, if any, to the purchase date (the "Change of Control
Purchase Date") pursuant to the offer described below (the "Change of Control
Offer") and in accordance with the other procedures set forth in this
Indenture.
(b) Within 10 days following any Change of Control, the Company
shall publish a notice in the Wall Street Journal,
-32-
<PAGE>
notify the Trustee thereof and give written notice of such Change of Control
to each holder of Notes, by first-class mail, postage prepaid, at the
Noteholder's address appearing in the Note register, stating, among other
things, (i) that a Change of Control has occurred, (ii) the Change of Control
Purchase Price, (iii) the Change of Control Purchase Date (which shall be a
Business Day no earlier than 30 days nor later than 60 days from the date
such notice is mailed, or such later date as is necessary to comply with
requirements under the Exchange Act), (iv) that any Note not tendered shall
continue to accrue interest and to have all of the benefits of this
Indenture, (v) that, unless the Company defaults in the payment of the Change
of Control Purchase Price, any Notes accepted for payment pursuant to the
Change of Control Offer shall cease to accrue interest after the Change of
Control Purchase Date, (vi) that Noteholders electing to have any Notes
purchased pursuant to a Change of Control Offer shall be required to
surrender the Notes, with the form entitled "Option of Noteholder to Elect
Purchase" on the reverse of the Notes completed, to the Company at the
address specified in the notice prior to the close of business on the third
Business Day preceding the Change of Control Purchase Date, (vii) that
Noteholders shall be entitled to withdraw their election if the Company
receives, not later than the close of business on the second Business Day
preceding the Change of Control Purchase Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the Noteholder, the
principal amount of Notes delivered for purchase, and a statement that such
Noteholder is withdrawing his election to have such Notes purchased, and
(viii) that Noteholders whose Notes are being purchased only in part shall be
issued new Notes equal in principal amount to the unpurchased portion of the
Notes surrendered, which unpurchased portion must be equal to $1,000 in
principal amount or an integral multiple thereof. The Company shall comply
with the requirements of Rule 13c-4 and 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes in
connection with a Change of Control.
(c) On the Change of Control Purchase Date, the Company shall, to
the extent lawful, (i) accept for payment Notes or portions thereof tendered
pursuant to the Change of Control Offer, (ii) deposit with the Trustee an
amount equal to the Change of Control Purchase Price in respect of all Notes
or portions thereof so tendered and (iii) deliver or cause to be delivered to
the Trustee the Notes so accepted together with an Officers' Certificate
stating the Notes or portions thereof tendered to the Company. The Trustee
shall promptly mail to each Noteholder of Notes so accepted payment in an
amount equal to the purchase price of such Notes, and the Trustee shall
promptly authenticate
-33-
<PAGE>
and mail to each Noteholder a new Note equal in principal amount to any
unpurchased portion of the Notes surrendered, if any; provided that each such
new Note shall be in a principal amount of $1,000 or an integral multiple
thereof. The Company shall publicly announce the results of the Change of
Control Offer on or as soon as practicable after the Change of Control
Payment Date.
(d) The term "Change in Control" shall mean an event or series of
events as a result of which (i) any person or group is or becomes the
beneficial owner of shares representing more than fifty percent (50%) of the
combined voting power of the then outstanding securities entitled to vote
generally in elections of directors of the Company (the "Voting Power Stock")
or (ii) the Company consolidates with or merges into any other corporation,
or conveys, transfers or leases all or substantially all of its assets to any
person, or any other corporation merges into the Company, and, in the case of
any such transaction, the outstanding Common Stock of the Company is changed
or exchanged as a result, unless the shareholders of the Company immediately
before such transaction own, directly or indirectly, immediately following
such transaction, at least fifty-one percent (51%) of the combined voting
power of the outstanding voting securities of the corporation resulting from
such transaction in substantially the same proportion as their ownership of
the Voting Power Stock immediately before such transaction; PROVIDED that a
Change in Control shall not be deemed to have occurred if either (i) the
closing price per share of the Common Stock for any 5 trading day within the
period of 10 consecutive trading days ending immediately after the later of
the Change in Control or the public announcement of the Change in Control (in
the case of a Change in Control under clause (1) above) or ending immediately
before the Change in Control (in the case of a Change in Control under clause
(2) above) shall equal or exceed 105% of the conversion price of the Notes in
effect on such trading day, or (ii) at least 90% of the consideration
(determined the date on which the Change of Control is triggered and
excluding cash payments for fractional shares) in the transaction or
transactions constituting the Change in Control consists of shares of common
stock traded on a national securities exchange or quoted on the Nasdaq
National Market and as a result of such transaction or transactions the Notes
become convertible solely into such common stock.
ARTICLE IV.
PARTICULAR COVENANTS OF THE COMPANY
-34-
<PAGE>
Section 1. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST. The Company
covenants and agrees that it shall duly and punctually pay or cause to be
paid the principal of and premium, if any, and interest on each of the Notes
at the places, at the respective times and in the manner provided herein and
in the Notes. Each installment of interest on the Notes due on any
semi-annual interest payment date may be paid by mailing checks for the
interest payable to or upon the written order of the holders of Notes
entitled thereto as they shall appear on the Note register; provided that,
with respect to any holder of Notes with an aggregate principal amount equal
to or in excess of $5,000,000, at the request (such request to include
appropriate wire instructions) of such holder in writing to the Trustee,
interest on such holder's Notes shall be paid by wire transfer in immediately
available funds. An installment of principal or interest shall be considered
paid on the date due if the Trustee or paying agent (other than the Company,
a subsidiary of the Company or any Affiliate of any of them) holds on that
date money designated for and sufficient to pay the installment of principal
or interest and is not prohibited from paying such money to the holders of
the Notes pursuant to the terms of this Indenture.
Section 2. MAINTENANCE OF OFFICE OR AGENCY. The Company shall
maintain in the Borough of Manhattan, The City of New York, an office or
agency where the Notes may be surrendered for registration of transfer or
exchange or for presentation for payment or for conversion or redemption and
where notices and demands to or upon the Company in respect of the Notes and
this Indenture may be served. The Company shall give prompt written notice
to the Trustee of the location, and any change in the location, of such
office or agency. If at any time the Company shall fail to maintain any such
office or agency or shall fail to furnish the Trustee with the address
thereof, such presentations, surrenders, notices and demands may be made or
served at the Corporate Trust Office of the Trustee.
The Company may also from time to time designate one or more other
offices or agencies where the Notes may be presented or surrendered for any
or all such purposes and may from time to time rescind such designations;
provided that no such designation or rescission shall in any manner relieve
the Company of its obligation to maintain an office or agency in the Borough
of Manhattan, The City of New York, for such purposes. The Company shall
give prompt written notice to the Trustee of any such designation or
rescission and of any change in the location of any such other office or
agency.
The Company hereby initially designates the Trustee as paying
agent, Note registrar and conversion agent and each of the
-35-
<PAGE>
Corporate Trust Office of the Trustee and the office of Bank One, Columbus,
N.A. in the Borough of Manhattan, The City of New York, as such offices or
agencies of the Company for the purposes set forth in the first paragraph of
this Section 4.2.
So long as the Trustee is the Note registrar, the Trustee agrees to
mail, or cause to be mailed, the notices set forth in Section 7.11(a) and the
third paragraph of Section 7.12.
Section 3. APPOINTMENTS TO FILL VACANCIES IN TRUSTEE'S OFFICE. The
Company, whenever necessary to avoid or fill a vacancy in the office of
Trustee, shall appoint, in the manner provided in Section 7.11, a Trustee, so
that there shall at all times be a Trustee hereunder.
Section 4. PROVISIONS AS TO PAYING AGENT.
(a) If the Company shall appoint a paying agent other than the
Trustee, or if the Trustee shall appoint such a paying agent, the Company or
the Trustee, as the case may be, shall cause such paying agent to execute and
deliver to the Trustee an instrument in which such agent shall agree with the
Trustee, subject to the provisions of this Section 4.4:
(1) that it shall hold all sums held by it as such agent
for the payment of the principal of, premium, if any, or
interest on the Notes (whether such sums have been paid to
it by the Company or by any other obligor on the Notes) in
trust for the benefit of the holders of the Notes;
(2) that it shall give the Trustee notice of any failure by
the Company (or by any other obligor on the Notes) to make
any payment of the principal of, premium, if any, or
interest on the Notes when the same shall be due and
payable; and
(3) that at any time during the continuance of an Event of
Default, upon request of the Trustee, it shall forthwith pay
to the Trustee all sums so held in trust.
The Company shall, before each due date of the principal of,
premium, if any, or interest on the Notes, deposit with the paying agent a
sum sufficient to pay such principal, premium, if any, or interest, and
(unless such paying agent is the Trustee) the Company shall promptly notify
the Trustee of any failure to take such action.
(b) If the Company shall act as its own paying agent, it shall, on
or before each due date of the principal of, premium,
-36-
<PAGE>
if any, or interest on the Notes, set aside, segregate and hold in trust for
the benefit of the holders of the Notes a sum sufficient to pay such
principal, premium, if any, or interest so becoming due and shall notify the
Trustee of any failure to take such action and of any failure by the Company
(or any other obligor under the Notes) to make any payment of the principal
of, premium, if any, or interest on the Notes when the same shall become due
and payable.
(c) Anything in this Section 4.4 to the contrary notwithstanding,
the Company may, at any time, for the purpose of obtaining a satisfaction and
discharge of this Indenture, or for any other reason, pay or cause to be paid
to the Trustee all sums held in trust by the Company or any paying agent
hereunder as required by this Section 4.4, such sums to be held by the
Trustee upon the trusts herein contained and upon such payment by the Company
or any paying agent to the Trustee, the Company or such paying agent shall be
released from all further liability with respect to such sums.
(d) Anything in this Section 4.4 to the contrary notwithstanding,
the agreement to hold sums in trust as provided in this Section 4.4 is
subject to Sections 12.3 and 12.4.
Section 5. CORPORATE EXISTENCE. Subject to Article XI, the
Company shall do or cause to be done all things necessary to preserve and
keep in full force and effect (i) its corporate existence, and the corporate,
partnership or other existence of any subsidiary of the Company, in
accordance with the respective organizational documents (as the same may be
amended from time to time) of the Company or any such subsidiary and (ii) the
rights (charter and statutory), licenses and franchises of the Company and
its subsidiaries; provided that the Company shall not be required to preserve
any such right, license or franchise, or the corporate, partnership or other
existence of any of its subsidiaries if the Board of Directors shall
determine that the preservation thereof is no longer desirable in the conduct
of the business of the Company and its subsidiaries, taken as a whole, and
that the loss thereof is not materially adverse to the Holders of the Notes.
Section 6. RULE 144A INFORMATION REQUIREMENT. During the
three-year period following the original issuance date of any Note and during
the three-year period following the last date on which the Company or an
Affiliate of the Company was the owner of any Note (or shares of Common Stock
issued upon conversion of any Note), if the Company is subject neither to
Section 13 nor Section 15(d) of the Exchange Act, the Company shall at the
written request of any holder or beneficial holder of such Note (or shares of
Common Stock issued upon conversion of Notes) provide to such holder or
beneficial holder of such Note (or shares of Common Stock issued upon
conversion of Notes) and any prospective transferee designated by such holder
or beneficial holder of such Note
-37-
<PAGE>
(or shares of Common Stock issued upon conversion of Notes) such information,
if any, required by Rule 144A(d)(4) under the Securities Act (so long as such
information is required to permit such transfer under Rule 144A).
Section 7. STAY, EXTENSION AND USURY LAWS. The Company covenants
(to the extent that it may lawfully do so) that it shall not at any time
insist upon, plead or in any manner whatsoever claim or take the benefit or
advantage of, any stay, extension or usury law or other law that would
prohibit or forgive the Company from paying all or any portion of the
principal of or interest on the Notes as contemplated herein, wherever
enacted, now or at any time hereafter in force, or that may affect the
covenants or the performance of this Indenture; and the Company (to the
extent it may lawfully do so) hereby expressly waives all benefit or
advantage of any such law, and covenants that it shall not, by resort to any
such law, hinder, delay or impede the execution of any power herein granted
to the Trustee, but shall suffer and permit the execution of every such power
as though no such law has been enacted.
Section 8. COMPLIANCE STATEMENT; NOTICE OF DEFAULTS
(a) The Company shall deliver to the Trustee within 120 days after
the end of each fiscal year of the Company an Officer's Certificate stating
whether or not to the best knowledge of the signers thereof the Company is in
compliance (without regard to periods of grace or notice requirements) with
all conditions and covenants under this Indenture, and if the Company shall
not be in compliance, specifying such non-compliance and the nature and
status thereof of which such signer may have knowledge.
(b) The Company shall file with the Trustee written notice of the
occurrence of any default or Event of Default within ten days of
its becoming aware of any such default or Event of Default.
Section 9. LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS
AFFECTING SUBSIDIARIES. The Company shall not, and shall not permit any of
its subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any consensual encumbrance or restriction
on the ability of any subsidiary to (i) pay dividends or make any other
distribution on its Capital Stock or with respect to any other
-38-
<PAGE>
interest or participation in, or measured by, its profits, or pay any
indebtedness owed to, the Company or a subsidiary of the Company, (ii) make
loans or advances to the Company or any subsidiary of the Company, or (iii)
transfer any of its properties or assets to the Company, except for such
encumbrances or restrictions existing under or by reason of (x) the Credit
Facilities or any other agreement pursuant to which Senior Indebtedness
exists or is created, issued, assumed or guaranteed; (y) any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings of the agreements described in clause (x)
hereof, provided that such amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings are no more
restrictive with respect to such dividend and other payment restrictions than
those contained in such agreements as in effect on the execution date of this
indenture; (z) (A) customary provisions restricting the transfer of property
or assets contained in any conditional sales contract or capitalized lease;
(B) applicable law; (C) customary provisions restricting subletting or
assignment of any lease governing a leasehold interest of the Company or any
subsidiary which lease was entered into in the ordinary course of business
and consistent with past practice; or (D) any instrument governing
indebtedness of a person acquired by the Company or any subsidiary of the
Company at the time of such acquisition, which encumbrance or restriction is
not applicable to any person, or the properties or assets of any person,
other than the person, or the property or assets of the person, so acquired.
Section 10. TAXES. The Company shall pay or discharge or cause to
be paid or discharged, before the same shall become delinquent, (i) all
taxes, assessments and governmental charges (including withholding taxes and
any penalties, interest and additions to taxes) levied or imposed upon the
Company or its subsidiaries or upon the income, profits or property of the
Company or any such subsidiary and (ii) all lawful claims for labor,
materials and supplies that, if unpaid, might by law become a lien upon the
property of the Company or any such subsidiary; provided that the Company
shall not be required to pay or discharge or cause to be paid or discharged
any such tax, assessment, charge or claim whose amount, applicability or
validity is being contested in good faith by appropriate proceedings and for
which disputed amounts adequate reserves have been made.
Section 11. INSURANCE. The Company shall provide, or cause to be
provided, for itself and its subsidiaries, insurance (including appropriate
self-insurance) against loss or damage of the kinds customarily insured
against by corporations similarly
-39-
<PAGE>
situated and owning like properties, including, but not limited to, products
liability insurance and public liability insurance, with reputable insurers
or with the government of the United States of America or an agency or
instrumentality thereof, in such amounts with such deductibles and by such
methods as shall be determined in good faith by the Board of Directors to be
appropriate.
ARTICLE V.
NOTEHOLDERS' LISTS AND REPORTS BY
THE COMPANY
Section 1. NOTEHOLDERS' LISTS. The Trustee shall preserve in as
current a form as is reasonably practicable the most recent list available to
it of the names and addresses of holders of Notes and shall otherwise comply
with Trust Indenture Act Section 312(a). If the Trustee is not the Notes
registrar, the Company shall furnish to the Trustee on or before at least
seven Business Days preceding each interest payment date and at such other
times as the Trustee may request in writing a list in such form and as of
such date as the Trustee reasonably may require of the names and addresses of
holders of Notes, and the Company shall otherwise comply with Trust Indenture
Act Section 312(a).
Section 2. REPORTS BY COMPANY. The Company shall deliver to the
Trustee within 15 days after it files the same with the Commission, copies of
all reports and information (or copies of such portions of any of the
foregoing as the Commission may by its rules and regulations prescribe), if
any, which the Company is required to file with the Commission pursuant to
Section 13 or 15(d) of the Exchange Act or pursuant to the immediately
following sentence. So long as at least $5,000,000 aggregate principal
amount of Notes remain outstanding, the Company shall file with the
Commission such reports as may be required pursuant to Section 13 of the
Exchange Act in respect of a security registered pursuant to Section 12 of
the Exchange Act, regardless of whether the Company is otherwise required to
file such reports. If the Company is not subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act (or otherwise
required to file reports pursuant to the immediately preceding sentence), the
Company shall deliver to the Trustee, within 15 days after it would have been
required to file such information with the Commission were it required to do
so, annual and quarterly financial statements, including any notes thereto
(and, in the case of a fiscal year end, an auditors' report by an independent
certified public accounting firm of established national reputation), and a
"Management's Discussion and Analysis
-40-
<PAGE>
of Financial Condition and Results of Operations," in each case substantially
equivalent to that which it would have been required to include in such
quarterly or annual reports, information, documents or other reports if it
had been subject to the requirements of Section 13 or 15(d) of the Exchange
Act. The Company shall provide copies of the foregoing materials to the
Noteholders to the extent required by the Trust Indenture Act once this
Indenture has been qualified. The Company shall also comply with the other
provisions of the Trust Indenture Act Section 314(a).
Delivery of such reports, information and documents to the Trustee
is for informational purposes only and the Trustee's receipt of such shall
not constitute constructive notice of any information contained therein or
determinable from information contained therein, including the Company's
compliance with any of its covenants hereunder (as to which the Trustee is
entitled to rely exclusively on Officers' Certificates).
ARTICLE VI.
DEFAULTS AND REMEDIES
Section 1. EVENTS OF DEFAULT. In case one or more of the
following Events of Default (whatever the reason for such Event of Default
and whether it shall be voluntary or involuntary or be effected by operation
of law or pursuant to any judgment, decree or order of any court or any
order, rule or regulation of any administrative or governmental body) shall
have occurred and be continuing:
(a) default in the payment of the principal of or premium,
if any, on the Notes when due at maturity, upon redemption or
otherwise, including failure by the Company to purchase the Notes
when required under Section 3.5 (whether or not such payment shall
be prohibited by Article XV of this Indenture); or
(b) default in the payment of any installment of interest on
the Notes as and when the same shall become due and payable (whether
or not such payment shall be prohibited by Article XV of this
Indenture), and continuance of such default for a period of 30
days; or
(c) a failure on the part of the Company duly to observe or
perform any other covenants or agreements on the part of the
Company in this Indenture (other than a default in the performance
or breach of a covenant or agreement that is specifically dealt
with elsewhere in this Section 6.1)
-41-
<PAGE>
that continues for a period of 90 days after the date on which
written notice of such failure, requiring the Company to remedy the
same, shall have been given to the Company by the Trustee, or to
the Company and a Responsible Officer of the Trustee, by the
holders of at least 25% in aggregate principal amount of the Notes
at the time outstanding determined in accordance with Section 8.4;
or
(d) an event of default occurs under any mortgage, indenture
or instrument under which there may be issued or by which there may
be secured or evidenced any indebtedness for money borrowed by the
Company or any of its subsidiaries (or the payment of which is
guaranteed by the Company or any of its subsidiaries), whether such
indebtedness or guarantee now exists or shall be created after the
date hereof, which default (i) is caused by a failure to pay
principal or interest on such indebtedness prior to the expiration
of the grace period provided in such indebtedness (a "Payment
Default") or (ii) results in the acceleration of such indebtedness
prior to its expressed maturity and, in each case, the principal
amount of such indebtedness, together with the principal amount of
any other such indebtedness under which there has been a Payment
Default or the maturity of which has been so accelerated,
aggregates $10 million or more;
(e) final judgments or decrees shall be entered by a court of
competent jurisdiction against the Company or any subsidiary
involving liabilities of $10 million or more (singly or in the
aggregate) (after deducting the portion of such liabilities
accepted by a reputable insurance company) and such final judgments
or decrees shall not have been vacated, discharged, satisfied or
stayed pending appeal within 60 days from the entry thereof;
(f) the Company shall commence a voluntary case or other
proceeding seeking liquidation, reorganization or other relief with
respect to itself or its debts under any bankruptcy, insolvency or
other similar law now or hereafter in effect, or seeking the
appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, or
shall consent to any such relief or to the appointment of or taking
possession by any such official in an involuntary case or other
proceeding commenced against it or shall make a general assignment
for the benefit of creditors or shall fail generally to pay its
debts as they become due; or
(g) an involuntary case or other proceeding shall be commenced
against the Company seeking liquidation, reorganization
-42-
<PAGE>
or other relief with respect to it or its debts under any
bankruptcy, insolvency or other similar law now or hereafter in
effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any
substantial part of its property, and such involuntary case or
other proceeding shall remain undismissed and unstayed for a period
of 60 consecutive days;
then, and in each and every such case (other than an Event of Default
specified in Section 6.1(f) or (g)), unless the principal of all of the Notes
shall have already become due and payable, either the Trustee or the holders
of not less than 25% in aggregate principal amount of the Notes then
outstanding hereunder determined in accordance with Section 8.4, by notice in
writing to the Company (and to the Trustee if given by Noteholders), may
declare the principal of, premium, if any, on the Notes and the interest
accrued thereon to be due and payable immediately, and upon any such
declaration the same shall become and shall be immediately due and payable,
anything in this Indenture or in the Notes contained to the contrary
notwithstanding. If an Event of Default specified in Section 6.1(f) or (g)
occurs and is continuing, the principal of all the Notes and the interest
accrued thereon shall be immediately due and payable. The foregoing
provision is subject to the conditions that if, at any time after the
principal of the Notes shall have been so declared due and payable, and
before any judgment or decree for the payment of the monies due shall have
been obtained or entered as hereinafter provided, the Company shall pay or
shall deposit with the Trustee a sum sufficient to pay all matured
installments of interest upon all Notes and the principal of and premium, if
any, on any and all Notes that shall have become due otherwise than by
acceleration (with interest on overdue installments of interest (to the
extent that payment of such interest is enforceable under applicable law) and
on such principal and premium, if any, at the rate borne by the Notes, to the
date of such payment or deposit) and amounts due to the Trustee pursuant to
Section 7.7, and if any and all defaults under this Indenture, other than the
nonpayment of principal of, premium, if any, and accrued interest on Notes
that shall have become due by acceleration, shall have been cured or waived
pursuant to Section 6.7, then and in every such case the holders of a
majority in aggregate principal amount of the Notes then outstanding, by
written notice to the Company and to the Trustee, may waive all defaults or
Events of Default and rescind and annul such declaration and its
consequences; but no such waiver or rescission and annulment shall extend to
or shall affect any subsequent default or Event of Default, or shall impair
any right consequent thereto. The Company shall notify a Responsible Officer
of the Trustee, promptly upon becoming aware thereof, of any Event of Default.
-43-
<PAGE>
In case the Trustee shall have proceeded to enforce any right under
this Indenture and such proceedings shall have been discontinued or abandoned
because of such waiver or rescission and annulment or for any other reason or
shall have been determined adversely to the Trustee, then and in every such
case the Company, the holders of Notes and the Trustee shall be restored
respectively to their several positions and rights hereunder, and all rights,
remedies and powers of the Company, the holders of Notes and the Trustee
shall continue as though no such proceeding had been taken.
Section 2. PAYMENTS OF NOTES ON DEFAULT; SUIT THEREFOR. The
Company covenants that (a) in case default shall be made in the payment of
any installment of interest upon any of the Notes as and when the same shall
become due and payable, and such default shall have continued for a period of
30 days, or (b) in case default shall be made in the payment of the principal
of or premium, if any, on any of the Notes as and when the same shall have
become due and payable, whether at maturity of the Notes or in connection
with any redemption, by declaration or otherwise, then, upon demand of the
Trustee, the Company shall pay to the Trustee, for the benefit of the holders
of the Notes, the whole amount that then shall have become due and payable on
all such Notes for principal premium, if any, or interest, or both, as the
case may be, with interest upon the overdue principal, premium, if any, and
(to the extent that payment of such interest is enforceable under applicable
law) upon the overdue installments of interest at the rate borne by the
Notes; and, in addition thereto, such further amount as shall be sufficient
to cover the costs and expenses of collection, including reasonable
compensation to the Trustee, its agents, attorneys and counsel, and any
expenses or liabilities incurred by the Trustee hereunder other than through
its negligence or bad faith. Until such demand by the Trustee, the Company
may pay the principal of and premium, if any, and interest on the Notes to
the registered holders, whether or not the Notes are overdue.
In case the Company shall fail forthwith to pay such amounts upon
such demand, the Trustee, in its own name and as trustee of an express trust,
shall be entitled and empowered to institute any actions or proceedings at
law or in equity for the collection of the sums so due and unpaid and may
prosecute any such action or proceeding to judgment or final decree, and may
enforce any such judgment or final decree against the Company or any other
obligor on the Notes and collect in the manner provided by law out of the
property of the Company or any other obligor on the Notes wherever situated
the monies adjudged or decreed to be payable.
-44-
<PAGE>
In the case there shall be pending proceedings for the bankruptcy
or for the reorganization of the Company or any other obligor on the Notes
under Title 11 of the United States Code or any other applicable law, or in
case a receiver, assignee or trustee in bankruptcy or reorganization,
liquidator, sequestrator or similar official shall have been appointed for or
taken possession of the Company or such other obligor, the property of the
Company or such other obligor, or in the case of any other judicial
proceedings relative to the Company or such other obligor upon the Notes, or
to the creditors or property of the Company or such other obligor, the
Trustee, irrespective of whether the principal of the Notes shall then be due
and payable as therein expressed or by declaration or otherwise and
irrespective of whether the Trustee shall have made any demand pursuant to
the provisions of this Section 6.2, shall be entitled and empowered, by
intervention in such proceedings or otherwise, to file and prove a claim or
claims for the whole amount of principal, premium, if any, and interest owing
and unpaid in respect of the Notes and, in case of any judicial proceedings,
to file such proofs of claim and other papers or documents as may be
necessary or advisable in order to have the claims of the Trustee and of the
Noteholders allowed in such judicial proceedings relative to the Company or
any other obligor on the Notes, its or their creditors, or its or their
property and to collect and receive any monies or other property payable or
deliverable on any such claims and to distribute the same after the deduction
of any amounts due the Trustee under Section 7.7; and any receiver, assignee
or trustee in bankruptcy or reorganization, liquidator, custodian or similar
official is hereby authorized by each of the Noteholders to make such
payments to the Trustee and, in the event that the Trustee shall consent to
the making of such payments directly to the Noteholders, to pay to the
Trustee any amount due it for reasonable compensation, expenses, advances and
disbursements, including counsel fees incurred by it up to the date of such
distribution. To the extent that such payment of reasonable compensation,
expenses, advances and disbursements out of the estate in any such
proceedings shall be denied for any reason, payment of the same shall be
secured by a lien on, and shall be paid out of, any and all distributions,
dividends, monies, securities and other property that the holders of the
Notes may be entitled to receive in such proceedings, whether in liquidation
or under any plan of reorganization or arrangement or otherwise.
Nothing herein contained shall be deemed to authorize the Trustee
to authorize or consent to or adopt on behalf of any Noteholder any plan of
reorganization or arrangement affecting the Notes or the rights of any
Noteholder, or to authorize the
-45-
<PAGE>
Trustee to vote in respect of the claim of any Noteholder in any such
proceeding.
All rights of action and of asserting claims under this Indenture,
or under any of the Notes, may be enforced by the Trustee without the
possession of any of the Notes or the production thereof on any trial or
other proceeding relative thereto, and any such suit or proceeding instituted
by the Trustee shall be brought in its own name as trustee of an express
trust, and any recovery of judgment shall, after provision for the payment of
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, be for the ratable benefit of the holders of
the Notes.
In any proceedings brought by the Trustee (and in any proceedings
involving the interpretation of any provision of this Indenture to which the
Trustee shall be a party), the Trustee shall be held to represent all the
holders of the Notes, and it shall not be necessary to make any holders of
the Notes parties to any such proceedings.
Section 3. APPLICATION OF MONIES COLLECTED BY TRUSTEE. Any monies
collected by the Trustee pursuant to this Article VI shall be applied in the
order following, at the date or dates fixed by the Trustee for the
distribution of such monies, upon presentation of the several Notes and
stamping thereon the payment, if only partially paid, and upon surrender
thereof, if fully paid:
First: To the payment of all amounts due the Trustee under
Section 7.7;
Second: Subject to the provisions of Article XV, in case
the principal of the outstanding Notes shall not have become due
and be unpaid, to the payment of interest on the Notes in default
in the order of the maturity of the installments of such interest,
with interest (to the extent that such interest has been collected
by the Trustee) upon the overdue installments of interest at the
rate borne by the Notes, such payments to be made ratably to the
persons entitled thereto; and
Third: Subject to the provisions of Article XV, in case
the principal of the outstanding Notes shall have become due, by
declaration or otherwise, and be unpaid, to the payment of the
whole amount then holding and unpaid upon the Notes for principal,
premium, if any, and interest, with interest on the overdue
principal and premium, if any, and (to the extent that such
interest has been collected by the
-46-
<PAGE>
Trustee) upon overdue installments of interest at the rate borne by
the Notes; and in case such monies shall be insufficient to pay in
full the whole amounts so due and unpaid upon the Notes, then to
the payment of such principal, premium, if any, and interest
without preference or priority of principal and premium, if any,
over interest, or of interest over principal and premium, if any,
or of any installment of interest over any other installment of
interest, or of any Note over any other Note, ratably to the
aggregate of such principal and premium, if any, and accrued and
unpaid interest.
Section 4. PROCEEDINGS BY NOTEHOLDER. No holder of any Note shall
have any right by virtue of or by availing of any provision of this Indenture
to institute any suit, action or proceeding in equity or at law upon or under
or with respect to this Indenture, or for the appointment of a receiver,
trustee, liquidator, custodian or other similar official, or for any other
remedy hereunder, unless such holder previously shall have given to the
Trustee written notice of an Event of Default and of the continuance thereof,
as hereinbefore provided, and unless also the holders of not less than 25% in
aggregate principal amount of the Notes then outstanding shall have made
written request upon the Trustee to institute such action, suit or proceeding
in its own name as Trustee hereunder and shall have offered to the Trustee
such reasonable indemnity as it may require against the costs, expenses and
liabilities to be incurred therein or thereby, and the Trustee for 60 days
after its receipt of such notice, request and offer of indemnity, shall have
neglected or refused to institute any such action, suit or proceeding, and no
direction inconsistent with such written request shall have been given to the
Trustee pursuant to Section 6.7; it being understood and intended, and being
expressly covenanted by the taker and holder of every Note with every other
taker and holder and the Trustee, that no one or more holders of Notes shall
have any right in any manner whatever by virtue of or by availing of any
provision of this Indenture to affect, disturb or prejudice the rights of any
other holder of Notes, to obtain or seek to obtain priority over or
preference to any other such holder or to enforce any right under this
Indenture, except in the manner herein provided and for the equal, ratable
and common benefit of all holders of Notes (except as otherwise provided
herein). For the protection and enforcement of this Section 6.4, each and
every Noteholder and the Trustee shall be entitled to such relief as can be
given either at law or in equity.
Notwithstanding any other provision of this Indenture and any
provision of any Note, the right of any holder of any Note to receive payment
of the principal of, premium, if any, and
-47-
<PAGE>
interest on such Note, on or after the respective due dates expressed in such
Note, or to institute suit for the enforcement of any such payment on or
after such respective dates against the Company shall not be impaired or
affected without the consent of such holder except as otherwise set forth
herein.
Anything in this Indenture or the Notes to the contrary
notwithstanding, the holder of any Note, without the consent of either the
Trustee or the holder of any other Note, in his own behalf and for his own
benefit, may enforce, and may institute and maintain any proceeding suitable
to enforce, his rights of conversion as provided herein.
Section 5. PROCEEDINGS BY TRUSTEE. In case of an Event of
Default, the Trustee may in its discretion proceed to protect and enforce the
rights vested in it by this Indenture by such appropriate judicial
proceedings as the Trustee shall deem most effectual to protect and enforce
any of such rights, either by suit in equity or by action at law or by
proceeding in bankruptcy or otherwise, whether for the specific enforcement
of any covenant or agreement contained in this Indenture or in aid of the
exercise of any power granted in this Indenture or to enforce any other legal
or equitable right vested in the Trustee by this Indenture or by law.
Section 6. REMEDIES CUMULATIVE AND CONTINUING. Except as provided
in Section 2.6, all powers and remedies given by this Article VI to the
Trustee or to the Noteholders shall, to the extent permitted by law, be
deemed cumulative and not exclusive of such powers and remedies or of any
other powers and remedies available to the Trustee or the holders of the
Notes, by judicial proceedings or otherwise, to enforce the performance or
observance of the covenants and agreements contained in this Indenture, and
no delay or omission of the Trustee or of any holder of any of the Notes to
exercise any right or power accruing upon any default or Event of Default
occurring and continuing as aforesaid shall impair any such right or power or
shall be construed to be a waiver of any such default or any acquiescence
therein; and, subject to the provisions of Section 6.4, every power and
remedy given by this Article VI or by law to the Trustee or to the
Noteholders may be exercised from time to time, and as often as shall be
deemed expedient, by the Trustee or by the Noteholders.
Section 7. DIRECTION OF PROCEEDINGS AND WAIVER OF DEFAULTS BY
MAJORITY OF NOTEHOLDERS. The holders of a majority in aggregate principal
amount of the Notes at the time outstanding (determined in accordance with
Section 8.4) shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or
exercising
-48-
<PAGE>
any trust or power conferred on the Trustee; provided that (a) such direction
shall not be in conflict with any rule of law or with this Indenture and (b)
the Trustee may take any other action deemed proper by the Trustee that is
not inconsistent with such direction. The holders of a majority in aggregate
principal amount of the Notes at the time outstanding (determined in
accordance with Section 8.4) may on behalf of the holders of all of the Notes
waive any past default or Event of Default hereunder and its consequences
except (i) a default in the payment of interest or premium, if any, on, or
the principal of, the Notes, (ii) a failure by the Company to convert any
Notes into Common Stock or (iii) a default in respect of a covenant or
provisions hereof that under Article X cannot be modified or amended without
the consent of the holders of all Notes then outstanding. Whenever any
default or Event of Default hereunder shall have been waived as permitted by
this Section 6.7, said default or Event of Default shall for all purposes of
the Notes and this Indenture be deemed to have been cured and to be not
continuing and the Company, the Trustee and the holders of the Notes shall be
restored to their former positions and rights hereunder; but no such waiver
shall extend to any subsequent or other default or Event of Default or impair
any right consequent thereon.
Section 8. NOTICE OF DEFAULTS. The Trustee shall, within 90 days
after the occurrence of a default, mail to all Noteholders, as the names and
addresses of such holders appear upon the Note register, notice of all
defaults known to a Responsible Officer, unless such defaults shall have been
cured or waived before the giving of such notice; provided that, except in
the case of default in the payment of the principal of, premium, if any, or
interest on any of the Notes, the Trustee shall be protected in withholding
such notice if and so long as a trust committee of directors and/or
Responsible Officers of the Trustee in good faith determine that the
withholding of such notice is in the interests of the Noteholders.
Section 9. UNDERTAKING TO PAY COSTS. All parties to this
Indenture agree, and each holder of any Note by his acceptance thereof shall
be deemed to have agreed, that any court may, in its discretion, require, in
any suit for the enforcement of any right or remedy under this Indenture, or
in any suit against the Trustee for any action taken or omitted by it as
Trustee, the filing by any party litigant in such suit of an undertaking to
pay the costs of such suit and that such court may in its discretion assess
reasonable costs, including reasonable attorneys' fees and expenses, against
any party litigant in such suit, having due regard to the merits and good
faith of the claims or defenses made by such party litigant; provided that
the provisions of this Section 6.9 shall not apply to any suit instituted
-49-
<PAGE>
by the Trustee, to any suit instituted by any Noteholder or group of
Noteholders holding in the aggregate more than 10% in principal amount of the
Notes at the time outstanding determined in accordance with Section 8.4 or to
any suit instituted by any Noteholder for the enforcement of the payment of
the principal of, premium, if any, or interest on any Note on or after the
due date expressed in such Note or to any suit for the enforcement of the
right to convert any Note in accordance with the provisions of Article XIV.
ARTICLE VII
CONCERNING THE TRUSTEE
Section 1. DUTIES AND RESPONSIBILITIES OF TRUSTEE.
(a) If an Event of Default has occurred and is continuing, the
Trustee shall exercise the rights and powers vested in it by this Indenture
and use the same degree of care and skill in its exercise as a prudent person
would exercise or use under the circumstances in the conduct of such person's
own affairs.
(b) Except during the continuance of an Event of Default:
(1) the Trustee need perform only those duties that are
specifically set forth in this Indenture and no others; and
(2) in the absence of bad faith on its part, the Trustee
may conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the
requirements of this Indenture; provided that in the case of any
such certificates or opinions that by any provision hereof are
specifically required to be furnished to the Trustee, the Trustee
shall be under a duty to examine the same to determine whether or
not they conform to the requirements of this Indenture (but need
not confirm or investigate the accuracy of mathematical
calculations or other facts stated therein).
(c) The Trustee may not be relieved from liability for its own
grossly negligent action, its own grossly negligent failure to act or its own
willful misconduct, except that:
(1) this paragraph (c) does not limit the effect of
paragraph (b) of this Section 7.1;
-50-
<PAGE>
(2) the Trustee shall not be liable for any error of
judgment made in good faith by an officer of the Trustee unless it
is proved that the Trustee was negligent in ascertaining the
pertinent facts; and
(3) the Trustee shall not be liable with respect to any
action it takes or omits to take in good faith in accordance with a
direction received by it pursuant to Section 6.7.
(d) Every provision of this Indenture that in any way relates to
the Trustee is subject to paragraphs (a), (b), (c) and (e) of this Section
7.1.
(e) The Trustee may refuse to perform any duty or exercise any
right or power or extend or risk its own funds or otherwise incur any
financial liability unless it receives indemnity satisfactory to it against
any loss, liability or expense.
Section 2. REPORTS BY TRUSTEE TO HOLDERS. Within 60 days after
each May 15 commencing with the May 15 following the date of this Indenture,
the Trustee shall, if required by the Trust Indenture Act, mail to each
Noteholder a brief report dated as of such May 15 that complies with Trust
Indenture Act Section 313(a). The Trustee also shall comply with Trust
Indenture Act Sections 313(b) and 313(c).
The Company shall promptly notify the Trustee in writing if the
Notes become listed or delisted on any stock exchange or automatic quotation
system.
A copy of each report at the time of its mailing to Noteholders
shall be mailed to the Company and, to the extent required by Section 5.2
hereof and of the Trust Indenture Act Section 313(d), filed with the
Commission and each stock exchange, if any, on which the Notes are listed.
Section 3. RELIANCE ON DOCUMENTS, OPINIONS, ETC. Except as
otherwise provided in Section 7.1:
(a) The Trustee may rely and shall be protected in
acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, consent, order, bond, debenture,
coupon or other paper or document believed by it in good faith to
be genuine and to have been signed or presented by the proper party
or parties;
-51-
<PAGE>
(b) Any request, direction, order or demand of the
Company mentioned herein shall be sufficiently evidenced by an
Officers' Certificate (unless other evidence in respect thereof be
herein specifically prescribed or required by the Trust Indenture
Act); and any resolution of the Board of Directors may be evidenced
to the Trustee by a copy thereof certified by the Secretary or an
Assistant Secretary of the Company;
(c) The Trustee may consult with counsel of its
selection and any advice or opinion of counsel shall be full and
complete authorization and protection in respect of any action
taken or omitted by it hereunder in good faith and in accordance
with such advice or opinion of counsel;
(d) The Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or
through agents or attorneys, and the Trustee shall not be
responsible for any misconduct or negligence on the part of any
agent or attorney appointed by it with due care hereunder; no
Depositary, Custodian or paying agent who is not the Trustee shall
be deemed an agent of the Trustee, and the Trustee (in its capacity
as Trustee) shall not be responsible for any act or omission by any
such Depositary, Custodian or paying agent;
(e) The Trustee shall be under no obligation to exercise
any of the rights or powers vested in it by the Indenture at the
request or direction of any of the holders pursuant to this
Indenture unless such holders have offered the Trustee reasonable
security or indemnity against the costs, expenses and liabilities
that would be incurred by it in compliance with such request or
direction.
(f) Subject to the provisions of Section 7.1(c), the
Trustee shall not be liable for any action it takes or omits to
take in good faith that it believes to be authorized or within its
rights or powers;
(g) In connection with any request to transfer or
exchange any Note, the Trustee may request a direction (in the form
of an Officers' Certificate) from the Company and an Opinion of
Counsel with respect to compliance with any restrictions on
transfer or exchange imposed by this Indenture, the Securities Act,
other applicable law or the rules and regulations of any exchange
on which the Notes or the capital stock may be traded, and the
Trustee may rely and shall be protected in acting upon such
direction and in
-52-
<PAGE>
accordance with such Officers' Certificate and Opinion of Counsel;
(h) The Trustee may rely and shall be fully protected in
acting upon the determination and notice by the Company of the
Conversion Price; and
(i) The Trustee shall not be deemed to have knowledge of
any Event of Default or other fact or event upon the occurrence of
which it may be required to take action hereunder unless one of its
Responsible Officers has actual knowledge thereof.
Section 4. NO RESPONSIBILITY FOR RECITALS, ETC. The recitals
contained herein and in the Notes (except in the Trustee's certificate of
authentication) shall be taken as the statements of the Company, and the
Trustee assumes no responsibility for the correctness of the same. The
Trustee makes no representations as to the validity or sufficiency of this
Indenture or of the Notes. The Trustee shall not be accountable for the use
or application by the Company of any Notes or the proceeds of any Notes
authenticated and delivered by the Trustee in conformity with the provisions
of this Indenture.
Section 5. TRUSTEE, PAYING AGENTS, CONVERSION AGENTS OR REGISTRAR
MAY OWN NOTES. The Trustee, any paying agent, any conversion agent or any
Note registrar, in its individual or any other capacity, may become the owner
or pledgee of Notes with the same rights it would have if it were not
Trustee, paying agent, conversion agent or Note registrar.
Section 6. MONIES TO BE HELD IN TRUST. Subject to the provisions
of Section 12.4, all monies received by the Trustee shall, until used or
applied as herein provided, be held in trust for the purposes for which they
were received. Money held by the Trustee in trust hereunder need not be
segregated from other funds except to the extent required by law. The
Trustee shall be under no liability for interest on any money received by it
hereunder except as may be agreed to in writing from time to time by the
Company and the Trustee.
Section 7. COMPENSATION AND EXPENSES OF TRUSTEE. The Company
covenants and agrees to pay to the Trustee from time to time, and the Trustee
shall be entitled to, such compensation as the Company and the Trustee shall
from time to time agree in writing, for all services rendered by it hereunder
in any capacity (which shall not be limited by any provision of law in regard
to the compensation of a trustee of an express trust), and the Company shall
pay or reimburse the Trustee upon its request for
-53-
<PAGE>
all reasonable expenses, disbursements and advances incurred or made by the
Trustee in accordance with any of the provisions of this Indenture (including
the reasonable compensation and the expenses and disbursements of its counsel
and of all persons not regularly in its employ) except any such expense,
disbursement or advance as may arise from its negligence or bad faith. The
Company also covenants to indemnify each of the Trustee or any predecessor
Trustee in any capacity under this Indenture and its agents and any
authenticating agent for, and to hold them harmless against, any and all
loss, liability, damage, claim or expense, including taxes (other than taxes
based on the income of the Trustee) incurred without negligence or bad faith
on the part of the Trustee or such agent or authenticating agent, as the case
may be, and arising out of or in connection with the acceptance or
administration of this trust or in any other capacity hereunder, including
the costs and expenses of defending themselves against any claim of liability
in the premises. The obligations of the Company under this Section 7.7 to
compensate or indemnify the Trustee and to pay or reimburse the Trustee for
expenses, disbursements and advances shall be secured by a lien prior to that
of the Notes upon all property and funds held or collected by the Trustee as
such, except funds held in trust for the benefit of the holders of particular
Notes. The obligation of the Company under this Section shall survive the
satisfaction and discharge of this Indenture.
Section 8. OFFICERS' CERTIFICATE AS EVIDENCE. Except as otherwise
provided in Section 7.1, whenever in the administration of the provisions of
this Indenture the Trustee shall deem it necessary or desirable that a matter
be proved or established prior to taking or omitting any action hereunder,
such matter (unless other evidence in respect thereof be herein specifically
prescribed) may, in the absence of negligence or bad faith on the part of the
Trustee, be deemed to be conclusively proved and established by an Officers'
Certificate delivered to the Trustee, and such Officers' Certificate, in the
absence of negligence or bad faith on the part of the Trustee, shall be full
warrant to the Trustee for any action taken or omitted by it under the
provisions of this Indenture upon the faith thereof.
Section 9. CONFLICTING INTERESTS OF TRUSTEE. In the event that
the Trust Indenture Act is applicable hereto, and if the Trustee has or shall
acquire a conflicting interest within the meaning of Trust Indenture Act
Section 310(b) and there exists an Event of Default hereunder (exclusive of
any period of grace or requirement of notice), the Trustee shall either
eliminate such interest or resign, to the extent and in the manner provided
by, and subject to the provisions of, the Trust Indenture Act and this
Indenture.
-54-
<PAGE>
Section 10. ELIGIBILITY OF TRUSTEE. There shall at all times be a
Trustee hereunder that shall be a person that satisfied the requirements of
Trust Indenture Act Section 310(a)(1) and Section 310(a)(5) and that has a
combined capital and surplus of at least $50,000,000. If such person
publishes reports of condition at least annually, pursuant to law or to the
requirements of any supervising or examining authority, then for the purposes
of this Section, the combined capital and surplus of such person shall be
deemed to be its combined capital and surplus as set forth in its most recent
report of condition so published. If at any time the Trustee shall cease to
be eligible in accordance with the provisions of this Section, it shall
resign immediately in the manner and with the effect hereinafter specified in
this Article VII.
Section 11. RESIGNATION OR REMOVAL OF TRUSTEE.
(a) The Trustee may at any time resign by giving written notice of
such resignation to the Company; and the Company shall mail, or cause to be
mailed, notice thereof to the holders of Notes at their addresses as they
shall appear on the Note register. Upon receiving such notice of
resignation, the Company shall promptly appoint a successor trustee by
written instrument, in duplicate, executed by order of the Board of
Directors, one copy of which instrument shall be delivered to the resigning
Trustee and one copy to the successor trustee.
(b) In case at any time any of the following shall occur:
(1) the Trustee shall fail to comply with Section 7.9
after written request therefor by the Company or by any Noteholder
who has been a BONA FIDE holder of a Note or Notes for at least six
months; or
(2) the Trustee shall cease to be eligible in accordance
with the provisions of Section 7.10 and shall fail to resign after
written request therefor by the Company or by any such Noteholder;
or
(3) the Trustee shall become incapable of acting, or
shall be adjudged a bankrupt or insolvent, or a receiver of the
Trustee or of its property shall be appointed, or any public
officer shall take charge or control of the Trustee or of its
property or affairs for the purpose of rehabilitation, conservation
or liquidation,
-55-
<PAGE>
then, in any such case, the Company may remove the Trustee and appoint a
successor trustee by written instrument, in duplicate, executed by order of the
Board of Directors, one copy of which instrument shall be delivered to the
Trustee so removed and one copy to the successor trustee or any Noteholder who
has been a BONA FIDE holder of a Note or Notes for at least six months may, on
behalf of himself and all others similarly situated, petition any court of
competent jurisdiction for the removal of the Trustee and the appointment of a
successor trustee. Such court may thereupon, after such notice, if any, as it
may deem proper and prescribe, remove the Trustee and appoint a successor
trustee.
(c) The holders of a majority in aggregate principal amount of the
Notes at the time outstanding may at any time remove the Trustee and nominate
a successor trustee, which shall be deemed appointed as successor trustee
unless within ten days after notice to the Company of such nomination the
Company objects thereto, in which case the Trustee so removed or any
Noteholder, upon the terms and conditions and otherwise as provided in the
next paragraph, may petition any court of competent jurisdiction for an
appointment of a successor trustee.
If no successor trustee shall have been so appointed and have
accepted appointment within 60 days after removal or the mailing of such
notice of resignation to the Noteholders, the Trustee resigning or being
removed may petition any court of competent jurisdiction for the appointment
of a successor trustee, or, in the case of either resignation or removal, any
Noteholder who has been a BONA FIDE holder of a Note or Notes for at least
six months may, on behalf of himself and all others similarly situated,
petition any such court for the appointment of a successor trustee. Such
court may thereupon, after such notice, if any, as it may deem proper and
prescribe, appoint a successor trustee.
(d) Any resignation or removal of the Trustee and appointment of
a successor trustee pursuant to any of the provisions of this
Section 7.11 shall become effective upon acceptance of
appointment by the successor trustee as provided in Section 7.12.
Section 12. ACCEPTANCE BY SUCCESSOR TRUSTEE. Any successor
trustee appointed as provided in Section 7.11 shall execute, acknowledge and
deliver to the Company and to its predecessor trustee an instrument accepting
such appointment hereunder, and thereupon, the resignation or removal of the
predecessor trustee shall become effective and such successor trustee,
-56-
<PAGE>
without any further act, deed or conveyance, shall become vested with all the
rights, powers, duties and obligations of its predecessor hereunder, with
like effect as if originally named as trustee herein; but on the written
request of the Company or of the successor trustee, the Trustee ceasing to
act shall, upon payment of any amounts then due it pursuant to the provisions
of Section 7.7, execute and deliver an instrument transferring to such
successor trustee all the rights and powers of the Trustee so ceasing to act.
Upon request of any such successor trustee, the Company shall execute any and
all instruments in writing for more fully and certainly vesting in and
confirming to such successor trustee all such rights and powers. Any Trustee
ceasing to act shall, nevertheless, retain a lien upon all property and funds
held or collected by such trustee as such, except for funds held in trust for
the benefit of holders of particular Notes, to secure any amounts then due it
pursuant to the provisions of Section 7.7.
No successor trustee shall accept appointment as provided in this
Section 7.12 unless at the time of such acceptance such successor trustee
shall be qualified under the provisions of Section 7.9 and eligible under the
provisions of Section 7.10.
Upon acceptance of appointment by a successor trustee as provided
in this Section 7.12, the Company shall mail or cause to be mailed notice of
the succession of such Trustee hereunder to the holders of Notes at their
addresses as they shall appear on the Note register. If the Company fails to
mail such notice within ten days after acceptance of appointment by the
successor trustee, the successor trustee shall cause such notice to be mailed
at the expense of the Company.
Section 13. SUCCESSOR, BY MERGER, ETC. Any corporation into which
the Trustee may be merged or converted or with which it may be consolidated,
or any corporation resulting from any merger, conversion or consolidation to
which the Trustee shall be a party, or any corporation succeeding to all or
substantially all of the corporate trust business of the Trustee, shall be
the successor to the Trustee hereunder, provided such corporation shall be
qualified under the provisions of Section 7.9 and eligible under the
provisions of Section 7.10 without the execution or filing of any paper or
any further act on the part of any of the parties hereto.
Section 14. LIMITATION ON RIGHTS OF TRUSTEE AS CREDITOR. If and
when the Trustee shall be or become a creditor of the
Company (or any other obligor upon the Notes) and the
Trust Indenture Act is applicable hereto, the Trustee
shall be subject
-57-
<PAGE>
to the provisions of Trust Indenture Act Section 311(a) or, if applicable,
Trust Indenture Act Section 311(b) regarding the collection of the claims
against the Company (or any such other obligor).
ARTICLE VIII
CONCERNING THE NOTEHOLDERS
Section 1. ACTION BY NOTEHOLDERS. Whenever in this Indenture it
is provided that the holders of a specified percentage in aggregate principal
amount of the Notes may take any action (including the making of any demand
or request, the giving of any notice, consent or waiver or the taking of any
other action), the fact that at the time of taking any such action, the
holders of such specified percentage have joined therein may be evidenced (a)
by any instrument or any number of instruments of similar tenor executed by
Noteholders in person or by agent or proxy appointed in writing, (b) by the
record of the holders of Notes voting in favor thereof at any meeting of
Noteholders duly called and held in accordance with the provisions of Article
IX or (c) by a combination of such instrument or instruments and any such
record of such a meeting of Noteholders. Whenever the Company or the Trustee
solicits the taking of any action by the holders of the Notes, the Company or
the Trustee may fix in advance of such solicitation, a date as the record
date for determining holders entitled to take such action. The record date
shall be not more than 15 days prior to the date of commencement of
solicitation of such action.
Section 2. PROOF OF EXECUTION BY NOTEHOLDERS. Subject to the
provisions of Sections 7.1, 7.2 and 9.5, proof of the execution of any
instrument by a Noteholder or by agent or proxy shall be sufficient if made
in accordance with such reasonable rules and regulations as may be prescribed
by the Trustee or in such manner as shall be satisfactory to the Trustee.
The holding of Notes shall be proved by the Note register or by a certificate
of the Note registrar.
The record of any Noteholders' meeting shall be proved in the
manner provided in Section 9.5.
Section 3. WHO ARE DEEMED ABSOLUTE OWNERS. The Company, the
Trustee, any paying agent, any conversion agent and any Note registrar may
deem the person in whose name such Note shall be registered upon the books of
the Company to be, and may treat such person as, the absolute owner of such
Note (whether or not such Note shall be overdue and notwithstanding any
notation of ownership or other writing thereon) for the purpose of receiving
-58-
<PAGE>
payment of or on account of the principal of, premium, if any, and interest
on such Note, for conversion of such Note and for all other purposes; and
neither the Company nor the Trustee nor any paying agent nor any conversion
agent nor any Note registrar shall be affected by any notice to the contrary.
All such payments so made to any holder for the time being, or upon order of
such holder, shall be valid and, to the extent of the sum or sums so paid,
effectual to satisfy and discharge the liability for monies payable upon any
such Note.
The Depositary shall be deemed to be the owner of any global Note
for all purposes, including receipt of notices to Noteholders and payment of
principal of, premium, if any, and interest on the Notes. None of the
Company, the Trustee (in its capacity as Trustee), any paying agent or the
Note registrar (or co-registrar) shall have any responsibility for any aspect
of the records relating to or payments made on account of beneficial
interests of a global Note or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests; provided that the
foregoing shall not apply to the Trustee or any other person acting in its
capacity as Custodian.
Section 4. COMPANY-OWNED NOTES DISREGARDED. In determining
whether the holders of the requisite aggregate principal amount of Notes have
concurred in any direction, consent, waiver or other action under this
Indenture, Notes that are owned by the Company or any other obligor on the
Notes or by any person directly or indirectly controlling or controlled by or
under direct or indirect common control with the Company or any other obligor
on the Notes shall be disregarded and deemed not to be outstanding for the
purpose of any such determination; provided that for the purposes of
determining whether the Trustee shall be protected in relying on any such
direction, consent, waiver or other action, only Notes that a Responsible
Officer actually knows are so owned shall be so disregarded. Notes so owned
that have been pledged in good faith may be regarded as outstanding for the
purposes of this Section 8.4 if the pledgee shall establish to the
satisfaction of the Trustee the pledger's right to vote such Notes and that
the pledgee is not the Company, any other obligor on the Notes or a person
directly or indirectly controlling or controlled by or under direct or
indirect common control with the Company or any such other obligor. In the
case of a dispute as to such right, any decision by the Trustee taken upon
the advice of counsel shall be full protection to the Trustee. Upon request
of the Trustee, the Company shall furnish to the Trustee promptly an
Officers' Certificate listing and identifying all Notes, if any, known by the
Company to be owned or held by or for the account of any of the above
described persons; and subject to Section 7.1, the Trustee shall be entitled
to accept
-59-
<PAGE>
such Officers' Certificate as conclusive evidence of the facts therein set
forth and of the fact that all Notes not listed therein are outstanding for
the purpose of any such determination.
Section 5. REVOCATION OF CONSENTS, FUTURE HOLDERS BOUND. At any
time prior to (but not after) the evidencing to the Trustee, as provided in
Section 8.1, of the taking of any action by the holders of the percentage in
aggregate principal amount of the Notes specified in this Indenture in
connection with such action, any holder of a Note that is shown by the
evidence to be included in the Notes the holders of which have consented to
such action may, by filing written notice with the Trustee at its Corporate
Trust Office and upon proof of holding as provided in Section 8.2, revoke
such action so far as concerns such Note. Except as aforesaid, any such
action taken by the holder of any Note shall be conclusive and binding upon
such holder and upon all future holders and owners of such Note and of any
Notes issued in exchange or substitution therefor, irrespective of whether
any notation in regard thereto is made upon such Note or any Note issued in
exchange or substitution therefor.
ARTICLE IX
NOTEHOLDERS' MEETINGS
Section 1. PURPOSES FOR WHICH MEETINGS MAY BE CALLED. A meeting
of Noteholders may be called at any time and from time to time pursuant to
the provisions of this Article IX for any of the following purposes:
(i) to give any notice to the Company or to the Trustee,
or to give any directions to the Trustee, or to consent to the
waiving of any default hereunder and its consequences, or to take
any other action authorized to be taken by Noteholders pursuant to
any of the provisions of Article VI;
(ii) to remove the Trustee and appoint a successor
trustee pursuant to the provisions of Article VII;
(iii) to consent to the execution of an indenture or
indentures supplemental hereto pursuant to the provisions of
Section 10.2; or
(iv) to take any other action authorized to be taken by
or on behalf of the holders of any specified aggregate principal
amount of the Notes under any other provisions of this Indenture or
under applicable law.
-60-
<PAGE>
Section 2. MANNER OF CALLING MEETINGS; RECORD DATE. The Trustee
may at any time call a meeting of Noteholders to take any action specified in
Section 9.1, to be held at such time and at such place in the City of New
York, State of New York, as the Trustee shall determine. Notice of every
meeting of the Noteholders, setting forth the time and the place of such
meeting and in general terms the action proposed to be taken at such meeting,
shall be mailed not less than 30 nor more than 60 days prior to the date
fixed for the meeting to such Noteholders at their addresses as such
addresses appear in the Note register. For the purpose of determining
Noteholders entitled to notice of any meeting of Noteholders, the Trustee
shall fix in advance a date as the record date for such determination, such
date to be a business day not more than ten days prior to the date of the
mailing of such notice as hereinabove provided. Only persons in whose name
any Note shall be registered in the Note register at the close of business on
a record date fixed by the Trustee as aforesaid, or by the Company or the
Noteholders as provided in Section 9.3, shall be entitled to notice of the
meeting of Noteholders with respect to which such record date was so fixed.
Section 3. CALL OF MEETING BY COMPANY OR NOTEHOLDERS. In case at
any time the Company, pursuant to a resolution of its Board of Directors or
the holders of at least 10% in aggregate principal amount of the Notes then
outstanding shall have requested the Trustee to call a meeting of Noteholders
to take any action authorized in Section 9.1 by written request setting forth
in reasonable detail the action proposed to be taken at the meeting, and the
Trustee shall not have mailed notice of such meeting within 20 days after
receipt of such request, then the Company or the holders of Notes in the
amount above specified, as the case may be, may fix the record date with
respect to, and determine the time and the place for, such meeting and may
call such meeting to take any action authorized in Section 9.1, by mailing
notice thereof as provided in Section 9.2. The record date fixed as provided
in the preceding sentence shall be set forth in a written notice to the
Trustee and shall be a business day not less than 15 nor more than 20 days
after the date on which the original request is sent to the Trustee.
Section 4. WHO MAY ATTEND AND VOTE AT MEETINGS. Only persons
entitled to receive notice of a meeting of Noteholders and their respective
proxies duly appointed by an instrument in writing shall be entitled to vote
at such meeting. The only persons who shall be entitled to be present or to
speak at any meeting of Noteholders shall be the persons entitled to vote at
such meeting and their counsel and any representatives of the Trustee and its
counsel and any representatives of the Company and its counsel. When a
determination of Noteholders entitled to
-61-
<PAGE>
vote at any meeting of Noteholders has been made as provided in this Section,
such determination shall apply to any adjournments thereof.
Section 5. MANNER OF VOTING AT MEETINGS AND RECORD TO BE KEPT. The
vote upon any resolution submitted to any meeting of Noteholders shall be by
written ballots on each of which shall be subscribed the signature of the
Noteholder or proxy casting such ballot and the identifying number or numbers
of the Notes held or represented in respect of which such ballot is cast. The
chairman of the meeting shall appoint two inspectors of votes who shall count
all votes cast at the meeting for or against any resolution and who shall
make and file with the secretary of the meeting their verified written
reports in duplicate of all votes cast at the meeting. A record in duplicate
of the proceedings of each meeting of Noteholders shall be prepared by the
secretary of the meeting and there shall be attached to said record the
original reports of the inspectors of votes on any vote by ballot taken
thereat and affidavits by one or more persons having knowledge of the facts
setting forth a copy of the notice of the meeting and showing that said
notice was mailed as provided in Section 9.2. The record shall show the
identifying numbers of the Notes voting in favor of or against any
resolution. Each counterpart of such record shall be signed and verified by
the affidavits of the chairman and secretary of the meeting and one of the
counterparts shall be delivered to the Company and the other to the Trustee
to be preserved by the Trustee.
Any counterpart record so signed and verified shall be conclusive
evidence of the matters therein stated and shall be the record referred to in
clause (b) of Section 8.1.
Section 6. EXERCISE OF RIGHTS OF TRUSTEE AND NOTEHOLDERS NOT TO BE
HINDERED OR DELAYED. Nothing in this Article IX contained shall be deemed or
construed to authorize or permit, by reason of any call of a meeting of
Noteholders or any rights expressly or impliedly conferred hereunder to make
such call, any hinderance or delay in the exercise of any right or rights
conferred upon or reserved to the Trustee or to the Noteholders under any of
the provisions of this Indenture or of the Notes.
ARTICLE X
SUPPLEMENTAL INDENTURES
Section 1. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF NOTEHOLDERS.
The Company, when authorized by a Board Resolution, and the Trustee may from
time to time and at any time enter into
-62-
<PAGE>
an indenture or indentures supplemental hereto for one or more of the
following purposes:
(a) to make provision with respect to the conversion rights
of the holders of Notes pursuant to the requirements of Section
14.6;
(b) subject to Article XV, to convey, transfer, assign,
mortgage or pledge to the Trustee as security for the Notes, any
property or assets;
(c) to evidence the succession of another person to the
Company, or successive successions, and the assumption by the
Successor Company of the covenants, agreements and obligations of
the Company pursuant to Article XI;
(d) to add to the covenants of the Company such further
covenants, restrictions or conditions as the Board of Directors and
the Trustee shall consider to be for the benefit of the holders of
Notes and to make the occurrence, or the occurrence and
continuance, of a default in any such additional covenants,
restrictions or conditions a default or an Event of Default
permitting the enforcement of all or any of the several remedies
provided in this Indenture as herein set forth; provided that in
respect of any such additional covenant, restriction or condition,
such supplemental indenture may provide for a particular period of
grace after default (which period may be shorter or longer than
that allowed in the case of other defaults) or may provide for an
immediate enforcement upon such default or may limit the remedies
available to the Trustee upon such default;
(e) to provide for the issuance under this Indenture of Notes
in coupon form (including Notes registrable as to principal only)
and to provide for exchangeability of such Notes with the Notes
issued hereunder in fully registered form and to make all
appropriate changes for such purpose;
(f) to cure any ambiguity or to correct or supplement any
provision contained herein or in any supplemental indenture that
may be defective or inconsistent with any other provision contained
herein or in any supplemental indenture, or to make such other
provisions in regard to matters or questions arising under this
Indenture that shall not adversely affect the interests of the
holders of the Notes;
-63-
<PAGE>
(g) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee with respect to the Notes; or
(h) to modify, eliminate or add to the provisions of this
Indenture to such extent necessary to effect the qualification of
this Indenture under the Trust Indenture Act (if applicable), or
under any similar federal statute hereafter enacted (if applicable).
The Trustee is hereby authorized to join with the Company in the
execution of any such supplemental indenture, to make any further appropriate
agreements and stipulations that may be therein contained and to accept the
conveyance, transfer and assignment of any property thereunder, but the
Trustee shall not be obligated to, but may in its discretion, enter into any
supplemental indenture that affects the Trustee's own rights, duties or
immunities under this Indenture or otherwise.
Any supplemental indenture authorized by the provisions of this
Section 10.1 may be executed by the Company and the Trustee without the
consent of the holders of any of the Notes at the time outstanding,
notwithstanding any of the provisions of Section 10.2.
Section 2. SUPPLEMENTAL INDENTURES WITH CONSENT OF NOTEHOLDERS.
With the consent (evidenced as provided in Article VIII) of the holders of
not less than a majority in aggregate principal amount of the Notes at the
time outstanding, the Company, when authorized by a Board Resolution and the
Trustee may from time to time and at any time enter into an indenture or
indentures supplemental hereto for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Indenture
or any supplemental indenture or of modifying in any manner the rights of the
holders of the Notes; provided that, without the consent of the holders of
all Notes then outstanding, no such supplemental indenture shall (i) extend
the fixed maturity of any Note, or reduce the rate or extend the time of
payment of interest thereon, or reduce the principal amount thereof or
premium, if any, thereon or reduce any amount payable on redemption thereof,
alter the obligation of the Company to redeem the Notes at the option of the
holder upon the occurrence of a Change of Control or impair or affect the
right of any Noteholder to institute suit for the payment thereof or make the
principal thereof or interest or premium, if any, thereon payable in any coin
or currency other than that provided in the Notes, modify the subordination
provisions in a manner adverse to the holders of the Notes, or impair the
right to convert the Notes into Common Stock subject to the terms set
-64-
<PAGE>
forth herein without the consent of the holder of each Note so affected or
(ii) reduce the aforesaid percentage of Notes, the holders of which are
required to consent to any such supplemental indenture.
Upon the request of the Company, accompanied by a copy of a Board
Resolution certified by its Secretary or Assistant Secretary authorizing the
execution of any such supplemental indenture, and upon the filing with the
Trustee of evidence of the consent of Noteholders as aforesaid, the Trustee
shall join with the Company in the execution of such supplemental indenture
unless such supplemental indenture affects the Trustee's own rights, duties
or immunities under this Indenture or otherwise, in which case the Trustee
may in its discretion, but shall not be obligated to, enter into such
supplemental indenture.
It shall not be necessary for the consent of the Noteholders under
this Section 10.2 to approve the particular form of any proposed supplemental
indenture, but it shall be sufficient if such consent shall approve the
substance thereof.
Section 3. EFFECT OF SUPPLEMENTAL INDENTURES. Any supplemental
indenture executed pursuant to the provisions of this Article X shall comply
with the Trust Indenture Act, as then in effect, if such supplemental
indenture is then required to so comply. Upon the execution of any
supplemental indenture pursuant to the provisions of this Article X, this
Indenture shall be and be deemed to be modified and amended in accordance
therewith and the respective rights, limitation of rights, obligations,
duties and immunities under this Indenture of the Trustee, the Company and
the holders of Notes shall thereafter be determined, exercised and enforced
hereunder subject in all respects to such modifications and amendments and
all the terms and conditions of any such supplemental indenture shall be and
be deemed to be part of the terms and conditions of this Indenture for any
and all purposes.
Section 4. NOTATION ON NOTES. Notes authenticated and delivered
after the execution of any supplemental indenture pursuant to the provisions
of this Article X may bear a notation in form approved by the Trustee as to
any matter provided for in such supplemental indenture, but they need not do
so. If the Company or the Trustee shall determine to add such a notation,
new Notes so modified as to conform, in the opinion of the Trustee and the
Board of Directors, to any modification of this Indenture contained in any
such supplemental indenture may, at the Company's expense, be prepared and
executed by the Company, authenticated by the Trustee (or an authenticating
agent duly appointed by the Trustee pursuant to Section 16.14) and delivered
-65-
<PAGE>
in exchange for the Notes then outstanding, upon surrender of such Notes then
outstanding.
Section 5. EVIDENCE OF COMPLIANCE OF SUPPLEMENTAL INDENTURE TO BE
FURNISHED TRUSTEE. The Trustee shall be furnished with and, subject to the
provisions of Sections 7.1 and 7.2, may rely upon an Officers' Certificate
and an Opinion of Counsel as conclusive evidence that any supplemental
indenture executed pursuant hereto complies with the requirements of this
Article X.
ARTICLE XI
CONSOLIDATION, MERGER, SALE, CONVEYANCE,
TRANSFER AND LEASE
Section 1. COMPANY MAY CONSOLIDATE, ETC. ON CERTAIN TERMS. The
Company shall not consolidate with or merge with or into, or convey, transfer
or lease all or substantially all of its assets (determined on a consolidated
basis) to any person unless: (i) either the Company is the resulting,
surviving or transferee person (the "Successor Company") or the Successor
Company is a person organized and existing under the laws of the United
States or any State thereof or the District of Columbia, and the Successor
Company (if not the Company) expressly assumes by a supplemental indenture,
executed and delivered to the Trustee, in form satisfactory to the Trustee,
all the obligations of the Company under this Indenture and the Notes,
including the rights pursuant to Article XIV hereof, (ii) immediately after
giving effect to such transaction, no Event of Default has happened and is
continuing and (iii) the Company delivers to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger or transfer and such supplemental indenture (if any) comply with this
Indenture.
Section 2. SUCCESSOR COMPANY TO BE SUBSTITUTED. In case of any
such consolidation, merger, sale, conveyance, transfer or lease and upon the
assumption by the Successor Company, by supplemental indenture, executed and
delivered to the Trustee and satisfactory in form to the Trustee, of the due
and punctual payment of the principal of, premium, if any, and interest on
all of the Notes and the due and punctual performance of all of the covenants
and conditions of this Indenture to be performed by the Company, such
Successor Company shall succeed to and be substituted for the Company, with
the same effect as if it had been named herein as the party hereto. When a
Surviving Person duly assumes all the obligations of the Company pursuant to
their Indenture and the Notes, the predecessor shall be released from all
such obligations.
-66-
<PAGE>
Section 3. OPINION OF COUNSEL TO BE GIVEN TO TRUSTEE. The Trustee
subject to Sections 7.1 and 7.2, shall receive an Officers' Certificate and
an Opinion of Counsel as conclusive evidence that any such consolidation,
merger, sale, conveyance, transfer or lease and any such assumption complies
with the provisions of this Article XI.
-67-
<PAGE>
ARTICLE XIII
SATISFACTION AND DISCHARGE OF INDENTURE;
UNCLAIMED MONEYS
Section 1. LEGAL DEFEASANCE AND COVENANT DEFEASANCE OF THE NOTES.
(a) The Company may, at its option by Board Resolution, at any
time, with respect to the Notes, elect to have either paragraph (b) or
paragraph (c) below be applied to the outstanding Notes upon compliance with
the conditions set forth in paragraph (d).
(b) Upon the Company's exercise under paragraph (a) of the option
applicable to this paragraph (b), the Company shall be deemed to have been
released and discharged from its obligations with respect to the outstanding
Notes on the date the conditions set forth below are satisfied (hereinafter,
"legal defeasance"). For this purpose, such legal defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the outstanding Notes, which shall thereafter be deemed to be
"outstanding" only for the purposes of the Sections of and matters under this
Indenture referred to in clauses (i) and (ii) below and to have satisfied all
its other obligations under such Notes and this Indenture insofar as such
Notes are concerned, except for the following, which shall survive until
otherwise terminated or discharged hereunder: (i) the rights of holders of
outstanding Notes to receive solely from the trust fund described in
paragraph (d) below and as more fully set forth in such paragraph, payments
in respect of the principal of, premium, if any, and interest on such Notes
when such payments are due and (ii) obligations listed in Section 12.3.
(c) Upon the Company's exercise under paragraph (a) of the option
applicable to this paragraph (c), the Company shall be released and
discharged from its obligations under any covenant contained in Section 4.9,
Article XI and Section 3.5 with respect to the outstanding Notes on and after
the date the conditions set forth in paragraph (d) are satisfied
(hereinafter, "covenant defeasance"), and the Notes shall thereafter be
deemed to be not "outstanding" for the purpose of any direction, waiver,
consent or declaration or act of Holders (and the consequences of any
thereof) in connection with such covenants, but shall continue to be deemed
"outstanding" for all other purposes hereunder. For this purpose, such
covenant defeasance means that, with respect to the outstanding Notes, the
Company may omit to comply with and shall have no liability in respect of any
term, condition or limitation set forth in any such covenant, whether
directly or
-68-
<PAGE>
indirectly, by reason of any reference elsewhere herein to any such covenant
or by reason of any reference in any such covenant to any other provision
herein or in any other document, and such omission to comply shall not
constitute a Default or an Event of Default under Section 6.1, but, except as
specified above, the remainder of this Indenture and such Notes shall be
unaffected thereby.
(d) The following shall be the conditions to application of either
paragraph (b) or paragraph (c) above to the outstanding Notes:
(i) The Company shall have irrevocably deposited in trust
with the Trustee, pursuant to an irrevocable trust and security
agreement in form and substance satisfactory to the Trustee, cash
or U.S. Government Obligations maturing as to principal and
interest at such times, or a combination thereof, in such amounts
as are sufficient, without consideration of the reinvestment of
such interest and after payment of all federal, state and local
taxes or other charges or assessments in respect thereof payable by
the Trustee, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification
thereof (in form and substance reasonably satisfactory to the
Trustee) delivered to the Trustee, to pay the principal of,
premium, if any, and interest on the outstanding Notes on the dates
on which any such payments are due and payable in accordance with
the terms of this Indenture and of the Notes;
(ii) (A) No Event of Default shall have occurred or be
continuing on the date of such deposit, and (B) no Default or Event
of Default under Section 6.1(f) or 6.1(g) shall occur on or before
the 123rd day after the date of such deposit;
(iii) Such deposit shall not result in a Default under
this Indenture or a breach or violation of, or constitute a default
under, any other instrument or agreement to which the Company is a
party or by which it or its property is bound;
(iv) In the case of a legal defeasance under paragraph (b)
above, the Company has delivered to the Trustee an Opinion of
Counsel stating that (A) the Company has received from, or there
has been published by, the Internal Revenue Service a ruling or (B)
since the date of this Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect
that, and based thereon
-69-
<PAGE>
such opinion shall confirm that, the holders of the Notes shall not
recognize income, gain or loss for federal income tax purposes as a
result of such deposit, defeasance and discharge and shall be
subject to federal income tax on the same amounts and in the same
manner and at the same times as would have been the case if such
deposit, defeasance and discharge had not occurred; and, in the
case of a covenant defeasance under paragraph (c) above, the
Company shall deliver to the Trustee an Officers' Certificate and
an Opinion of Counsel, in form and substance reasonably
satisfactory to the Trustee, to the effect that holders of the
Notes shall not recognize income, gain or loss for federal income
tax purposes as a result of such deposit and defeasance and shall
be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such
deposit and defeasance had not occurred;
(v) The holders shall have a perfected security interest
under applicable law in the cash or U.S. Government Obligations
deposited pursuant to Section 12.1(d)(i) above;
(vi) The Company shall have delivered to the Trustee an
Opinion of Counsel, in form and substance reasonably satisfactory
to the Trustee, to the effect that, after the passage of 123 days
following the deposit, the trust funds shall not be subject to any
applicable bankruptcy, insolvency, reorganization or similar law
affecting creditors' rights generally;
(vii) Such defeasance shall not cause the Trustee to have
a conflicting interest with respect to any securities of the
Company; and
(viii) The Company has delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that
all conditions precedent specified herein relating to the
defeasance contemplated by this Section 12.1 have been complied
with;
provided, that no deposit under clause (i) shall be effective to terminate
the obligations of the Company under the Notes or this Indenture prior to the
passage of 123 days following such deposit.
Section 2. TERMINATION OF OBLIGATIONS UPON CANCELLATION OF THE
NOTES. In addition to the Company's rights under Section 12.1, the Company
may terminate all of its obligations under this Indenture (subject to Section
12.3) when:
-70-
<PAGE>
(a) (i) all Notes theretofore authenticated and delivered
(other than Notes that have been destroyed, lost or stolen and that
have been replaced or paid as provided in Section 2.6) have been
delivered to the Trustee for cancellation; and
(ii) the Company has paid or caused to be paid all other
sums payable hereunder and under the Notes by the Company; or
(b) (i) the Notes not previously delivered to the Trustee
for cancellation shall have become due and payable or are by their
terms to become due and payable within one year or are to be called
for redemption under arrangements satisfactory to the Trustee upon
delivery of notice, (ii) the Company shall have irrevocably
deposited with the Trustee, as trust funds, cash, in an amount
sufficient to pay principal of and interest on the outstanding
Notes, to maturity or redemption, as the case may be, (iii) such
deposit shall not result in a breach or violation of, or constitute
a default under, any agreement or instrument pursuant to which the
Company is a party or by which it or its property is bound and (iv)
the Company has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that all conditions related
to such defeasance have been complied with.
Section 3. SURVIVAL OF CERTAIN OBLIGATIONS. Notwithstanding the
satisfaction and discharge of this Indenture and of the Notes referred to in
Section 12.1 or 12.2, the respective obligations of the Company and the
Trustee under Sections 2.3, 2.4, 2.5, 2.6, 3.1, 4.2, 5.1, 6.4, 6.9, 7.6,
7.11, 12.5, 12.6, 12.7, Articles XIV and XV shall survive until the Notes are
no longer outstanding, and thereafter, the obligations of the Company and the
Trustee under Sections 6.9, 7.6, 12.5, 12.6 and 12.7 shall survive. Nothing
contained in this Article XII shall abrogate any of the rights, obligations
or duties of the Trustee under this Indenture.
Section 4. ACKNOWLEDGMENT OF DISCHARGE BY TRUSTEE. Subject to
Section 12.7, after (i) the conditions of Section 12.1 or 12.2 have been
satisfied, (ii) the Company has paid or caused to be paid all other sums
payable hereunder by the Company and (iii) the Company has delivered to the
Trustee an Officers' Certificate and an Opinion of Counsel, each stating that
all conditions precedent referred to in clause (i) above relating to the
satisfaction and discharge of this Indenture have been complied with, the
Trustee upon written request shall acknowledge in writing the discharge of
the Company's obligations under this
-71-
<PAGE>
Indenture except for those surviving obligations specified in Section 12.3.
Section 5. APPLICATION OF TRUST ASSETS. The Trustee shall hold any
cash or U.S. Government Obligations deposited with it in the irrevocable
trust established pursuant to Section 12.1 or 12.2, as the case may be. The
Trustee shall apply the deposited cash or the U.S. Government Obligations,
together with earnings thereon in accordance with this Indenture and the
terms of the irrevocable trust agreement established pursuant to Section 12.1
or 12.2, as the case may be, to the payment of principal of, premium, if any,
and interest on the Notes. The cash or U.S. Government Obligations so held
in trust and deposited with the Trustee in compliance with Section 12.1 or
12.2, as the case may be, shall not be part of the trust estate under this
Indenture, but shall constitute a separate trust fund for the benefit of all
holders entitled thereto. Except as specifically provided herein, the Trustee
shall not be requested to invest any amounts held by it for the benefit of
the holders or pay interest on uninvested amounts to any holder.
The Company shall pay and indemnify the Trustee against any tax,
fee or other charge imposed on or assessed against the U.S. Government
Obligations deposited pursuant to Section 12.1 hereof or Section 12.2 hereof
or the principal and interest received in respect thereof other than any such
tax, fee or other charge which by law is for the account of the holders of
outstanding Notes.
Section 6. REPAYMENT TO THE COMPANY; UNCLAIMED MONEY. Subject to
applicable laws governing escheat of such property, and upon termination of
the trust established pursuant to Section 12.1 hereof or 12.2 hereof, as the
case may be, the Trustee shall promptly pay to the Company upon written
request any excess cash or U.S. Government Obligations held by them.
Additionally, if amounts for the payment of principal, premium, if any, or
interest remains unclaimed for two years, the Trustee shall, upon written
request, pay such amounts back to the Company forthwith. Thereafter, all
liability of the Trustee with respect to such amounts shall cease. After
payment to the Company, holders entitled to such payment must look to the
Company for such payment as general creditors unless an applicable abandoned
property law designates another person.
Section 7. REINSTATEMENT. If the Trustee is unable to apply any
cash or U.S. Government Obligations in accordance with Section 12.1 or 12.2
by reason of any legal proceeding or by reason of any order or judgment of
any court or governmental authority enjoining, restraining or otherwise
prohibiting such
-72-
<PAGE>
application, the Company's obligations under this Indenture and the Notes
shall be revived and reinstated as though no deposit had occurred pursuant to
Section 12.1 or 12.2 until such time as the Trustee is permitted to apply all
such cash or U.S. Government Obligations in accordance with Section 12.1 or
12.2, as the case may be; provided that if the Company makes any payment of
principal of, premium, if any, or interest on any Notes following the
reinstatement of its obligations, the Company shall be subrogated to the
rights of the holders of such Notes to receive such payment from the amounts
held by the Trustee.
ARTICLE XIII
IMMUNITY OF INCORPORATORS, STOCKHOLDERS,
OFFICERS AND DIRECTORS
Section 1. INDENTURE AND NOTES SOLELY CORPORATE OBLIGATIONS.
No recourse for the payment of the principal of, or premium, if any, or
interest on any Note, or for any claim based thereon or otherwise in respect
thereof, and no recourse under or upon any obligation, covenant or agreement
of the Company in this Indenture or in any supplemental indenture or in any
Note, or because of the creation of any indebtedness represented thereby,
shall be had against any incorporator, stockholder, officer or director, as
such, past, present or future, of the Company or of any successor entity,
either irectly or through the Company or any successor entity, whether by
virtue of any constitution, statute or rule of law, or by the enforcement of
any assessment or penalty or otherwise; it being expressly understood that
all such liability is hereby expressly waived and released as a condition of,
and as a consideration for, the execution of this Indenture and the issuance
of the Notes.
ARTICLE XIV
CONVERSION OF NOTES
Section 1. RIGHT TO CONVERT. Subject to and upon compliance
with the provisions of this Indenture, the holder of any Note shall have the
right, at the option of such holder, at any time after 60 days following the
latest date of original issuance of the Notes and prior to the close of
business on August 15, 2003 (except that, with respect to any Note or portion
of a Note that shall be called for redemption or delivered for repurchase,
such right shall terminate, except as provided in the fourth paragraph of
Section 14.2, immediately prior to the close of business on the date fixed
for redemption of such Note or portion of a Note unless the Company shall
default in payment due upon redemption thereof) to convert the principal
amount of any
-73-
<PAGE>
such Note, or any portion of such principal amount that is $1,000 or an
integral multiple thereof, into that number of fully paid and nonassessable
shares of Common Stock (as such shares shall then be constituted) obtained by
dividing the aggregate principal amount of the Notes or portion thereof
surrendered for conversion by the Conversion Price in effect at such time
rounded to the nearest 1/100,000th of a share (with .0000005 being rolled
upward), by surrender of the Note so to be converted in whole or in part in
the manner provided in Section 14.2. A holder of Notes is not entitled to
any rights of a holder of Common Stock until such holder has converted such
holder's Notes to Common Stock and only to the extent such Notes are deemed
to have been converted to Common Stock under this Article XIV.
Section 2. EXERCISE OF CONVERSION PRIVILEGE; ISSUANCE OF
COMMON STOCK ON CONVERSION; NO ADJUSTMENT FOR INTEREST OR DIVIDENDS. In
order to exercise the conversion privilege with respect to any Note in
definitive form, the holder of any such Note to be converted in whole or in
part shall surrender such Note, duly endorsed, at an office or agency
maintained by the Company pursuant to Section 4.2, accompanied by the funds,
if any, required by the penultimate paragraph of this Section 14.2, and shall
give written notice of conversion in the form provided on the form of Note
(or such other notice that is acceptable to the Company) to the office or
agency that the holder elects to convert such Note or the portion thereof
specified in said notice. Such notice shall also state the name or names
(with address) in which the certificate or certificates for shares of Common
Stock that shall be issuable on such conversion shall be issued and shall be
accompanied by transfer taxes, if required pursuant to Section 14.7. Each
such Note surrendered for conversion shall, unless the shares issuable on
conversion are to be issued in the name of the holder of such Note as it
appears on the Note register, be duly endorsed by, or be accompanied by
instruments of transfer in form satisfactory to the Company duly executed by,
the holder or his duly authorized attorney.
In order to exercise the conversion privilege with respect to any
interest in a global Note, the beneficial holder must complete the
appropriate instruction form for conversion pursuant to the Depositary's
book-entry conversion program and follow the other procedures set forth in
such program.
As promptly as practicable after satisfaction of the requirements
for conversion set forth above, subject to compliance with any restrictions
on transfer if shares issuable on conversion are to be issued in a name other
than that of the Noteholder (as if such transfer were a transfer of the Note
or Notes (or portion thereof) so converted), the Company shall issue
-74-
<PAGE>
and shall deliver to such holder at the office or agency maintained by the
Company for such purpose pursuant to Section 4.2, a certificate or
certificates for the number of full shares issuable upon the conversion of
such Note or portion thereof in accordance with the provisions of this
Article XIV and a check or cash in respect of any fractional interest in
respect of a share of Common Stock arising upon such conversion, as provided
in Section 14.3. In case any Note of a denomination greater than $1,000 shall
be surrendered for partial conversion, and subject to Section 2.3, the
Company shall execute and the Trustee shall authenticate and make available
for delivery to the holder of the Note so surrendered, without charge to him,
a new Note or Notes in authorized denominations in an aggregate principal
amount equal to the unconverted portion of the surrendered Note.
Each conversion shall be deemed to have been effected as to any
such Note (or portion thereof) on the date on which the requirements set
forth above in this Section 14.2 have been satisfied as to such Note (or
portion thereof), and the person in whose name any certificate or
certificates for shares of Common Stock shall be issuable upon such
conversion shall be deemed to have become on said date the holder of record
of the shares represented thereby; provided that any such surrender on any
date when the stock transfer books of the Company shall be closed shall
constitute the person in whose name the certificates are to be issued as the
record holder thereof for all purposes on the next succeeding day on which
such stock transfer books are open, but such conversion shall be at the
Conversion Price in effect on the date upon which such Note shall have been
surrendered.
Any Note or portion thereof surrendered for conversion during the
period from the close of business on the record date for any interest payment
date through the opening of business on the next succeeding interest payment
date shall (unless such Note or portion thereof being converted shall have
been called for redemption on a date during the period from the close of
business on or after any record date to the close of business on the business
day following the corresponding payment date) be accompanied by payment, in
funds acceptable to the Company, of an amount equal to the interest otherwise
payable on such interest payment date on the principal amount being
converted; provided that no such payment need be made if there shall exist at
the time of conversion a default in the payment of interest on the Notes. An
amount equal to such payment shall be paid by the Company on such interest
payment date to the holder of such Note at the close of business on such
record date; provided that if the Company shall default in the payment of
interest on such interest payment date, such amount shall be paid to the
person who made such required payment. The interest payment with
-75-
<PAGE>
respect to a Note called for redemption on a date during the period from the
close of business on or after any record date to the close of business on the
business day following the corresponding payment date shall be payable on the
corresponding interest payment date to the registered Holder at the close of
business on that record date (notwithstanding the conversion of such Note
before the corresponding interest payment date) and a Holder who elects to
convert need not include funds equal to the interest paid. Except as
provided above in this Section 14.2, no adjustment shall be made for interest
accrued on any Note converted or for dividends on any shares issued upon the
conversion of such Note as provided in this Article XIV.
Upon the conversion of an interest in a global Note, the Trustee,
or the Custodian at the direction of the Trustee, shall make a notation on
such global Note as to the reduction in the principal amount represented
thereby.
Section 3. CASH PAYMENTS IN LIEU OF FRACTIONAL SHARES. No
fractional shares of Common Stock or scrip representing fractional shares
shall be issued upon conversion of Notes. If more than one Note shall be
surrendered for conversion at one time by the same holder, the number of
fully paid and non-assessable shares of Common Stock issuable upon conversion
of a Note shall be determined by dividing the aggregate principal amount of
the Note or portion thereof surrendered for conversion by the Conversion
Price in effect at such time. The aggregate number of shares of Common Stock
issuable upon conversion shall be rounded to the nearest 1/100,000th of a
share (with .0000005 being rolled upward). If any fractional share of stock
would be issuable upon the conversion of any Note or Notes, the Company shall
make an adjustment therefor in cash at the current market value thereof. The
current market value of a share of Common Stock shall be determined by
multiplying the fractional share by the Closing Price on the Trading Day
immediately preceding the date on which the Notes (or specified portions
thereof) are deemed to have been converted.
Section 4. CONVERSION PRICE. The Conversion Price shall be as
specified in the forms of Notes (herein called the "Conversion Price")
attached as Exhibits A, B and C hereto, subject to adjustment as provided in
this Article XIV.
Section 5. ADJUSTMENT OF CONVERSION PRICE. The Conversion
Price shall be adjusted from time to time by the Company as follows:
(a) In case the Company shall (i) pay a dividend or make a
distribution on its Common Stock in shares of its
-76-
<PAGE>
Common Stock, (ii) subdivide or split its outstanding Common Stock into a
greater number of shares, (iii) combine its outstanding Common Stock
into a smaller number of shares or (iv) issue any shares of capital
stock by reclassification of its Common Stock, the conversion price in
effect immediately prior thereto shall be adjusted so that the Holder of
any Notes thereafter surrendered for conversion shall be entitled to
receive the number of shares of Common Stock of the Company which such
Holder would have owned or have been entitled to receive after the
occurrence of any of the events described above had such Notes been
surrendered for conversion immediately prior to the occurrence of such
event or the record date therefor, which is earlier. An adjustment made
pursuant to this subsection (a) shall become effective immediately after
the close of business on the record date for determination of
stockholders entitled to receive such dividend or distribution in the
case of a dividend or distribution and shall become effective
immediately after the close (except as provided in Section 14.5(k)) of
business on the effective date in the case of a subdivision, split,
combination or reclassification. Any shares of Common Stock issuable in
payment of a dividend shall be deemed to have been issued immediately
prior to the close of business on the record date for such dividend for
purposes of calculating the number of outstanding shares of Common Stock
under Sections 14.5(b) and (c).
(b) In case the Company shall issue rights, options or
warrants to all holders of its outstanding shares of Common Stock
entitling them (for a period expiring within 45 days after the date
fixed for determination of stockholders entitled to receive such rights,
options or warrants) to subscribe for or purchase shares of Common Stock
at a price per share less than the Current Market Price (as defined in
Section 14.5(g)) on the Record Date fixed for determination of
stockholders entitled to receive such rights, options or warrants, the
Conversion Price shall be adjusted so that the same shall equal the
price determined by multiplying the Conversion Price in effect at the
opening of business on the date after the Record Date by a fraction the
numerator of which shall be the number of shares of Common Stock
outstanding at the close of business on the Record Date plus the number
of shares that the aggregate offering price of the total number of
shares so offered would purchase at such Current Market Price, and the
denominator of which shall be the number of shares of Common Stock
outstanding on the close of business on the Record Date plus the total
number of additional shares of Common Stock so offered for subscription
or purchase. Such adjustment shall become effective
-77-
<PAGE>
immediately after the opening of business on the day following the Record
Date fixed for determination of stockholders entitled to receive such
rights, options or warrants. To the extent that shares of Common Stock
are not delivered after the expiration or termination of such rights,
options or warrants, the Conversion Price shall be readjusted to the
Conversion Price that would then be in effect had the adjustments made
upon the issuance of such rights, options or warrants been made on the
basis of delivery of only the number of shares of Common Stock actually
delivered. In the event that such rights, options or warrants are not
so issued, the Conversion Price shall again be adjusted to be the
Conversion Price that would then be in effect if such date fixed for the
determination of stockholders entitled to receive such rights, options
or warrants had not been fixed. In determining whether any rights,
options or warrants entitle the holders to subscribe for or purchase
shares of Common Stock at less than such Current Market Price, and in
determining the aggregate offering price of such shares of Common Stock,
there shall be taken into account any consideration received for such
rights, options or warrants, the value of such consideration, if other
than cash, to be determined by the Board of Directors.
(c) In case outstanding shares of Common Stock shall be
subdivided into a greater number of shares of Common Stock, the
Conversion Price in effect at the opening of business on the day
following the day upon which such subdivision becomes effective shall be
proportionately reduced, and conversely, in case outstanding shares of
Common Stock shall be combined into a smaller number of shares of Common
Stock, the Conversion Price in effect at the opening of business on the
day following the day upon which such combination becomes effective
shall be proportionately increased, such reduction or increase, as the
case may be, to become effective immediately after the opening of
business on the day following the day upon which such subdivision or
combination becomes effective.
(d) In case the Company shall, by dividend or otherwise,
distribute to all holders of its Common Stock shares of any class of
capital stock of the Company (other than any dividends or distributions
to which Section 14.5(a) applies) or evidences of its indebtedness or
assets (including securities, but excluding any rights, options or
warrants referred to in Section 14.5(b), and excluding any dividend or
distribution (x) in connection with the liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary, (y)
exclusively in cash or (z) referred to in
-78-
<PAGE>
Section 14.5(a) (any of the foregoing hereinafter in this Section 14.5(d)
called the "Securities")), then, in each such case, the Conversion Price
shall be reduced so that the same shall be equal to the price determined
by multiplying the Conversion Price in effect immediately prior to the
close of business on the Record Date (as defined in Section 14.5(g))
with respect to such distribution by a fraction of which the numerator
shall be the Current Market Price (determined as provided in Section
14.5(g)) on such date less the fair market value (as determined by the
Board of Directors, whose determination shall be conclusive and
described in a Board Resolution) on such date of the portion of the
Securities so distributed applicable to one share of Common Stock and
the denominator shall be such Current Market Price, such reduction to
become effective immediately prior to the opening of business on the day
following the Record Date; provided that in the event the then fair
market value (as so determined) of the portion of the Securities so
distributed applicable to one share of Common Stock is equal to or
greater than the Current Market Price on the Record Date, in lieu of the
foregoing adjustment, adequate provision shall be made so that each
Noteholder shall have the right to receive upon conversion the amount of
Securities such holder would have received had such holder converted
each Note on such date. In the event that such dividend or distribution
is not so paid or made, the Conversion Price shall again be adjusted to
be the Conversion Price that would then be in effect if such dividend or
distribution had not been declared. If the Board of Directors
determines the fair market value of any distribution for purposes of
this Section 14.5(d) by reference to the actual or when issued trading
market for any securities comprising all or part of such distribution,
it must in doing so consider the prices in such market over the same
period used in computing the Current Market Price pursuant to Section
14.5(g) to the extent possible.
Notwithstanding the foregoing provisions of this Section 14.5(d), no
adjustment shall be made hereunder for any distribution of Securities if
the Company makes proper provision so that each Noteholder who converts a
Note (or any portion thereof) after the date fixed for determination of
stockholders entitled to receive such distribution shall be entitled to
receive upon such conversion, in addition to the shares of Common Stock
issuable upon such conversion, the amount and kind of Securities that such
holder would have been entitled to receive if such holder had, immediately
prior to such determination date, converted such Note into Common Stock;
provided that, with respect to any Securities
-79-
<PAGE>
that are convertible, exchangeable or exercisable, the foregoing provision
shall only apply to the extent (and so long as) the Securities receivable
upon conversion of such Note would be convertible, exchangeable or
exercisable, as applicable, without any loss of rights or privileges for a
period of at least 60 days following conversion of such Note.
Rights, options or warrants distributed by the Company to all
holders of Common Stock entitling the holders thereof to subscribe for or
purchase shares of the Company's capital stock (either initially or under
certain circumstances), which rights, options or warrants, until the
occurrence of a specified event or events (the "Trigger Event") (i) are
deemed to be transferred with such shares of Common Stock, (ii) are not
exercisable and (iii) are also issued in respect of future issuances of
Common Stock, shall not be deemed distributed for purposes of this Section
14.5(d) (and no adjustment to the Conversion Price under Section 14.5(d)
shall be required) until the occurrence of the earliest Trigger Event. In
addition, in the event of any distribution of rights, options or warrants, or
any Trigger Event with respect thereto, that shall have resulted in an
adjustment to the Conversion Price under this Section 14.5(d), (1) in the
case of any such rights, options or warrants that shall all have been
redeemed or repurchased without exercise by any holders thereof, the
Conversion Price shall be readjusted upon such final redemption or repurchase
to give effect to such distribution or Trigger Event, as the case may be, as
though it were a cash distribution, equal to the per share redemption or
repurchase price received by a holder of Common Stock with respect to such
rights, options or warrants (assuming such holder had retained such rights,
options or warrants), made to all holders of Common Stock as of the date of
such redemption or repurchase, and (2) in the case of such rights, options or
warrants all of which shall have expired or been terminated without exercise
by any holder thereof, the Conversion Price shall be readjusted as if such
issuance had not occurred.
For purposes of this Section 14.5(d) and Sections 14.5(a) and (b),
any dividend or distribution to which this Section 14.5(d) is applicable that
also includes shares of Common Stock, or rights, options or warrants to
subscribe for or purchase shares of Common Stock (or both), shall be deemed
instead to be (1) a dividend or distribution of the evidences of
indebtedness, assets or shares of capital stock other than such shares of
Common Stock or rights, options or warrants (and any Conversion Price
reduction required by
-80-
<PAGE>
this Section 14.5(d) with respect to such dividend or distribution shall then
be made) immediately followed by (2) a dividend or distribution of such
shares of Common Stock or such rights, options or warrants (and any further
Conversion Price reduction required by Sections 14.5(a) and (b) with respect
to such dividend or distribution shall then be made) except (A) the Record
Date of such dividend or distribution shall be substituted as "the date fixed
for the determination of stockholders entitled to receive such dividend or
other distribution" and "the date fixed for such determination" within the
meaning of Sections 14.5(a) and (b) and (B) any shares of Common Stock
included in such dividend or distribution shall not be deemed "outstanding at
the close of business on the date fixed for such determination" within the
meaning of Section 14.5(a).
(e) In case the Company shall, by dividend or otherwise,
distribute to all holders of its Common Stock cash (excluding any cash
that is distributed upon a merger or consolidation to which Section 14.6
applies or as part of a distribution referred to in Section 14.5(d) for
which an adjustment to the Conversion Price is provided therein) in an
aggregate amount that, combined together with (1) the aggregate amount
of any other such distributions to all holders of its Common Stock made
exclusively in cash within the 12 months preceding the date of payment
of such distribution, and in respect of which no adjustment pursuant to
this Section 14.5(e) has been made, and (2) the aggregate of any cash
plus the fair market value (as determined by the Board of Directors,
whose determination shall be conclusive and described in a Board
Resolution) of consideration payable in respect of any tender offer, by
the Company or any of its subsidiaries for all or any portion of the
Common Stock concluded within the 12 months preceding the date of
payment of such distribution, and in respect of which no adjustment
pursuant to Section 14.5(f) has been made, exceeds 20.0% of the product
of the Current Market Price (determined as provided in Section 14.5(g))
on the Record Date with respect to such distribution times the number of
shares of Common Stock outstanding on such date, then, and in each such
case, immediately after the close of business on such date, unless the
Company elects to reserve such cash for distribution to the holders of
the Notes upon the conversion of the Notes so that any such holder
converting Notes shall receive upon such conversion, in addition to the
shares of Common Stock to that such holder is entitled, the amount of
cash which such holder would have received if such holder had,
immediately prior to the Record Date for such distribution of cash,
converted its Notes into Common Stock,
-81-
<PAGE>
the Conversion Price shall be reduced so that the same shall equal the
price determined by multiplying the Conversion Price in effect immediately
prior to the close of business on such date by a fraction (i) the
numerator of which shall be equal to the Current Market Price on the
Record Date less an amount equal to the quotient of (x) the excess of
such combined amount over such 20.0% and (y) the number of shares of
Common Stock outstanding on the Record Date and (ii) the denominator of
which shall be equal to the Current Market Price on such date; provided
that in the event the portion of the cash so distributed applicable to
one share of Common Stock is equal to or greater than the Current Market
Price of the Common Stock on the Record Date, in lieu of the foregoing
adjustment, adequate provision shall be made so that each Noteholder
shall have the right to receive upon conversion the amount of cash such
holder would have received had such holder converted each Note on the
Record Date. In the event that such dividend or distribution is not so
paid or made, the Conversion Price shall again be adjusted to be the
Conversion Price that would then be in effect if such dividend or
distribution had not been declared.
(f) In case a tender offer made by the Company or any of its
subsidiaries for all or any portion of the Common Stock shall expire and
such tender offer (as amended upon the expiration thereof) shall require
the payment to stockholders (based on the acceptance (up to any maximum
specified in the terms of the tender offer) of Purchased Shares (as
defined below)) of an aggregate consideration having a fair market value
(as determined by the Board of Directors, whose determination shall be
conclusive and described in a Board Resolution) that combined together
with (1) the aggregate of the cash plus the fair market value (as
determined by the Board of Directors, whose determination shall be
conclusive and described in a Board Resolution), as of the expiration of
such tender offer, of consideration payable in respect of any other
tender offer, by the Company or any of its subsidiaries for all or any
portion of the Common Stock expiring within the 12 months preceding the
expiration of such tender offer, and in respect of which no adjustment
pursuant to Section 14.5(f) has been made, and (2) the aggregate amount
of any distributions to all holders of the Company's Common Stock made
exclusively in cash within 12 months preceding the expiration of such
tender offer, and in respect of which no adjustment pursuant to Section
14.5 (e) has been made, exceeds 20.0% of the product of the Current
Market Price (determined as provided in Section 14.5(g)) as of the last
time (the "Expiration Time") tenders could have
-82-
<PAGE>
been made pursuant to such tender offer (as it may be amended) times the
number of shares of Common Stock outstanding (including any tendered
shares) on the Expiration Time, then, and in each such case, immediately
prior to the opening of business on the day after the date of the
Expiration Time, the Conversion Price shall be adjusted so that the same
shall equal the price determined by multiplying the Conversion Price in
effect immediately prior to close of business on the date of the
Expiration Time by a fraction of which the numerator shall be the number
of shares of Common Stock outstanding (including any tendered shares) on
the Expiration Time multiplied by the Current Market Price of the Common
Stock on the Trading Day next succeeding the Expiration Time and the
denominator shall be the sum of (x) the fair market value (determined as
aforesaid) of the aggregate consideration payable to stockholders based
on the acceptance (up to any maximum specified in the terms of the
tender offer) of all shares validly tendered and not withdrawn as of the
Expiration Time (the shares deemed so accepted, up to any such maximum,
being referred to as the "Purchased Shares") and (y) the product of the
number of shares of Common Stock outstanding (less any Purchased Shares)
on the Expiration Time and the Current Market Price of the Common Stock
on the Trading Day next succeeding the Expiration Time, such reduction
to become effective immediately prior to the opening of business on the
day following the Expiration Time. In the event that the Company is
obligated to purchase shares pursuant to any such tender offer, but the
Company is permanently prevented by applicable law from effecting any
such purchases or all such purchases are rescinded, the Conversion Price
shall again be adjusted to be the Conversion Price that would then be in
effect if such tender offer had not been made.
(g) For purposes of this Section 14.5, the following terms shall
have the meaning indicated:
(1) "Closing Price" with respect to any securities
on any day shall mean the closing sale price regular way on such
day or, in case no such sale takes place on such day, the average
of the reported closing bid and
-83-
<PAGE>
asked prices, regular way, in each case on the New York Stock
Exchange, or, if such security is not listed or admitted to trading
on such Exchange, on the principal national security exchange or
quotation system on which such security is quoted or listed or
admitted to trading, or, if not quoted or listed or admitted to
trading on any national securities exchange or quotation system, the
average of the closing bid and asked prices of such security on the
over-the-counter market on the day in question as reported by the
National Quotation Bureau Incorporated, or a similar generally
accepted reporting service, or if not so available, in such manner
as furnished by any New York Stock Exchange member firm selected
from time to time by the Board of Directors for that purpose, or a
price determined in good faith by the Board of Directors, whose
determination shall be conclusive and described in a Board
Resolution.
(2) "Current Market Price" shall mean the average of the
daily Closing Prices per share of Common Stock for the ten
consecutive Trading Days immediately prior to the date in
question; provided that (1) if the "ex" date (as hereinafter
defined) for any event (other than the issuance or distribution or
Change of Control requiring such computation) that requires an
adjustment to the Conversion Price pursuant to Section 14.5(a),
(b), (c), (d), (e) or (f) occurs during such ten consecutive
Trading Days, the Closing Price for each Trading Day prior to the
"ex" date for such other event shall be adjusted by multiplying
such Closing Price by the same fraction by which the Conversion
Price is so required to be adjusted as a result of such other
event, (2) if the "ex" date for any event (other than the
issuance, distribution or Change of Control requiring such
computation) that requires an adjustment to the Conversion Price
pursuant to Section 14.5(a), (b), (c), (d), (e) or (f) occurs on
or after the "ex" date for the issuance or distribution requiring
such computation and prior to the day in question, the Closing
Price for each Trading Day on and after the "ex" date for such
other event shall be adjusted by multiplying such Closing Price by
the reciprocal of the fraction by which the Conversion Price is so
required to be adjusted as a result of such other event and (3) if
the "ex" date for the issuance, distribution or Change of Control
requiring such computation is prior to the day in question, after
taking into account any adjustment required pursuant to clause (1)
or (2) of this proviso, the Closing Price for each Trading Day on
or after such "ex" date shall be adjusted by adding thereto the
amount of any cash and the fair market value (as determined by the
Board of Directors in a manner consistent with any determination
of such value for purposes of Section 14.5(d) or (f), whose
determination shall be conclusive and described in a Board
Resolution) of the evidences of indebtedness, shares of capital
stock or
-84-
<PAGE>
assets being distributed applicable to one share of Common Stock as
of the close of business on the day before such "ex" date. For
purposes of any computation under Section 14.5(f), the Current Market
Price of the Common Stock on any date shall be deemed to be the
average of the daily Closing Prices per share of Common Stock for
such day and the next two succeeding Trading Days; provided that if
the "ex" date for any event (other than the tender or exchange offer
requiring such computation) that requires an adjustment to the
Conversion Price pursuant to Section 14.5(a), (b), (c), (d), (e)
or (f) occurs on or after the Expiration Time for the tender or
exchange offer requiring such computation and prior to the day in
question, the Closing Price for each Trading Day on and after the
"ex" date for such other event shall be adjusted by multiplying
such Closing Price by the reciprocal of the fraction by which the
Conversion Price is so required to be adjusted as a result of such
other event. For purposes of this paragraph, the term "ex" date,
(1) when used with respect to any issuance or distribution, means
the first date on which the Common Stock trades regular way on the
relevant exchange or in the relevant market from which the Closing
Price was obtained without the right to receive such issuance or
distribution, (2) when used with respect to any subdivision or
combination of shares of Common Stock, means the first date on
which the Common Stock trades regular way on such exchange or in
such market after the time at which such subdivision or
combination becomes effective and (3) when used with respect to
any tender or exchange offer means the first date on which the
Common Stock trades regular way on such exchange or in such market
after the expiration of such offer. Notwithstanding the
foregoing, whenever successive adjustments to the Conversion Price
are called for pursuant to this Section 14.5, such adjustments
shall be made to the Current Market Price as may be necessary or
appropriate to effectuate the intent of this Section 14.5 and to
avoid unjust or inequitable results as determined in good faith by
the Board of Directors.
(3) "fair market value" shall mean the amount that a
willing buyer would pay a willing seller in an arm's-length
transaction.
(4) "Record Date" shall mean, with respect to any
dividend, distribution or other transaction or event in which the
holders of Common Stock have the right to
-85-
<PAGE>
receive any cash, securities or other property or in which the
Common Stock (or other applicable security) is exchanged for
or converted into any combination of cash, securities or other
property, the date fixed for determination of stockholders
entitled to receive such cash, securities or other property
(whether such date is fixed by the Board of Directors or by
statute, contract or otherwise).
(5) "Trading Day" shall mean (x) if the applicable
security is listed or admitted for trading on the New York
Stock Exchange or another national security exchange, a day on
which the New York Stock Exchange or such other national
security exchange is open for business or (y) if the
applicable security is quoted on the Nasdaq National Market, a
day on which trades may be made thereon or (z) if the
applicable security is not so listed, admitted for trading or
quoted, any day other than a Saturday or Sunday or a day on
which banking institutions in the State of New York are
authorized or obligated by law or executive order to close.
(h) The Company may make such reductions in the Conversion
Price, in addition to those required by Sections 14.5(a), (b), (c),
(d), (e) and (f), as the Board of Directors considers to be
advisable to avoid or diminish any income tax to holders of Common
Stock or rights to purchase Common Stock resulting from any
dividend or distribution of stock (or rights to acquire stock) or
from any event treated as such for income tax purposes. To the
extent permitted by applicable law, the Company from time to time
may reduce the Conversion Price by any amount for any period of
time if the period is at least 20 days, the reduction is
irrevocable during the period and the Board of Directors shall have
made a determination that such reduction would be in the best
interests of the Company, which determination shall be conclusive
and described in a Board Resolution. Whenever the Conversion Price
is reduced pursuant to the preceding sentence, the Company shall
mail to all holders of record of the Notes a notice of the
reduction at least 15 days prior to the date the reduced Conversion
Price takes effect, and such notice shall state the reduced
Conversion Price and the period it shall be in effect.
(i) No adjustment in the Conversion Price shall be required
unless such adjustment would require an increase or decrease of at
least 1% in such price; provided that any adjustments that by
reason of this Section 14.5(i) are not
-86-
<PAGE>
required to be made shall be carried forward and taken into account
in any subsequent adjustment. All calculations under this Article
XIV shall be made by the Company and shall be made to the nearest
1/100,000th (with 0.0000005 being rolled upward).
No adjustment need be made for rights to purchase Common Stock
pursuant to a Company plan for reinvestment of dividends or
interest.
No adjustment need be made for a change in the par value, or
to or from no par value, of the Common Stock.
To the extent the Notes become convertible into cash, assets,
property or securities (other than Common Stock of the Company), no
adjustment need be made thereafter as to the cash, assets, property
or such securities (except as such securities may otherwise by
their terms provide), and interest shall not accrue on such cash.
(j) Whenever the Conversion Price is adjusted as herein
provided, the Company shall promptly file with the Trustee and any
conversion agent other than the Trustee an Officers' Certificate
setting forth the Conversion Price after such adjustment and
setting forth a brief statement of the facts requiring such
adjustment. Promptly after delivery of such certificate, the
Company shall prepare a notice of such adjustment of the Conversion
Price setting forth the adjusted Conversion Price and the date on
which each adjustment becomes effective and shall mail such notice
of such adjustment of the Conversion Price to the holder of each
Note at his last address appearing on the Note register provided
for in Section 2.5, within 20 days after execution thereof.
Failure to deliver such notice shall not affect the legality or
validity of any such adjustment.
(k) In any case in which this Section 14.5 provides that an
adjustment shall become effective immediately after a Record Date
for an event, the Company may defer until the occurrence of such
event (i) issuing to the holder of any Note converted after such
Record Date and before the occurrence of such event the additional
shares of Common Stock issuable upon such conversion by reason of
the adjustment required by such event over and above the Common
Stock issuable upon such conversion before giving effect to such
adjustment and (ii) paying to such holder any amount in cash in
lieu of any fraction pursuant to Section 14.3.
-87-
<PAGE>
Section 6. EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER OR
SALE. If any of the following events occur, namely (i) any reclassification
or change of outstanding shares of Common Stock (other than a change in par
value, or to or from no par value, as a result of a subdivision or
combination), (ii) any consolidation, merger or combination of the Company
with another corporation as a result of which holders of Common Stock shall
be entitled to receive stock, securities or other property or assets
(including cash) with respect to or in exchange for such Common Stock or
(iii) any sale or conveyance of the properties and assets of the Company as,
or substantially as, an entirety (determined on a consolidated basis) to any
other corporation as a result of which holders of Common Stock shall be
entitled to receive stock, securities or other property or assets (including
cash) with respect to or in exchange for such Common Stock, then the Company
or the successor or purchasing corporation, as the case may be, shall execute
with the Trustee a supplemental indenture (which shall comply with the Trust
Indenture Act as in force at the date of execution of such supplemental
indenture if such supplemental indenture is then required to so comply)
providing that the Notes shall be convertible into the kind and amount of
shares of stock and other securities or property or assets (including cash)
receivable upon such reclassification, change, consolidation, merger,
combination, sale or conveyance by a holder of a number of shares of Common
Stock issuable upon conversion of such Notes (assuming, for such purposes, a
sufficient number of authorized shares of Common Stock available to convert
all such Notes) immediately prior to such reclassification, change,
consolidation, merger, combination, sale or conveyance, assuming such holder
of Common Stock did not exercise his rights of election, if any, as to the
kind or amount of securities, cash or other property receivable upon such
reclassification, change, consolidation, merger, combination, sale or
conveyance (provided that, if the kind or amount of securities, cash or other
property receivable upon such reclassification, change, consolidation,
merger, combination, sale or conveyance is not the same for each share of
Common Stock in respect of which such rights of election shall not have been
exercised ("non-electing share"), then for the purposes of this Section 14.6
the kind and amount of securities, cash or other property receivable upon
such reclassification, change, consolidation, merger, combination, sale or
conveyance for each non-electing share shall be deemed to be the kind and
amount so receivable per share by a plurality of the non-electing shares).
Such supplemental indenture shall provide for adjustments that shall be as
nearly equivalent as may be practicable to the adjustments provided for in
this Article XIV.
-88-
<PAGE>
The Company shall cause notice of the execution of such
supplemental indenture to be mailed to each holder of Notes, at his address
appearing on the Note register provided for in Section 2.5, within 20 days
after execution thereof. Failure to deliver such notice shall not affect the
legality or validity of such supplemental indenture.
The above provisions of this Section 14.6 shall similarly apply to
successive reclassifications, changes, consolidations, mergers, combinations,
sales and conveyances.
Section 7. TAXES ON SHARES ISSUED. The issuance of stock
certificates on conversions of Notes shall be made without charge to the
converting Noteholder for any transfer or similar tax in respect of the issue
thereof. The Company shall not, however, be required to pay any tax that may
be payable in respect of any transfer involved in the issue and delivery of
stock in any name other than that of the holder of any Note converted, and
the Company shall not be required to issue or deliver any such stock
certificate unless and until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
Section 8. RESERVATION OF SHARES; SHARES TO BE FULLY PAID; LISTING
OF COMMON STOCK. The Company shall provide, free from preemptive rights, out
of its authorized but unissued shares or shares held in treasury, sufficient
shares to provide for the conversion of the Notes from time to time as such
Notes are presented for conversion.
Before taking any action that would cause an adjustment reducing
the Conversion Price below the then par value, if any, of the shares of
Common Stock issuable upon conversion of the Notes, the Company shall take
all corporate action that may, in the opinion of its counsel, be necessary in
order that the Company may validly and legally issue shares of such Common
Stock at such adjusted Conversion Price.
The Company covenants that all shares of Common Stock that may be
issued upon conversion of Notes shall, upon issuance, be fully paid and
nonassessable by the Company and free from all taxes, liens and charges with
respect to the issuance thereof.
The Company further covenants that it shall, if permitted by the
rules of Nasdaq National Market, list and keep listed, so long as the Common
Stock shall be so listed on such exchanges, all Common Stock issuable upon
conversion of the Notes.
-89-
<PAGE>
Section 9. RESPONSIBILITY OF TRUSTEE. The Trustee and any other
conversion agent shall not at any time be under any duty or responsibility to
any holder of Notes to determine whether any facts exist that may require any
adjustment of the Conversion Price, or with respect to the nature or extent
or calculation of any such adjustment when made, or with respect to the
method employed, or herein or in any supplemental indenture provided to be
employed, in making the same. The Trustee and any other conversion agent
shall not be accountable with respect to the validity or value (or the kind
or amount) of any shares of Common Stock, or of any securities or property,
that may at any time be issued or delivered upon the conversion of any Note;
and the Trustee and any other conversion agent make no representations with
respect thereto. Subject to the provisions of Section 7.1, neither the
Trustee nor any conversion agent shall be responsible for any failure of the
Company to issue, transfer or deliver any shares of Common Stock or stock
certificates or other securities or property or cash upon the surrender of
any debenture for the purpose of conversion or to comply with any of the
duties, responsibilities or covenants of the Company contained in this
Article XIV. Without limiting the generality of the foregoing, neither the
Trustee nor any conversion agent shall be under any responsibility to
determine whether a supplemental indenture under Section 14.6 hereof need to
be entered into or the correctness of any provisions contained in any
supplemental indenture entered into pursuant to Section 14.6 relating either
to the kind or amount of shares of stock or securities or property (including
cash) receivable by Noteholders upon the conversion of their Notes after any
event referred to in such Section 14.6 or to any adjustment to be made with
respect thereto, but, subject to the provisions of Section 7.1, may accept as
conclusive evidence of the correctness of any such provisions, and shall be
protected in relying upon, the Officers' Certificate (which the Company shall
be obligated to file with the Trustee prior to the execution of any such
supplemental indenture) with respect thereto.
Section 10. NOTICE TO HOLDERS PRIOR TO CERTAIN ACTIONS. In case:
(a) the Company makes any distribution or dividend that would
require an adjustment in the Conversion Price pursuant to Section
14.5; or
(b) the Company takes any action that would require a
supplemental indenture pursuant to Section 14.6; or
(c) of the voluntary or involuntary dissolution, liquidation
or winding-up of the Company,
-90-
<PAGE>
the Company shall cause to be filed with the Trustee and to be mailed to each
holder of Notes at his address appearing on the Note register, as promptly as
possible but in any event at least 15 days prior to the applicable date
hereinafter specified, a notice stating (x) the date on which a record date
is to be taken for the purpose of such dividend, distribution, rights,
options or warrants, or, if a record is not to be taken, the date as of which
the holders of Common Stock of record to be entitled to such dividend,
distribution, rights, options or warrants are to be determined or (y) the
date on which such reclassification, change, consolidation, merger, sale,
conveyance, transfer, dissolution, liquidation or winding-up is expected to
become effective or occur and the date as of which it is expected that
holders of record of Common Stock shall be entitled to exchange their Common
Stock for securities or other property deliverable upon such
reclassification, change, consolidation, merger, sale, conveyance, transfer,
dissolution, liquidation or winding-up. Neither the failure to give such
notice nor any defect therein shall affect the legality or validity of the
proceedings referenced in clauses (a) through (c) of this Section 14.10.
ARTICLE XV
SUBORDINATION
Section 1. AGREEMENT TO SUBORDINATE. The Company agrees, and each
Noteholder by accepting a Note agrees, that the indebtedness evidenced by the
Notes and the payment of the principal of (and premium, if any, on) and
interest on the Notes or the purchase of any of the foregoing, and all
redemptions of and distributions and other payments to be made in respect of
Common Stock received upon the conversion of any Note, is expressly made
subordinated and subject in right of payment, to the extent and in the manner
provided in this Article XV, to the prior payment in full of all Senior
Indebtedness (whether outstanding on the date hereof or hereafter created,
incurred, assumed or guaranteed) and that the subordination is for the
benefit of the holders of Senior Indebtedness. This Article XV shall
constitute a continuing offer to all persons who become holders of, or
continue to hold, Senior Indebtedness, and such provisions are made for the
benefit of the holders of Senior Indebtedness.
Section 2. CERTAIN DEFINITIONS. For purposes of this Article XV,
the following terms shall have the meaning indicated:
-91-
<PAGE>
(1) "Representative" shall mean the indenture trustee or
other trustee, agent or representative for any Senior Indebtedness
or the Person to whom such Senior Indebtedness is owing, if there
is no such trustee, agent or representative for such Senior
Indebtedness.
(2) "Senior Indebtedness" with respect to the Notes means the
principal of, premium, if any, and interest on, and any fees,
costs, expenses and any other amounts (including indemnity
payments) related to the following, whether outstanding on the date
hereof or hereafter incurred or created, assumed or guaranteed: (a)
indebtedness, matured or unmatured, whether or not contingent, of
the Company for money borrowed evidenced by notes or other written
obligations, (b) any interest rate contract, interest rate swap
agreement or other similar agreement or arrangement designed to
protect the Company or any of its subsidiaries against fluctuations
in interest rates, (c) indebtedness, matured or unmatured, whether
or not contingent, of the Company evidenced by notes, debentures,
bonds or similar instruments or letters of credit (or reimbursement
agreements in respect thereof), (d) obligations of the Company as
lessee under capitalized leases and under leases of property made
as part of any sale and leaseback transactions, (e) indebtedness of
others of any of the kinds described in the preceding clauses (a)
through (d) assumed or guaranteed by the Company including but not
limited to all indebtedness at any time outstanding under the
Credit Facilities, assumed or guaranteed by the Company and (f)
renewals, extensions, modifications, amendments, and refundings of,
and indebtedness and obligations of a successor person issued in
exchange for or in replacement of, indebtedness or obligations of
the kinds described in the preceding clauses (a) through (f),
provided that the following shall not constitute Senior
Indebtedness: (i) any indebtedness or obligation of the Company in
respect of the Notes, (ii) any indebtedness of the Company to any
of its subsidiaries or other Affiliates; (iii) any indebtedness
described in clauses (a) through (f) ranking PARI PASSU with or
subordinate to the Notes pursuant to the terms of the instrument
creating or evidencing such indebtedness; and (iv) any indebtedness
incurred for the purchase of goods or materials in the ordinary
course of business (for purposes of this clause (iv) only, the
phrase "ordinary course of business" shall not be deemed to include
one-time or non-recurring purchases of capital goods).
For the purposes of this Indenture, Senior Indebtedness shall not
be deemed to have been paid in full until the holders
-92-
<PAGE>
of the Senior Indebtedness shall have indefeasibly received payment in full
in cash of all Senior Indebtedness; provided that if any holder of Senior
Indebtedness agrees to accept payment in full of such Senior Indebtedness for
consideration other than cash, such holder shall be deemed to have
indefeasibly received payment in full of such Senior Indebtedness. The
provisions of this Article XV shall continue to be effective or be
reinstated, as the case may be, if at any time any payment of any of the
Senior Indebtedness is rescinded or must otherwise be returned by any holder
of Senior Indebtedness upon the insolvency, bankruptcy or organization of the
Company or otherwise, all as though such payment had not been made.
A distribution may consist of cash, securities or other property,
by set-off or otherwise.
Section 3. LIQUIDATION; DISSOLUTION; BANKRUPTCY. Upon any
distribution to creditors of the Company in a liquidation or dissolution of
the Company or in a bankruptcy, reorganization, insolvency, receivership or
similar proceeding relating to the Company or its property, in an assignment
for the benefit of creditors or any marshalling of the Company's assets and
liabilities, (a) holders of Senior Indebtedness shall be entitled to receive
payment in full of all amounts due or to become due thereon before
Noteholders shall be entitled to receive any payment upon or in respect of
the Notes (except that Noteholders may receive securities that are
subordinated to at least the same extent as the Notes to Senior Indebtedness
and any securities issued in exchange for Senior Indebtedness) and (b) until
all Senior Indebtedness (as provided in clause (a) above) is paid in full,
any distribution to which Noteholders would be entitled but for this Article
shall be made to holders of Senior Indebtedness (except that Noteholders may
receive securities that are subordinated to at least the same extent as the
Notes to (x) Senior Indebtedness and (y) any securities issued in exchange
for Senior Indebtedness), as their interests may appear.
Section 4. DEFAULT ON SENIOR INDEBTEDNESS. The Company may not
make any payment upon or in respect of the Notes (except in such subordinated
securities) and may not acquire from the Trustee or any Noteholder any Note
for cash or property (other than securities that are subordinated to at least
the same extent as the Notes to (i) Senior Indebtedness and (ii) any
securities issued in exchange for Senior Indebtedness) until all Senior
Indebtedness has been paid in full if:
(a) a default in the payment of the principal of, premium, if
any, or interest on Senior Indebtedness occurs and is continuing
beyond any applicable period
-93-
<PAGE>
of grace in the agreement, indenture, or other document governing
the Senior Indebtedness; or
(b) a default, other than a default referred to in
subparagraph (a) above, on Senior Indebtedness occurs and is
continuing that permits holders of the Senior Indebtedness as to
which such default relates to accelerate its maturity and the
Trustee receives a notice of the default (a "Payment Blockage
Notice") from the Representative of holder(s) of any Senior
Indebtedness then outstanding. No default specified in this
subparagraph (b) that existed or was continuing on the date of
delivery of any such Payment Blockage Notice to the Trustee shall
be, or be made, the basis for a subsequent Payment Blockage Notice
unless such default shall have been cured or waived for a period of
not less than 180 days.
The Company may and shall resume payments on and distributions in
respect of the Notes and may acquire them upon the earlier of:
(i) in the case of a default referred to in Section 15.4(a)
hereof, upon the date on which the default is cured or waived, or
(ii) in the case of a default referred to in Section 15.4(b)
hereof, 179 days after the date on which the applicable Payment
Blockage Notice is received, unless the maturity of such Senior
Indebtedness has been accelerated. No new period of payment
blockage may be commenced within 360 days after the receipt by the
Trustee of any prior Payment Blockage Notice,
if, AND ONLY IF, this Article XV otherwise permits the payment, distribution
or acquisition at the time of such payment or acquisition.
Section 5. WHEN DISTRIBUTION MUST BE PAID OVER. In the event that
the Trustee (or paying agent if other than the Trustee) or any Noteholder (or
any holder of Common Stock received upon the conversion of any Note) receives
any payment of principal or interest with respect to the Notes at a time when
such payment is prohibited by Section 15.3 or 15.4 hereof, such payment shall
be held by the Trustee (or paying agent if other than the Trustee) or such
Noteholder, in trust for the benefit of, and immediately shall be paid over
and delivered, upon written request, to, the holders of Senior Indebtedness
as their interests may appear or their Representative under the indenture
-94-
<PAGE>
or other agreement (if any) pursuant to which Senior Indebtedness may have
been issued, as their respective interests may appear, for application to the
payment of all Senior Indebtedness remaining unpaid to the extent necessary
to pay all Senior Indebtedness in full in accordance with its terms, after
giving effect to any concurrent payment or distribution to or for the holders
of Senior Indebtedness.
With respect to the holders of Senior Indebtedness, the Trustee
undertakes to perform only such obligations on the part of the Trustee as are
specifically set forth in this Article XV, and no implied covenants or
obligations with respect to the holders of Senior Indebtedness shall be read
into this Indenture against the Trustee. The Trustee shall not be deemed to
owe any fiduciary duty to the holders of Senior Indebtedness and shall not be
liable to any such holders if the Trustee shall pay over or distribute to or
on behalf of Noteholders or the Company or any other person money or assets
to which any holders of Senior Indebtedness shall be entitled by virtue of
this Article XV, except if such payment is made as a result of the willful
misconduct or gross negligence of the Trustee.
Section 6. NOTICE BY COMPANY. The Company shall promptly notify
the Trustee and the paying agent of any facts known to the Company that would
cause a payment of any principal or interest with respect to the Notes to
violate this Article XV, but failure to give such notice shall not affect the
subordination of the Notes to the Senior Indebtedness as provided in this
Article XV.
Section 7. SUBROGATION. After all Senior Indebtedness is paid in
full and until the Notes are paid in full, Noteholders shall be subrogated
(equally and ratably with all other Indebtedness pari passu with the Notes)
to the rights of holders of Senior Indebtedness to receive distributions
applicable to Senior Indebtedness to the extent that distributions otherwise
payable to the Noteholders have been applied to the payment of Senior
Indebtedness. A distribution made under this Article XV to holders of Senior
Indebtedness that otherwise would have been made to Noteholders is not, as
between the Company and Noteholders, a payment by the Company on the Notes.
Section 8. RELATIVE RIGHTS. This Article XV defines the relative
rights of Noteholders and holders of Senior Indebtedness. Nothing in this
Indenture shall:
(a) impair, as between the Company and the Noteholders, the
obligation of the Company, which is absolute and
-95-
<PAGE>
unconditional, to pay principal of, premium, if any, and
interest on the Notes in accordance with their terms;
(b) affect the relative rights of Noteholders and creditors
of the Company other than their rights in relation to holders of
Senior Indebtedness; or
(c) prevent the Trustee or any Noteholder from exercising its
available remedies upon a default or Event of Default, subject to
the rights of holders and owners of Senior Indebtedness to receive
distributions and payments otherwise payable to Noteholders.
If the Company fails because of this Article XV to pay principal
of, premium, if any, or interest on a Note on the due date, the failure is
still a default or Event of Default.
Section 9. SUBORDINATION MAY NOT BE IMPAIRED BY COMPANY. (a) No
right of any holder of Senior Indebtedness to enforce the subordination of
the indebtedness evidenced by the Notes shall be impaired by any act or
failure to act by the Company or any holder of Notes or by the failure of the
Company or any holder of Notes to comply with this Indenture.
(b) Without in any way limiting the generality of the preceding
paragraph of this Section, the holders of Senior Indebtedness may, at any
time and from time to time, without the consent of or notice to the Trustee
or the Noteholders, without incurring responsibility to the Noteholders and
without impairing or releasing the subordination or other benefits provided
in this Article XV, or the obligations hereunder of the Noteholders to the
holders of Senior Indebtedness, do any one or more of the following: (1)
change the manner, place or terms of payment or extend the time of payment
of, or renew, exchange, amend, increase or alter, Senior Indebtedness or the
term of any instrument evidencing the same or any agreement under which
Senior Indebtedness is outstanding or any liability of any obligor thereon
(unless such change, extension or alteration results in such indebtedness no
longer being Senior Indebtedness as defined in this Indenture); (2) sell
Senior Indebtedness; (3) settle or compromise any Senior Indebtedness or any
liability of any obligor thereon or release any Person liable in any manner
for the collection of Senior Indebtedness; and (4) exercise or refrain from
exercising any rights against the Company and any other Person.
Section 10. DISTRIBUTION OR NOTICE TO REPRESENTATIVE. Whenever a
distribution is to be made or a notice given to
-96-
<PAGE>
holders of Senior Indebtedness, the distribution may be made and the notice
given to their Representative.
Upon any payment or distribution of assets of the Company referred
to in this Article XV, the Trustee and the Noteholders shall be entitled to
rely upon any order or decree made by any court of competent jurisdiction or
upon any certificate of such Representative or of the liquidating trustee or
agent or other person making any distribution to the Trustee or to the
Noteholders for the purpose of ascertaining the persons entitled to
participate in such distribution, the holders of the Senior Indebtedness and
other indebtedness of the Company, the amount thereof or payable thereon, the
amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Article XV.
Section 11. RIGHTS OF TRUSTEE AND PAYING AGENT. Notwithstanding
the provisions of this Article XV or any other provision of this Indenture,
the Trustee shall not be charged with knowledge of the existence of any facts
that would prohibit the making of any payment or distribution by the Trustee,
and the Trustee and the paying agent may continue to make payments on the
Notes, unless the Trustee shall have received at its Corporate Trust Office
at least three Business Days prior to the date of such payment written notice
of facts that would cause the payment of any principal, premium, if any, and
interest with respect to the Notes to violate this Article XV. Only the
Company or a Representative may give the notice. Nothing in this Article XV
shall impair the claims of, or payments to, the Trustee under or pursuant to
Section 7.6 hereof.
The Trustee shall be entitled to rely on the delivery to it of a
written notice by a person representing such person to be a holder of Senior
Indebtedness (or a trustee or agent on behalf of such holder) to establish
that such notice has been given by a holder of Senior Indebtedness (or a
trustee or agent on behalf of any such holder). In the event that the
Trustee determines in good faith that further evidence is required with
respect to the right of any person as a holder of Senior Indebtedness to
participate in any payment or distribution pursuant to this Article XV, the
Trustee may request such person to furnish evidence to the reasonable
satisfaction of the Trustee as to the amount of Senior Indebtedness held by
such person, the extent to which such person is entitled to participate in
such payment or distribution and any other facts pertinent to the rights of
such person under this Article XV, and if such evidence is not furnished, the
Trustee may defer any payment which it may be required to make for the
benefit of such person pursuant to the
-97-
<PAGE>
terms of this Indenture pending judicial determination as to the rights of
such person to receive such payment.
The Trustee in its individual or any other capacity may hold Senior
Indebtedness with the same rights it would have if it were not Trustee. Any
paying agent, any authenticating agent, any conversion agent, any Note
registrar and their successors may do the same with like rights.
Section 12. AUTHORIZATION TO EFFECT SUBORDINATION. Each holder of
a Note by the holder's acceptance thereof authorizes and directs the Trustee
on the holder's behalf to take such action as may be necessary or appropriate
to effectuate the subordination as provided in this Article XV and appoints
the Trustee to act as the holder's attorney-in-fact for any and all such
purposes. Without limiting the foregoing, each Representative is hereby
irrevocably authorized and empowered (in its own name or in the name of the
Noteholders or the Trustee or otherwise), but shall have no obligation, to
demand, sue for, collect and receive every payment or distribution referred
to in Section 15.3 above and give acquittance therefor and to file claims and
proofs of claim and take such other action as it may deem necessary or
advisable for the exercise or enforcement of any of the rights or interests
of the holders or owners of the Senior Indebtedness hereunder; provided that
for purposes of this Section 15.12 holders or owners of Senior Indebtedness
may act only through such Representative.
Section 13. CONVERSIONS NOT DEEMED PAYMENT. For the purposes of
this Article XV only, the issuance and delivery of Common Stock upon
conversion of the Notes in accordance with Article XIV shall not be deemed to
constitute a payment or distribution on account of the principal of or
interest on the Notes or on account of the purchase or other acquisition of
Notes. Nothing contained in this Article or elsewhere in this Indenture or
in the Notes is intended to or shall impair, as among the Company, its
creditors other than holders of Senior Indebtedness and the holders, the
right, which is absolute and unconditional, of the holder of any Note to
convert such Note in accordance with Article XIV.
Section 14. AUTHORIZATION TO EFFECT SUBORDINATION. Each
Noteholder by the acceptance of a Note authorizes and directs the Trustee on
the Noteholder's behalf to take such action as may be necessary or
appropriate to effectuate the subordination as provided in this Article XV
and to protect the rights of the Noteholders pursuant to this Indenture, and
appoints the Trustee to act as the Noteholder's attorney-in-fact for any and
all such purposes, including, in the event of any
-98-
<PAGE>
dissolution, winding up, liquidation or reorganization of the Company
(whether in bankruptcy, insolvency or receivership proceedings or upon an
assignment for the benefit of creditors of the Company), the making of a
timely filing of a claim for the unpaid balance of the Notes in the form
required in said proceedings and cause said claim to be approved. If the
Trustee does not file a proper proof of claim or proof of debt in the form
required in such proceeding prior to 30 days before the expiration of the
time to file such claim or claims, any Representative is hereby authorized to
file an appropriate claim for and on behalf of the Noteholders. Nothing
herein contained shall be deemed to authorize the Trustee or any holders of
Senior Indebtedness or any Representative to authorize or consent to or
accept or adopt on behalf of any Noteholder any plan of reorganization,
arrangement, adjustment or composition affecting the Notes or the rights of
any Noteholder, or to authorize the Trustee or the holders of Senior
Indebtedness or any Representative to vote in respect of the claim of any
Noteholder in any such proceeding.
Section 15. ACCELERATION OF NOTES. If payment of the Notes is
accelerated because of any Event of Default, the Company shall promptly
notify holders of Senior Indebtedness of the acceleration.
Section 16. AMENDMENTS. The provisions of this Article XV shall
not be amended or modified without the written consent of the holders of all
Senior Indebtedness in accordance with the terms thereof.
-99-
<PAGE>
ARTICLE XVI
MISCELLANEOUS PROVISIONS
Section 1. POOLING OF INTERESTS. The Company desires to preserve
its ability to account for acquisition and other business combination
transactions using the pooling-of-interests method where appropriate, and the
provisions of this Indenture shall be interpreted accordingly.
Section 2. PROVISIONS BINDING ON COMPANY'S SUCCESSORS. All the
covenants, stipulations, promises and agreements in this Indenture made by
the Company shall bind its successors and assigns whether so expressed or not.
Section 3. OFFICIAL ACTS BY SUCCESSOR COMPANY. Any act or
proceeding by any provision of this Indenture authorized or required to be
done or performed by any board (including the Board of Directors), committee
or officer of the Company shall and may be done and performed with like force
and effect by the like board, committee or officer of any corporation that
shall at the time be the lawful sole successor of the Company.
Section 4. ADDRESSES FOR NOTICES, ETC. Any notice or demand that
by any provision of this Indenture is required or permitted to be given or
served by the Trustee or by the holders of Notes on the Company shall be
deemed to have been sufficiently given or made, for all purposes if given or
served by being sent by prepaid overnight delivery or being deposited postage
prepaid by registered or certified mail in a post office letter box addressed
(until another address is filed by the Company with the Trustee) to Rac
Financial Group, Inc., 1250 West Mockingbird Lane, Dallas, Texas 75247,
Attention: Chief Financial Officer with a copy to Ronald J. Frappier, Esq.,
Jenkens & Gilchrist, 1445 Ross Ave., Suite 3200, Dallas, Texas 75202. Any
notice, direction, request or demand hereunder to or upon the Trustee shall
be deemed to have been sufficiently given or made, for all purposes, if given
or served by being sent by prepaid overnight delivery or being deposited
postage prepaid by registered or certified mail in a post office letter box
addressed to the Corporate Trust Office of the Trustee, which office is, at
the date as of which this Indenture is dated, located at Bank One, Columbus,
N.A., 100 East Broad Street, 8th Floor, Columbus, Ohio 43272-0181 Attention:
Corporate Trust Administration.
The Trustee, by notice to the Company, may designate additional or
different addresses for subsequent notices or communications.
-100-
<PAGE>
Any notice or communication mailed to a Noteholder shall be mailed
to him by first class mail, postage prepaid, at the address of such
Noteholder as it appears on the Note register and shall be sufficiently given
to such Noteholder if so mailed within the time prescribed.
Failure to mail a notice or communication to a Noteholder or any
defect in it shall not affect its sufficiency with respect to other
Noteholders. If a notice or communication is mailed in the manner provided
above, it is duly given, whether or not the addressee receives it.
Section 5. COMMUNICATIONS BY HOLDERS WITH OTHER HOLDERS.
Noteholders may communicate pursuant to Trust Indenture Act Section 312(b)
with other Noteholders with respect to their rights under this Indenture or
the Notes. The Company, the Trustee, the Note registrar and any other person
shall have the protection of Trust Indenture Act Section 312(c).
Section 6. GOVERNING LAW. This Indenture and each Note shall be
deemed to be a contract made under the substantive laws of New York and for
all purposes shall be construed in accordance with the substantive laws of
New York without regard to conflicts of laws principles thereof.
Section 7. EVIDENCE OF COMPLIANCE WITH CONDITIONS PRECEDENT;
CERTIFICATES TO TRUSTEE. Upon any application or demand by the Company to
the Trustee to take any action under any of the provisions of this Indenture,
including those actions set forth in Trust Indenture Act Section 314(c), the
Company shall furnish to the Trustee an Officers' Certificate stating that
all conditions precedent, if any, provided for in this Indenture relating to
the proposed action have been complied with, and an Opinion of Counsel
stating that, in the Opinion of such Counsel, all such conditions precedent
have been complied with.
Each certificate or opinion provided for in this Indenture and
delivered to the Trustee with respect to compliance with a condition or
covenant provided for in this Indenture shall include: (1) a statement that
the person making such certificate or opinion has read such covenant or
condition, (2) a brief statement as to the nature and scope of the
examination or investigation upon which the statement or opinion contained in
such certificate or opinion is based, (3) a statement that, in the opinion of
such person, he has made such examination or investigation as is necessary to
enable him to express an informed opinion as to whether or not such covenant
or condition has been complied with and (4) a statement as to whether or not,
-101-
<PAGE>
in the opinion of such person, such condition or covenant has been complied
with.
Section 8. LEGAL HOLIDAYS. In any case where any interest payment
date, date fixed for redemption, stated maturity or Change of Control
Purchase Date of any Note or the last date on which a Holder has the right to
convert his Notes shall not be a Business Day, then (notwithstanding any
other provision of this Indenture or of the Notes) payment of interest or
principal (and premium, if any) or conversion of the Notes need not be made
on such date, but may be made on the next succeeding Business Day with the
same force and effect as if made on the Interest Payment Date, date fixed for
redemption, Change of Control Purchase Date, or at the stated maturity, or on
such last day for conversion, provided that no interest shall accrue for the
period from and after such interest payment date, date fixed for redemption,
Change of Control Purchase Date or stated maturity, as the case may be.
Section 9. NO SECURITY INTEREST CREATED. Nothing in this Indenture
or in the Notes, expressed or implied, shall be construed to constitute a
security interest under the Uniform Commercial Code or similar legislation,
as now or hereafter enacted and in effect, in any jurisdiction where property
of the Company or its subsidiaries is located.
Section 10. TRUST INDENTURE ACT. This Indenture is hereby made
subject to, and shall be governed by, the provisions of the Trust Indenture
Act required to be part of and to govern indentures qualified under the Trust
Indenture Act.
Section 11. TRUST INDENTURE ACT CONTROLS. If any provision of this
Indenture limits, qualifies, or conflicts with the duties imposed by
operation of the Trust Indenture Act, the imposed duties, upon qualification
of this Indenture under the Trust Indenture Act, shall control.
Section 12. BENEFITS OF INDENTURE. Nothing in this Indenture or in
the Notes, expressed or implied, shall give to any person, other than the
parties hereto, any paying agent, any authenticating agent, any conversion
agent, any Note registrar and their successors hereunder and the holders of
Notes, any benefit or any legal or equitable right, remedy or claim under
this Indenture.
Section 13. TABLE OF CONTENTS, HEADINGS ETC. The table of contents
and the titles and headings of the articles and sections of this Indenture
have been inserted for convenience of reference only, are not to be
considered a part hereof, and shall
-102-
<PAGE>
in no way modify or restrict any of the terms or provisions hereof.
Section 14. AUTHENTICATING AGENT. The Trustee may appoint an
authenticating agent that shall be authorized to act on its behalf and
subject to its direction in the authentication and delivery of Notes in
connection with the original issuance thereof and transfers and exchanges of
Notes hereunder, including under Sections 2.4, 2.5, 2.6, 2.7 and 3.3, as
fully to all intents and purposes as though the authenticating agent had been
expressly authorized by this Indenture and those Sections to authenticate and
deliver Notes. For all purposes of this Indenture, the authentication and
delivery of Notes by the authenticating agent shall be deemed to be
authentication and delivery of such Notes "by the Trustee" and a certificate
of authentication executed on behalf of the Trustee by an authenticating
agent shall be deemed to satisfy any requirement hereunder or in the Notes
for the Trustee's certificate of authentication. Such authenticating agent
shall at all times be a person eligible to serve as Trustee hereunder
pursuant to Section 7.10.
Any corporation into which any authenticating agent may be merged
or converted or with which it may be consolidated, or any corporation
resulting from any merger, consolidation or conversion to which any
authenticating agent shall be a party, or any corporation succeeding to the
corporate trust business of any authenticating agent, shall be the successor
of the authenticating agent hereunder, if such successor company is otherwise
eligible under this Section, without the execution or filing of any paper or
any further act on the part of the parties hereto or the authenticating agent
or such successor company.
Any authenticating agent may at any time resign by giving written
notice of resignation to the Trustee and to the Company. The Trustee may at
any time terminate the agency of any authenticating agent by giving written
notice of termination to such authenticating agent and to the Company. Upon
receiving such a notice of resignation or upon such a termination, or in case
at any time any authenticating agent shall cease to be eligible under this
Section, the Trustee shall promptly appoint a successor authenticating agent
(which may be the Trustee), shall give written notice of such appointment to
the Company and shall mail notice of such appointment to all holders of Notes
as the names and addresses of such holders appear on the Note register.
The Company agrees to pay to the authenticating agent from time to
time reasonable compensation for its services.
-103-
<PAGE>
The provisions of Sections 7.3, 7.4, 7.5, 8.3 and this Section
16.14 shall be applicable to any authenticating agent.
Section 15. EXECUTION IN COUNTERPARTS. This Indenture may be
executed in any number of counterparts, each of which shall be an original,
but such counterparts shall together constitute but one and the same
instrument.
Bank One, Columbus, N.A. hereby accepts the trusts in this
Indenture declared and provided, upon the terms and conditions hereinabove
set forth.
IN WITNESS WHEREOF, the parties hereto have caused this Indenture
to be duly signed and attested, all as of the date first written above.
RAC FINANCIAL GROUP, INC.
By:_______________________________________
Name:
Title:
Attest:
___________________________
BANK ONE, COLUMBUS, N.A.,
as Trustee
By:________________________________________
Name:
Title:
Attest:
___________________________
-104-
<PAGE>
CROSS-REFERENCE TABLE*
Trust Indenture
Act Section Indenture Section
- ---------------- -----------------
310(a)(1). . . . . . . . . . . . . . . . . . . 7.10
(a)(2) . . . . . . . . . . . . . . . . . . . 7.10
(a)(3) . . . . . . . . . . . . . . . . . . . N.A.
(a)(4) . . . . . . . . . . . . . . . . . . . N.A.
(a)(5) . . . . . . . . . . . . . . . . . . . 7.10
(b). . . . . . . . . . . . . . . . . . . . . 7.9
(c). . . . . . . . . . . . . . . . . . . . . N.A.
311(a) . . . . . . . . . . . . . . . . . . . . 7.14
(b). . . . . . . . . . . . . . . . . . . . . 7.14
(c). . . . . . . . . . . . . . . . . . . . . N.A.
312(a) . . . . . . . . . . . . . . . . . . . . 2.5(a);5.1
(b). . . . . . . . . . . . . . . . . . . . . 16.5
(c). . . . . . . . . . . . . . . . . . . . . 16.5
313(a) . . . . . . . . . . . . . . . . . . . . 7.2
(b)(1) . . . . . . . . . . . . . . . . . . . N.A.
(b)(2) . . . . . . . . . . . . . . . . . . . 7.2
(c). . . . . . . . . . . . . . . . . . . . . 7.2
(d). . . . . . . . . . . . . . . . . . . . . 7.2
314(a) . . . . . . . . . . . . . . . . . . . . 4.8(a)
(b). . . . . . . . . . . . . . . . . . . . . N.A.
(c)(1) . . . . . . . . . . . . . . . . . . . 16.7
(c)(2) . . . . . . . . . . . . . . . . . . . 16.7
(c)(3) . . . . . . . . . . . . . . . . . . . N.A.
(d). . . . . . . . . . . . . . . . . . . . . N.A.
(e). . . . . . . . . . . . . . . . . . . . . 16.7
(f). . . . . . . . . . . . . . . . . . . . . N.A.
315(a) . . . . . . . . . . . . . . . . . . . . 7.1(b)
(b). . . . . . . . . . . . . . . . . . . . . 6.8
(c). . . . . . . . . . . . . . . . . . . . . 7.1(a)
(d). . . . . . . . . . . . . . . . . . . . . 7.1(c)
(e). . . . . . . . . . . . . . . . . . . . . 6.9
316(a)(last sentence). . . . . . . . . . . . . 8.4
(a)(1)(A). . . . . . . . . . . . . . . . . . 6.7
(a)(1)(B). . . . . . . . . . . . . . . . . . 6.7
(a)(2) . . . . . . . . . . . . . . . . . . . N.A.
(b). . . . . . . . . . . . . . . . . . . . . 6.4
(c). . . . . . . . . . . . . . . . . . . . . 9.2
317(a) . . . . . . . . . . . . . . . . . . . . 6.2
(b). . . . . . . . . . . . . . . . . . . . . 4.4
-i-
<PAGE>
318(a) . . . . . . . . . . . . . . . . . . . . 16.10; 16.11
N.A. means Not applicable.
- -------------
* This Cross-Reference Table is not part of the Indenture.
-ii-
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.2 Incorporation by Reference of Trust
Indenture Act. . . . . . . . . . . . . . . . . . . . . . . 8
Section 1.3 Rules of Construction. . . . . . . . . . . . . . . . . . . 9
ARTICLE II
ISSUE, DESCRIPTION, EXECUTION, REGISTRATION
AND EXCHANGE OF NOTES
Section 2.1 Designation, Amount and Issue of Notes . . . . . . . . . . 9
Section 2.2 Form of Notes. . . . . . . . . . . . . . . . . . . . . . . 10
Section 2.3 Date and Denomination of Notes; Payments
of Interest. . . . . . . . . . . . . . . . . . . . . . . . 11
Section 2.4 Execution of Notes . . . . . . . . . . . . . . . . . . . . 13
Section 2.5 Exchange and Registration of Transfer of
Notes; Restrictions on Transfer; Depositary. . . . . . . . 14
Section 2.6 Mutilated, Destroyed, Lost or Stolen Notes . . . . . . . . 25
Section 2.7 Temporary Notes. . . . . . . . . . . . . . . . . . . . . . 27
Section 2.8 Cancellation of Notes Paid, Etc. . . . . . . . . . . . . . 27
Section 2.9 CUSIP Numbers. . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE III
REDEMPTION OF NOTES
Section 3.1 Redemption Prices. . . . . . . . . . . . . . . . . . . . . 28
Section 3.2 Notice of Redemption; Selection of Notes . . . . . . . . . 28
Section 3.3 Payment of Notes Called for Redemption . . . . . . . . . . 30
Section 3.4 Conversion Arrangement on Call for
Redemption . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 3.5 Purchase of Notes Upon a Change of
Control. . . . . . . . . . . . . . . . . . . . . . . . . . 32
-iii-
<PAGE>
Page
----
ARTICLE IV
PARTICULAR COVENANTS OF THE COMPANY
Section 4.1 Payment of Principal, Premium and
Interest . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 4.2 Maintenance of Office or Agency. . . . . . . . . . . . . . 34
Section 4.3 Appointments to Fill Vacancies in Trustee's Office . . . . 35
Section 4.4 Provisions as to Paying Agent. . . . . . . . . . . . . . . 35
Section 4.5 Corporate Existence. . . . . . . . . . . . . . . . . . . . 36
Section 4.6 Rule 144A Information Requirement. . . . . . . . . . . . . 37
Section 4.7 Stay, Extension and Usury Laws . . . . . . . . . . . . . . 37
Section 4.8 Compliance Statement; Notice of Defaults . . . . . . . . . 37
Section 4.9 Limitation on Dividend and Other Payment
Restrictions Affecting Subsidiaries . . . . . . . . . . . 38
Section 4.10 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 4.11 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . 39
ARTICLE V
NOTEHOLDERS' LISTS AND REPORTS BY
THE COMPANY
Section 5.1 Noteholders' Lists . . . . . . . . . . . . . . . . . . . . 39
Section 5.2 Reports by Company . . . . . . . . . . . . . . . . . . . . 39
ARTICLE VI
DEFAULTS AND REMEDIES
Section 6.1 Events of Default. . . . . . . . . . . . . . . . . . . . . 40
Section 6.2 Payments of Notes on Default; Suit
Therefor . . . . . . . . . . . . . . . . . . . . . . . . . 43
Section 6.3 Application of Monies Collected by
Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . 45
Section 6.4 Proceedings by Noteholder. . . . . . . . . . . . . . . . . 46
Section 6.5 Proceedings by Trustee . . . . . . . . . . . . . . . . . . 47
Section 6.6 Remedies Cumulative and Continuing . . . . . . . . . . . . 47
Section 6.7 Direction of Proceedings and Waiver of Defaults by
Majority of Noteholders. . . . . . . . . . . . . . . . . . 48
Section 6.8 Notice of Defaults . . . . . . . . . . . . . . . . . . . . 48
Section 6.9 Undertaking to Pay Costs . . . . . . . . . . . . . . . . . 48
-iv-
<PAGE>
Page
----
ARTICLE VII
CONCERNING THE TRUSTEE
Section 7.1 Duties and Responsibilities of Trustee . . . . . . . . . . 49
Section 7.2 Reports by Trustee to Holders. . . . . . . . . . . . . . . 50
Section 7.3 Reliance on Documents, Opinions, Etc.. . . . . . . . . . . 50
Section 7.4 No Responsibility for Recitals, Etc. . . . . . . . . . . . 52
Section 7.5 Trustee, Paying Agents, Conversion Agents or
Registrar May Own Notes. . . . . . . . . . . . . . . . . . 52
Section 7.6 Monies to Be Held in Trust . . . . . . . . . . . . . . . . 52
Section 7.7 Compensation and Expenses of Trustee . . . . . . . . . . . 52
Section 7.8 Officers' Certificate as Evidence. . . . . . . . . . . . . 53
Section 7.9 Conflicting Interests of Trustee . . . . . . . . . . . . . 53
Section 7.10 Eligibility of Trustee . . . . . . . . . . . . . . . . . . 54
Section 7.11 Resignation or Removal of Trustee. . . . . . . . . . . . . 54
Section 7.12 Acceptance by Successor Trustee. . . . . . . . . . . . . . 55
Section 7.13 Successor, by Merger, Etc. . . . . . . . . . . . . . . . . 56
Section 7.14 Limitation on Rights of Trustee as
Creditor . . . . . . . . . . . . . . . . . . . . . . . . . 56
ARTICLE VIII
CONCERNING THE NOTEHOLDERS
Section 8.1 Action by Noteholders. . . . . . . . . . . . . . . . . . . 57
Section 8.2 Proof of Execution by Noteholders. . . . . . . . . . . . . 57
Section 8.3 Who Are Deemed Absolute Owners . . . . . . . . . . . . . . 57
Section 8.4 Company-Owned Notes Disregarded. . . . . . . . . . . . . . 58
Section 8.5 Revocation of Consents, Future Holders Bound . . . . 59
ARTICLE IX
NOTEHOLDERS' MEETINGS
Section 9.1 Purposes for Which Meetings May be Called. . . . . . . . . 59
Section 9.2 Manner of Calling Meetings; Record Date. . . . . . . . . . 59
Section 9.3 Call of Meeting by Company or Noteholders. . . . . . . . . 60
Section 9.4 Who May Attend and Vote at Meetings. . . . . . . . . . . . 60
Section 9.5 Manner of Voting at Meetings and Record to be Kept . . . . 60
Section 9.6 Exercise of Rights of Trustee and
Noteholders Not To Be Hindered or Delayed. . . . . . 61
-v-
<PAGE>
Page
----
ARTICLE X
SUPPLEMENTAL INDENTURES
Section 10.1 Supplemental Indentures Without Consent of
Noteholders. . . . . . . . . . . . . . . . . . . . . . . 61
Section 10.2 Supplemental Indentures With Consent of
Noteholders. . . . . . . . . . . . . . . . . . . . . . . 63
Section 10.3 Effect of Supplemental Indentures . . . . . . . . . . . . 64
Section 10.4 Notation on Notes . . . . . . . . . . . . . . . . . . . . 64
Section 10.5 Evidence of Compliance of Supplemental Indenture
to Be Furnished Trustee. . . . . . . . . . . . . . . . . . 64
ARTICLE XI
CONSOLIDATION, MERGER, SALE, CONVEYANCE,
TRANSFER AND LEASE
Section 11.1 Company May Consolidate, Etc. on Certain Terms. . . . . . 65
Section 11.2 Successor Company To Be Substituted . . . . . . . . . . . 65
Section 11.3 Opinion of Counsel To Be Given to
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . 65
ARTICLE XII
SATISFACTION AND DISCHARGE OF INDENTURE;
UNCLAIMED MONEYS
Section 12.1 Legal Defeasance and Covenant Defeasance of
the Notes. . . . . . . . . . . . . . . . . . . . . . . . 66
Section 12.2 Termination of Obligations upon Cancellation of the
Notes. . . . . . . . . . . . . . . . . . . . . . . . . . 68
Section 12.3 Survival of Certain Obligations . . . . . . . . . . . . . 69
Section 12.4 Acknowledgment of Discharge by Trustee. . . . . . . . . . 69
Section 12.5 Application of Trust Assets . . . . . . . . . . . . . . . 70
Section 12.6 Repayment to the Company; Unclaimed Money . . . . . . . . 70
Section 12.7 Reinstatement . . . . . . . . . . . . . . . . . . . . . . 70
ARTICLE XIII
IMMUNITY OF INCORPORATORS, STOCKHOLDERS,
OFFICERS AND DIRECTORS
Section 13.1 Indenture and Notes Solely Corporate
Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
-vi-
<PAGE>
Page
----
ARTICLE XIV
CONVERSION OF NOTES
Section 14.1 Right to Convert. . . . . . . . . . . . . . . . . . . . . 71
Section 14.2 Exercise of Conversion Privilege; Issuance of
Common Stock on Conversion; No Adjustment for Interest
or Dividends. . . . . . . . . . . . . . . . . . . . . . . 72
Section 14.3 Cash Payments in Lieu of Fractional Shares. . . . . . . . 74
Section 14.4 Conversion Price. . . . . . . . . . . . . . . . . . . . . 74
Section 14.5 Adjustment of Conversion Price. . . . . . . . . . . . . . 74
Section 14.6 Effect of Reclassification, Consolidation,
Merger or Sale. . . . . . . . . . . . . . . . . . . . . . 85
Section 14.7 Taxes on Shares Issued. . . . . . . . . . . . . . . . . . 86
Section 14.8 Reservation of Shares; Shares to Be Fully Paid;
Listing of Common Stock. . . . . . . . . . . . . . . . . . 87
Section 14.9 Responsibility of Trustee . . . . . . . . . . . . . . . . 87
Section 14.10 Notice to Holders Prior to Certain
Actions . . . . . . . . . . . . . . . . . . . . . . . . . 88
ARTICLE XV
SUBORDINATION
Section 15.1 Agreement to Subordinate. . . . . . . . . . . . . . . . . 89
Section 15.2 Certain Definitions . . . . . . . . . . . . . . . . . . . 89
Section 15.3 Liquidation; Dissolution; Bankruptcy. . . . . . . . . . . 90
Section 15.4 Default on Senior Indebtedness. . . . . . . . . . . . . . 91
Section 15.5 When Distribution Must Be Paid Over . . . . . . . . . . . 92
Section 15.6 Notice by Company . . . . . . . . . . . . . . . . . . . . 92
Section 15.7 Subrogation . . . . . . . . . . . . . . . . . . . . . . . 93
Section 15.8 Relative Rights . . . . . . . . . . . . . . . . . . . . . 93
Section 15.9 Subordination May Not Be Impaired by Company. . . . . . . 93
Section 15.10 Distribution or Notice to Representative. . . . . . . . . 94
Section 15.11 Rights of Trustee and Paying Agent. . . . . . . . . . . . 94
Section 15.12 Authorization to Effect Subordination . . . . . . . . . . 95
Section 15.13 Conversions Not Deemed Payment. . . . . . . . . . . . . . 95
Section 15.14 Authorization to Effect Subordination . . . . . . . . . . 96
Section 15.15 Acceleration of Notes . . . . . . . . . . . . . . . . . . 96
Section 15.16 Amendments. . . . . . . . . . . . . . . . . . . . . . . . 96
-vii-
<PAGE>
Page
----
ARTICLE XVI
MISCELLANEOUS PROVISIONS
Section 16.1 Pooling of Interests. . . . . . . . . . . . . . . . . . . 97
Section 16.2 Provisions Binding on Company's
Successors. . . . . . . . . . . . . . . . . . . . . . . . 97
Section 16.3 Official Acts by Successor Company. . . . . . . . . . . . 97
Section 16.4 Addresses for Notices, Etc. . . . . . . . . . . . . . . . 97
Section 16.5 Communications by Holders with Other Holders . . . . . . . 98
Section 16.6 Governing Law . . . . . . . . . . . . . . . . . . . . . . 98
Section 16.7 Evidence of Compliance with Conditions Precedent;
Certificates to Trustee . . . . . . . . . . . . . . . . . 98
Section 16.8 Legal Holidays. . . . . . . . . . . . . . . . . . . . . . 99
Section 16.9 No Security Interest Created. . . . . . . . . . . . . . . 99
Section 16.10 Trust Indenture Act . . . . . . . . . . . . . . . . . . . 99
Section 16.11 Trust Indenture Act Controls. . . . . . . . . . . . . . . 99
Section 16.12 Benefits of Indenture . . . . . . . . . . . . . . . . . . 99
Section 16.13 Table of Contents, Headings Etc.. . . . . . . . . . . . . 99
Section 16.14 Authenticating Agent. . . . . . . . . . . . . . . . . . . 100
Section 16.15 Execution in Counterparts . . . . . . . . . . . . . . . . 100
-ix-
<PAGE>
EXHIBIT 4.3
================================================================================
NOTE RESALE REGISTRATION RIGHTS AGREEMENT
Dated as of August 20, 1996
by and among
RAC FINANCIAL GROUP, INC.
and
THE PURCHASERS NAMED HEREIN
================================================================================
<PAGE>
This Note Resale Registration Rights Agreement (this "AGREEMENT") is made and
entered into as of August 20, 1996 by and among RAC Financial Group, Inc. a
Nevada corporation (the "COMPANY"), and Bear, Stearns & Co. Inc., Prudential
Securities Incorporated and Keefe Bruyette & Woods, Inc. (collectively, the
"PURCHASERS"), which Purchasers have agreed to purchase from the Company up
to $100,000,000 principal amount of 7.25% Convertible Subordinated Notes due
2003 (the "NOTES") pursuant to the Purchase Agreement (as defined below).
This Agreement is made pursuant to the Purchase Agreement, dated August
14, 1996 (the "PURCHASE AGREEMENT"), by and among the Company and the
Purchasers. In order to induce the Purchasers to purchase the Notes, the
Company has agreed to provide the registration rights set forth in this
Agreement. The execution and delivery of this Agreement is provided for in
the Purchase Agreement.
The parties hereby agree as follows:
1. DEFINITIONS
As used in this Agreement, the following capitalized terms shall have
the following meanings:
"ADVICE": As defined in Section 4(b) hereof.
"AGREEMENT": As defined in the preamble hereto.
"BROKER-DEALER": Any broker or dealer registered under the Exchange Act.
"BUSINESS DAY": A day other than a Saturday, a Sunday, a day on which
the banking institutions in the State and City of New York are authorized or
obligated by law or executive order to close or a day that is declared a
national or New York state holiday.
"CLOSING DATE": The date of this Agreement.
"COMMISSION": Securities and Exchange Commission.
"COMMON STOCK": Common Stock of the Company, par value $0.01 per share.
"COMPANY": As defined in the preamble hereto.
"COMPANY COUNSEL": As defined in Section 3(a)(ii) hereof.
-1-
<PAGE>
"CONSUMMATE": An Exchange Offer shall be deemed "Consummated" for
purposes of this Agreement upon (i) the filing and effectiveness under the
Securities Act of the Exchange Offer Registration Statement relating to the
New Notes to be issued in the Exchange Offer, (ii) the maintenance of such
Exchange Offer Registration Statement continuously effective and the keeping
of the Exchange Offer open for a period of not less than the minimum period
required under applicable federal and state securities laws to consummate the
Exchange Offer, PROVIDED that in no event shall such period be less than 20
Business Days, and (iii) the delivery by the Company to the registrar under
the Indenture of New Notes in the same aggregate principal amount as the
aggregate principal amount of Notes that were tendered by Holders thereof
pursuant to the Exchange Offer.
"CONVERSION SHARES": The Shares of Common Stock or other securities
issuable upon conversion of the Notes or the New Notes.
"EFFECTIVENESS TARGET DATE": As defined in Section 3(a) hereof.
"EXCHANGE ACT": Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.
"EXCHANGE OFFER": The registration by the Company under the Securities
Act of the New Notes pursuant to the Exchange Offer Registration Statement
through which the Company offers the Holders of all outstanding Transfer
Restricted Securities the opportunity to exchange all such outstanding
Transfer Restricted Securities held by such Holders for New Notes in an
aggregate principal amount equal to the aggregate principal amount of the
Transfer Restricted Securities tendered in such exchange offer by such
Holders.
"EXCHANGE OFFER REGISTRATION STATEMENT": As defined in Section 3(b)(i)
hereof.
"HOLDER": As defined in Section 2(b) hereof.
"INDEMNIFIED HOLDER": As defined in Section 6(a) hereof.
"INDENTURE": The Indenture, dated as of August 20, 1996, by and between
the Company and the Trustee, pursuant to which the Notes are to be issued, as
such Indenture is amended, modified or supplemented from time to time in
accordance with the terms thereof.
"LOSSES": As defined in Section 6(a) hereof.
-2-
<PAGE>
"NASD": National Association of Securities Dealers, Inc.
"NEW NOTES": As defined in Section 3(b) hereof.
"NOTES": As defined in the preamble hereto.
"PERSON": A corporation, an association, a partnership, an individual,
a joint venture, a joint stock company, a trust, an unincorporated
organization or a government or an agency or political subdivision thereof.
"PROSPECTUS": The prospectus included in any Registration Statement, as
amended or supplemented including without limitation by any post-effective
amendments thereto, and all material incorporated by reference into such
prospectus.
"PURCHASE AGREEMENT": As defined in the preamble hereto.
"PURCHASERS": As defined in the preamble hereto.
"REGISTRATION STATEMENT": The Shelf Registration Statement or the
Exchange Offer Registration Statement of the Company that is filed pursuant
to the provisions of Section 3 hereof, including the Prospectus included
therein, all amendments and supplements thereto (including any post-effective
amendments) and all exhibits and material incorporated by reference therein.
"SECURITIES ACT": Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
"SHELF FILING DEADLINE": As defined in Section 3(a) hereof.
"SHELF REGISTRATION STATEMENT": As defined in Section 3(a) hereof.
"TIA": The Trust Indenture Act of 1939, as amended and in effect on the
date of the Indenture.
"TRANSFER RESTRICTED SECURITIES": Each Note, and any Conversion Shares
issued upon conversion of any Note, until the earliest to occur of (i) the
date on which such Note or Conversion Shares, as the case may be, has been
effectively registered under the Securities Act and disposed of in accordance
with an effective Shelf Registration Statement, (ii) the date on which such
Note is exchanged for a New Note in the Exchange Offer and entitled to be
resold to the public by the Holder thereof without complying with the
prospectus delivery
-3-
<PAGE>
requirements of the Securities Act and (iii) the date on which such Note or
Conversion Shares, as the case may be, is distributed to the public pursuant
to Rule 144 under the Securities Act or by a Broker-Dealer pursuant to the
"Plan of Distribution" contemplated by the Exchange Offer Registration
Statement (including delivery of the Prospectus contained therein).
"UNDERWRITTEN REGISTRATION" or "UNDERWRITTEN OFFERING": A registration
in which securities of the Company are sold to an underwriter for reoffering
to the public.
2. SECURITIES SUBJECT TO THIS AGREEMENT
(a) TRANSFER RESTRICTED SECURITIES. The securities entitled to the
benefits of this Agreement are the Transfer Restricted Securities.
(b) HOLDERS OF TRANSFER RESTRICTED SECURITIES. A Person is deemed to
be a holder of Transfer Restricted Securities (each, a "HOLDER") whenever
such Person owns Transfer Restricted Securities of record.
3. REGISTRATION
(a) SHELF REGISTRATION. The Company hereby agrees to:
(i) use its best efforts to file or cause to be filed a continuous
registration statement pursuant to Rule 415 under the Securities Act
(together with the Prospectus included therein, all amendments and
supplements thereto (including post-effective amendments) and all exhibits
and materials incorporated by reference therein, (the "SHELF REGISTRATION
STATEMENT") on or prior to the 90th day after the Closing Date (the "SHELF
FILING DEADLINE"), which Shelf Registration Statement shall provide for
resales of all Transfer Restricted Securities; and
(ii) use all reasonable efforts to cause the Shelf Registration
Statement to be declared effective by the Commission as promptly as
practicable after the Closing Date (the "EFFECTIVENESS TARGET DATE").
Subject to any notice by the Company in accordance with Section 4(b) hereof
of the existence of any fact or event of the kind described in Section
4(b)(iii)(D) hereof, the Company shall use all reasonable efforts to keep the
Shelf Registration Statement continuously effective, supplemented and amended
as required by the provisions of Sections 4(a) and (b) hereof to the extent
necessary to ensure that it is
-4-
<PAGE>
available for resales of Transfer Restricted Securities by the Holders of
Transfer Restricted Securities entitled to the benefit of this Section 3(a)
and to ensure that the Shelf Registration Statement conforms to the
requirements of this Agreement, the Securities Act and the policies, rules
and regulations of the Commission as announced from time to time thereunder
for a period of at least three years following the Closing Date, PROVIDED
that the Company shall not be obligated to keep the Shelf Registration
Statement effective, if it has received an opinion from its outside counsel,
Jenkens & Gilchrist, a Professional Corporation, or other counsel reasonably
acceptable to the Purchasers ("COMPANY COUNSEL"), to the effect that the
Transfer Restricted Securities are freely tradable without the continued
effectiveness of the Shelf Registration Statement.
(b) REGISTERED EXCHANGE OFFER. If, based upon a written opinion of
Company Counsel addressed and delivered to the Holders, the Company
determines that it is permissible under applicable law and Commission policy
to Consummate an Exchange Offer, the Company may at its election Consummate
an Exchange Offer in lieu of filing and maintaining the Shelf Registration
Statement described herein. If the Company elects to Consummate an Exchange
Offer in accordance with the provisions hereof, the Company shall:
(i) cause to be filed with the Commission no later than the Shelf
Filing Deadline (or later if the Company has filed and maintained a Shelf
Registration Statement pursuant to this Agreement), a Registration Statement
(the "EXCHANGE OFFER REGISTRATION STATEMENT") under the Securities Act
relating to (A) a new issue of notes identical in all material respects to
the Notes except as to transfer restrictions (the "NEW NOTES") and (B) the
Conversion Shares issuable upon conversion of such New Notes;
(ii) use all reasonable efforts to cause the Exchange Offer
Registration Statement to become effective no later than the Effectiveness
Target Date;
(iii) in connection with the foregoing, file (A) all pre-effective
amendments to the Exchange Offer Registration Statement as may be necessary
in order to cause such Registration Statement to become effective, (B) if
applicable, a post-effective amendment to the Exchange Offer Registration
Statement pursuant to Rule 430A under the Securities Act and (C) cause all
necessary filings in connection with the registration and qualification of
the New Notes to be made under the Blue Sky laws of such jurisdictions
-5-
<PAGE>
as are necessary to permit Consummation of the Exchange Offer; and
(iv) upon the effectiveness of the Exchange Offer Registration
Statement, commence the Exchange Offer.
The Company shall cause the Exchange Offer to comply with all applicable
federal and state securities laws. The Company shall cause the Exchange Offer
to comply with all applicable federal and state securities laws. No
securities other than the New Notes (and the Conversion Shares issuable upon
conversion of such New Notes) shall be included in the Exchange Offer
Registration Statement. The Company shall use all reasonable efforts to
cause the Exchange Offer to be Consummated on the earliest practicable date
after the Exchange Offer Registration Statement has become effective, but in
no event later than 30 Business Days after such effectiveness. The Exchange
Offer shall be on the appropriate form permitting registration of the New
Notes to be offered in exchange for the Notes and to permit resales of New
Notes and Conversion Shares received by Broker-Dealers in the Exchange Offer
by delivering the Prospectus contained in the Exchange Offer Registration
Statement. The "Plan of Distribution" section in the Prospectus contained in
the Exchange Offer Registration Statement shall not name any such
Broker-Dealer or disclose the amount of Notes held by any such Broker-Dealer
except to the extent required by Commission policy. The Company shall use
its best efforts to keep the Exchange Offer Registration Statement
continuously effective, supplemented and amended to the extent necessary to
ensure that it is available for resales of New Notes and Conversion Shares
issuable upon conversion of New Notes acquired by Broker-Dealers for their
own accounts as a result of market-making activities or other trading
activities, and to ensure that it conforms with the requirements of this
Agreement, the Securities Act and the policies, rules and regulations of the
Commission as announced from time to time, for a period of one year from the
date on which the Exchange Offer Registration Statement is declared
effective. The Company shall provide sufficient copies of the latest version
of such Prospectus to Broker-Dealers promptly upon request at any time during
such one-year period in order to facilitate such resales. Notwithstanding
anything herein to the contrary, despite the Consummation of an Exchange
Offer, the Company shall be required to file the Shelf Registration Statement
in accordance with Section 3(a) hereof if any Holder of Transfer Restricted
Securities shall notify the Company within 20 Business Days of the
Consummation of the Exchange Offer (x) that such Holder is prohibited by
applicable law or Commission policy from participating in the Exchange Offer,
(y) that such
-6-
<PAGE>
Holder may not resell the New Notes or Conversion Shares issuable upon
conversion of New Notes acquired by it in the Exchange Offer to the public
without delivering a prospectus and that the Prospectus contained in the
Exchange Offer Registration Statement is not appropriate or available for
such resales by such Holder or (z) that such Holder is a Broker-Dealer and
holds Notes or Conversion Shares issuable upon conversion of New Notes
acquired directly from the Company or one of its affiliates.
4. REGISTRATION PROCEDURES
(a) In connection with any Shelf Registration Statement, the Company
shall comply with all the provisions of Section 4(b) below and shall use all
reasonable efforts to effect such registration to permit the resale of the
Transfer Restricted Securities being sold in accordance with the intended
method or methods of distribution thereof. The parties hereto agree that the
Transfer Restricted Securities shall not be sold in any Underwritten Offering
and the Company shall in no event be required to cooperate with or pay for
any Underwritten Offering.
(b) In connection with any Registration Statement and any Prospectus
required by this Agreement, the Company shall:
(i) subject to any notice by the Company in accordance with this
Section 4(b) of the existence of any fact or event of the kind described in
Section 4(b)(iii)(D) hereof, use all reasonable efforts to keep such
Registration Statement continuously effective and provide all requisite
financial statements for the period specified in Section 3 of this Agreement;
upon the occurrence of any event that would cause such Registration Statement
or the Prospectus contained therein (A) to contain a material misstatement or
omission or (B) not to be effective and usable for resales of Transfer
Restricted Securities during the period required by this Agreement, the
Company shall file promptly an appropriate amendment to such Registration
Statement correcting any such misstatement or omission, and, in the case of
either clause (A) or (B), except as set forth in Section 4(b)(xvi) below, use
all reasonable efforts to cause such amendment to be declared effective and
such Registration Statement and the related Prospectus to become usable for
their intended purpose(s) as soon as practicable thereafter;
(ii) prepare and file with the Commission such amendments and post-
effective amendments to such Registration Statement as may be necessary to keep
such Registration
-7-
<PAGE>
Statement effective for the applicable period set forth in Section 3 hereof,
or such shorter period as shall terminate when all Transfer Restricted
Securities covered by such Registration Statement have been sold; cause the
Prospectus to be supplemented by any required Prospectus supplement, and as
so supplemented, cause the Prospectus to be filed pursuant to Rule 424 under
the Securities Act and to comply fully with the applicable provisions of
Rules 424 and 430A under the Securities Act in a timely manner; and comply
with the provisions of the Securities Act with respect to the disposition of
all securities covered by such Registration Statement during the applicable
period in accordance with the intended method or methods of distribution by
the sellers thereof set forth in such Registration Statement or supplement to
the Prospectus;
(iii) advise the selling Holders promptly and, if requested by
such Persons, to confirm such advice in writing, (A) when the Prospectus or
any Prospectus supplement or post-effective amendment to any Registration
Statement has been filed, and, with respect to any Registration Statement or
any post-effective amendment thereto, when the same has become effective, (B)
of any request by the Commission for amendments to the Registration Statement
or amendments or supplements to the Prospectus or for additional information
relating thereto, (C) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement under the
Securities Act or of the suspension by any state securities commission of the
qualification of the Transfer Restricted Securities for offering or sale in
any jurisdiction or of the initiation of any proceeding for any of the
preceding purposes or (D) of the existence of any fact or the happening of
any event (including without limitation pending negotiations relating to, or
the consummation of, a transaction or the occurrence of any event that would
require additional disclosure of material, non-public information by the
Company in the Registration Statement as to which the Company has a BONA FIDE
business purpose for preserving confidentiality or that renders the Company
unable to comply with Commission requirements) that makes untrue any
statement of a material fact made in the Registration Statement, the
Prospectus, any amendment or supplement thereto or any document incorporated
by reference therein, or that requires the making of any additions to or
changes in the Registration Statement or the Prospectus in order to make the
statements therein not misleading. If at any time the Commission shall issue
any stop order suspending the effectiveness of the Registration Statement, or
any state securities commission or other regulatory authority shall issue an
order suspending the qualification or exemption from qualification of the
Transfer
-8-
<PAGE>
Restricted Securities under state securities or Blue Sky laws, the Company
shall use its best efforts to obtain the withdrawal or lifting of such order
at the earliest possible time;
(iv) furnish to each of the selling Holders, upon request, before
filing with the Commission, copies of any Registration Statement or any
Prospectus included therein and any amendments or supplements thereto
(including all documents incorporated by reference prior to the effectiveness
of such Registration Statement), which documents, other than documents
incorporated by reference, shall be subject to the review of such Holders for
a period of at least 5 Business Days, and the Company shall not file any such
Registration Statement or Prospectus or any amendment or supplement to any
such Registration Statement or Prospectus to which a selling Holder of
Transfer Restricted Securities covered by such Registration Statement shall
reasonably object within 5 Business Days after the receipt thereof; a selling
Holder shall be deemed to have reasonably objected to such filing only if
such Registration Statement, amendment, Prospectus or supplement, as
applicable, as proposed to be filed, contains a material misstatement or
omission;
(v) if practicable, promptly prior to the filing of any document
that is to be incorporated by reference into a Registration Statement or
Prospectus subsequent to the effectiveness thereof, and in any event no later
than the date such document is filed with the Commission, provide copies of
such document to the selling Holders, if requested, make representatives of
the Company available in person or by conference call for discussion of such
document and other customary due diligence matters, and include such
information in such document prior to the filing thereof as such selling
Holders reasonably may request;
(vi) subject to having received reasonable assurances of
confidentiality from any such selling Holders, make available at reasonable
times for inspection by the selling Holders participating in any disposition
pursuant to such Registration Statement and any attorney or accountant
retained by such selling Holder all financial and other records pertinent
corporate documents and properties of the Company and cause the officers,
directors and employees of the Company to supply all information reasonably
requested by any such selling Holder, attorney or accountant in connection
with such
-9-
<PAGE>
Registration Statement subsequent to the filing thereof and prior
to its effectiveness;
(vii) if requested by any selling Holder, promptly incorporate in
any Registration Statement or Prospectus, pursuant to a supplement or
post-effective amendment if necessary, such information as such selling
Holders may reasonably request to have included therein, the purchase price
being paid therefor and any other terms of the offering of the Transfer
Restricted Securities or New Notes (or Conversion Shares issuable upon
conversion of New Notes) to be sold in such offering; and make all required
filings of any such Prospectus supplement or post-effective amendment as soon
as practicable after the Company is notified of the matters to be
incorporated in such Prospectus supplement or post-effective amendment;
(viii) cause the Transfer Restricted Securities covered by the
Registration Statement to be rated with the appropriate rating agencies, if
so requested by the Holders of a majority in aggregate principal amount of
Notes or New Notes covered thereby;
(ix) deliver to each selling Holder, without charge, as many
copies of the Prospectus (including each preliminary prospectus intended for
public distribution) and any amendment or supplement thereto as such selling
Holder reasonably may request; subject to any notice by the Company in
accordance with this Section 4(b) of the existence of any fact or event of
the kind described in Section 4(b)(iii)(D) hereof, the Company hereby
consents to the use of the Prospectus and any amendment or supplement thereto
by each of the selling Holders in connection with the offering and the sale
of the Transfer Restricted Securities or New Notes (or Conversion Shares
issuable upon conversion of New Notes) covered by the Prospectus or any
amendment or supplement thereto;
(x) subject to any notice by the Company in accordance with this
Section 4(b) of the existence of any fact or event of the kinds described in
Section 4(b)(iii)(D) hereof, take all such other customary actions in
connection therewith in order to expedite or facilitate the disposition of
the Transfer Restricted Securities or New Notes (or Conversion Shares
issuable upon conversion of New Notes) pursuant to any Registration Statement
contemplated by this Agreement, all to
-10-
<PAGE>
such extent as may be requested by any Purchaser or by any Holder of Transfer
Restricted Securities in connection with any sale or resale pursuant to any
Registration Statement contemplated by this Agreement;
(xi) furnish to each Purchaser and each selling Holder, upon the
date of the effectiveness of the Shelf Registration Statement, and, to the
extent applicable, upon the Consummation of the Exchange Offer copies of the
following:
(A) a certificate, dated the date of effectiveness of the
Shelf Registration Statement (or, to the extent applicable, dated the date of
Consummation of the Exchange Offer) signed by (y) the president or chief
executive officer of the Company and (z) the chief financial officer or the
principal financial or accounting officer or the Company, confirming, as of
the date thereof, the matters set forth in Section 6(d)(i) and (iii) of the
Purchase Agreement and such other matters as such parties reasonably
requested at the time of effectiveness of the Shelf Registration Statement;
(B) opinions, dated the date of effectiveness of the Shelf
Registration Statement (or, to the extent applicable, dated the date of
Consummation of the Exchange Offer) of Company Counsel and Ronald M. Mankoff,
covering the matters set forth in Sections 6(a) and (b), respectively, of the
Purchase Agreement and addressed to all Purchasers and selling Holders; and
(C) comfort letters, dated as of the date of effectiveness of
the Shelf Registration Statement (and, to the extent applicable, as of the
date of Consummation of the Exchange Offer) from the independent certified
public accountants of the Company, in the customary form, addressed to all
Purchasers and selling Holders, and addressing the matters set forth in the
comfort letters delivered pursuant to Sections 6(e), (f) and (g) of the
Purchase Agreement, without exception;
(xii) deliver such other documents and certificates as were
reasonably requested at the time of effectiveness of the Shelf Registration
Statement by such parties to evidence compliance with clause (xi) above.
If at any time the representations and warranties of the Company indirectly
referenced in clause (xi)(A) above cease to be true and correct, the Company
shall so advise the Purchasers
-11-
<PAGE>
and each selling Holder promptly and, if requested by such Persons, shall
confirm such advice in writing;
(xiii) prior to any public offering of Transfer Restricted
Securities, cooperate with the selling Holders, and their respective counsel
in connection with the registration and qualification of the Transfer
Restricted Securities under the securities or Blue Sky laws of such domestic
jurisdictions as the selling Holders may request; and do any and all other
acts or things reasonably necessary or advisable to enable the disposition in
such jurisdictions of the Transfer Restricted Securities covered by the Shelf
Registration Statement; PROVIDED that the Company shall not be required to
register or qualify as a foreign corporation where it is not now so qualified
or to take any action that would subject it to service of process in suits or
to taxation, other than as to matters and transactions relating to the
Registration Statement, in any domestic jurisdiction where it is not now so
subject;
(xiv) cooperate with the selling Holders to facilitate the timely
preparation and delivery of certificates representing Transfer Restricted
Securities to be sold and not bearing any restrictive legends; and enable
such Transfer Restricted Securities to be in such denominations and
registered in such names as the selling Holders may request at least two
Business Days prior to any sale of Transfer Restricted Securities;
(xv) use all reasonable efforts to cause the Transfer Restricted
Securities covered by the Registration Statement to be registered with or
approved by such other domestic governmental agencies or authorities as may
be necessary to enable the selling Holder(s) thereof to consummate the
disposition of such Transfer Restricted Securities, subject to the proviso
contained in clause (xiii) above;
(xvi) as soon as reasonably practicable after the occurrence of
any fact or event of the kind described in Section 4(b)(iii)(D) above,
prepare a supplement or post-effective amendment to the Registration
Statement or related Prospectus or any document incorporated therein by
reference or file any other required document so that, as thereafter
delivered to the purchasers of Transfer Restricted Securities, the Prospectus
shall not contain an untrue statement of a material fact or omit to state any
material fact necessary, in light of the circumstances in which it was made,
to make the statements therein not misleading; PROVIDED that
-12-
<PAGE>
notwithstanding anything to the contrary herein, the Company shall not be
required to prepare and file such a supplement or post-effective amendment or
document if the fact no longer exists; and PROVIDED, FURTHER, that, in the
event of a material business transaction (including without limitation
pending negotiations relating to such a transaction) that, based upon the
advice of the Company Counsel, would require disclosure by the Company in the
Registration Statement of material, nonpublic information that the Company
has a BONA FIDE business purpose for not disclosing, then for so long as such
circumstances and such business purpose continue to exist, the Company shall
not be required to prepare and file a supplement or post-effective amendment
hereunder;
(xvii) provide a CUSIP number for all Transfer Restricted
Securities or New Notes not later than the effective date of the Registration
Statement and provide the Trustee under the Indenture with printed
certificates for the Notes or New Notes, as the case may be, that are in a
form eligible for deposit with The Depository Trust Company;
(xviii) use all reasonable efforts to cause such Registration
Statement to become effective;
(xix) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make generally available to its
security holders, in a regular filing on Form 10-Q or Form 10-K, a
consolidated earnings statement meeting the requirements of Rule 158 (which
need not be audited) for the twelve-month period commencing after the
effective date of the Registration Statement;
(xx) cause the Indenture to be qualified under the TIA not later
than the effective date of the first Registration Statement required to be
filed by this Agreement, and, in connection therewith, cooperate with the
Trustee and the Holders of Notes or New Notes, as the case may be, to effect
such changes to the Indenture as may be required for such Indenture to be so
qualified in accordance with the terms of the TIA; and execute, and use all
reasonable efforts to cause the Trustee to execute, all documents that may be
required to effect such changes and all other forms and documents required to
be filed with the Commission to enable such Indenture to be so qualified in a
timely manner;
(xxi) cause all Transfer Restricted Securities and Conversion
Shares issuable upon conversion of the New Notes
-13-
<PAGE>
covered by the Registration Statement to be listed on the Nasdaq National
Market; and
(xxii) provide promptly to each Holder upon request any document
filed with the Commission pursuant to the requirements of Section 13 and
Section 15 of the Exchange Act.
Each Holder agrees by acquisition of a Transfer Restricted Security
that, upon receipt of any notice from the Company of the existence of any
fact or event of the kind described in Section 4(b)(iii)(D) hereof, such
Holder shall: (i) keep the fact of such notice confidential and (ii)
forthwith discontinue disposition of Transfer Restricted Securities pursuant
to the applicable Registration Statement until such Holder's receipt of the
copies of a supplemented or amended Prospectus as contemplated by Section
4(b)(xvi) hereof, or until it receives advice in writing (the "ADVICE") from
the Company that the use of the Prospectus may be resumed, and has received
copies of any additional or supplemental filings that are incorporated by
reference in the Prospectus. If so directed by the Company, each Holder shall
deliver to the Company (at the expense of the Company) all copies, other than
permanent file copies then in such Holder's possession, of the Prospectus
covering such Transfer Restricted Securities that was current at the time of
receipt of such notice. In the event the Company shall give any such notice,
the time period regarding the effectiveness of such Registration Statement
set forth in Section 3 hereof shall be extended by the number of days during
the period from and including the date of the giving of such notice pursuant
to Section 4(b)(iii)(D) hereof to and including the date when each selling
Holder covered by such Registration Statement shall have received the copies
of the supplemented or amended prospectus contemplated by Section 4(b)(xvi)
hereof or shall have received the Advice, PROVIDED that the time period
regarding the effectiveness of such Registration Statement set forth in
Section 3 hereof shall not be extended, if the Company has received an
opinion from Company Counsel to the effect that the Restricted Transfer
Securities can be freely tradable without the continued effectiveness of the
Shelf Registration Statement.
(c) In connection with the Exchange Offer, the Company shall comply
with all of the provisions of Section 4(b) (other than those that are not
applicable) and shall use its best efforts to effect such exchange to permit
the sale of Transfer Restricted Securities being sold in accordance with the
intended method or methods of distribution thereof. In addition, prior to
effectiveness of the Exchange Offer Registration Statement, the Company shall
provide a
-14-
<PAGE>
supplemental letter to the Commission (i) stating that they are registering
the Exchange Offer in reliance on the position of the Commission enunciated
in EXXON CAPITAL HOLDINGS CORPORATION (available May 13, 1988), MORGAN
STANLEY AND CO., INC. (available June 5, 1991) and, if applicable, any
no-action letter obtained by the Company and (ii) including a representation
that the Company has not entered into any arrangement or understanding with
any Person to distribute the New Notes to be received in the Exchange Offer
and that, to the best of the Company's information and belief, each Holder
participating in the Exchange Offer is acquiring the New Notes in its
ordinary course of business and has no arrangement or understanding with any
Person to participate in the distribution of the New Notes received in the
Exchange Offer. As a condition to its participation in the Exchange Offer
pursuant to the terms of this Agreement, each Holder of Transfer Restricted
Securities shall furnish, upon the request of the Company, prior to the
Consummation thereof, a written representation to the Company (which may be
contained in the letter of transmittal contemplated by the Exchange Offer
Registration Statement) to the effect that (A) it is not an affiliate of the
Company, (B) it is not engaged in and does not intend to engage in and has no
arrangement or understanding with any person to participate in, a
distribution of the New Notes to be issued in the Exchange Offer and (C) it
is acquiring the New Notes in its ordinary course of business. In addition,
all such Holders of Transfer Restricted Securities shall otherwise cooperate
in the Company's preparations for the Exchange Offer. Each Holder hereby
acknowledges and agrees that any Broker-Dealer and any such Holder using the
Exchange Offer to participate in a distribution of the securities to be
acquired in the Exchange Offer (1) could not under Commission policy as in
effect on the date of this Agreement rely on the position of the Commission
enunciated in MORGAN STANLEY AND CO., INC. (available June 5, 1991) and EXXON
CAPITAL HOLDINGS CORPORATION (available May 13, 1988), as interpreted in the
Commission's letter to Shearman & Sterling dated July 2, 1993, and similar
no-action letters and (2) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction and that such a secondary resale transaction should be
covered by an effective registration statement containing the selling
security holder information required by Item 507 or 508, as applicable, of
Regulation S-K if the resales are of New Notes obtained by such Holder in
exchange for Notes acquired by such Holder directly from the Company.
5. REGISTRATION EXPENSES
-15-
<PAGE>
The following expenses incident to the Company's performance of or
compliance with this Agreement shall be borne by the Company regardless of
whether a Registration Statement becomes effective, including: (i) all
registration and filing fees and expenses (including filings made by any
Purchaser or Holder with the NASD); (ii) all fees and expenses associated
with compliance with federal securities and state Blue Sky or securities laws
including the legal fees of Stroock & Stroock & Lavan or such other counsel
as may be chosen by the Holders of a majority in principal amount of the
Transfer Restricted Securities for whose benefit such Registration Statement
is being prepared; (iii) all expenses of printing or copying (including
printing of any certificates evidencing the Notes and printing or copying of
Prospectuses), messenger and delivery services and telephone; (iv) all fees
and disbursements of counsel for the Company; (v) all application and filing
fees in connection with listing any securities on a national securities
exchange or automated quotation system pursuant to the requirements hereof;
and (vi) all fees and disbursements of independent certified public
accountants of the Company (including the expenses of any special audit and
comfort letters required by or incident to such performance).
The Company shall, in any event, bear its own internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expenses of any annual
audit and the fees and expenses of any Person, including special experts,
retained by the Company.
6. INDEMNIFICATION
(a) The Company agrees to indemnify and hold harmless (i) each Holder
and (ii) each person, if any, who controls (within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act) any Holder (any of
the persons referred to in this clause (ii) being hereinafter referred to as
a "CONTROLLING PERSON") and (iii) the respective officers, directors,
partners, employees, representatives and agents of any Holder or any
controlling person (any person referred to in clause (i), (ii) or (iii) may
hereinafter be referred to as an "INDEMNIFIED HOLDER"), to the fullest extent
lawful, from and against any and all losses, claims, damages, liabilities,
judgments, costs and expenses ("LOSSES") (including, without limitation and
as incurred, reimbursement of all costs of investigating, preparing, pursuing
or defending any claim or action, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, including the
reasonable fees and expenses of counsel to any Indemnified
-16-
<PAGE>
Holder) directly or indirectly caused by, related to, based upon, arising out
of or in connection with any untrue statement or alleged untrue statement of
a material fact contained in any Registration Statement or Prospectus (or any
amendment or supplement thereto) or any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they
were made, not misleading, except (as to any Holder) insofar as such Losses
are caused by an untrue statement or omission or alleged untrue statement or
omission that is made in reliance upon and in conformity with information
relating to such Holder furnished in writing to the Company by such Holder
for use therein. The Company shall notify the Holders promptly of the
institution, threat or assertion of any claim, proceeding (including any
governmental investigation) or litigation in connection with the matters
addressed by this Agreement that involves the Company or any Indemnified
Holder.
(b) In case any action or proceeding (including, without limitation,
any governmental or regulatory investigation or proceeding) shall be brought
or asserted against any of the Indemnified Holders with respect to which
indemnity may be sought against the Company, such Indemnified Holder (or the
Indemnified Holder controlled by such controlling person) shall promptly
notify the Company in writing (PROVIDED that the failure to give such notice
shall not relieve the Company of its obligations pursuant to this Agreement).
Any Indemnified Holder shall have the right to employ separate counsel in
any such action and participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Holder,
PROVIDED that the fees and expenses of such counsel shall be at the expense
of the Company if (i) the Company has failed to assume the defense and employ
counsel reasonably satisfactory to the Holders or (ii) the named parties to
any such action (including any impleaded parties) include such indemnified
Holder and the Company and such Indemnified Holder shall have reasonably
concluded that there may be one or more legal defenses available to it that
are different from or in addition to those available to the Company;
PROVIDED, FURTHER, that the Company shall not in such event be responsible
hereunder for the fees and expenses of more than one firm of separate
counsel, which firm shall be designated by the Holders and shall be subject
to the Company's approval, not to be unreasonably withheld, in connection
with any action in the same jurisdiction, in addition to any local counsel.
The Company shall not be liable for any settlement of any such action or
proceeding effected without its prior written consent, which consent shall
not be unreasonably withheld or
-17-
<PAGE>
delayed, and the Company agrees to indemnify and hold harmless any
Indemnified Holder from and against any Loss by reason of any settlement of
any action effected with its written consent. The Company shall not, without
the prior written consent of each Indemnified Holder, settle or compromise or
consent to the entry of a judgment in or otherwise seek to terminate any
pending or threatened action, claim, litigation or proceeding in respect of
which indemnification or contribution may be sought hereunder (whether or not
any Indemnified Holder is a party thereto), unless such settlement,
compromise, consent or termination includes an unconditional release of each
Indemnified Holder from all liability arising out of such action, claim,
litigation or proceeding.
(c) Each Holder of Transfer Restricted Securities agrees, severally and
not jointly, to indemnify and hold harmless the Company, its directors, its
officers, and any person controlling (within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act) the Company, and the
respective officers, directors, partners, employees, representatives and
agents of each such person, to the same extent as the foregoing indemnity
from the Company to each of the Indemnified Holders, but only with respect to
claims and actions based on information relating to such Holder furnished in
writing by such Holder for use in any Registration Statement or Prospectus.
In case any action or proceeding shall be brought against any of Company or
its directors or officers or any such controlling person in respect of which
indemnity may be sought against a Holder of Transfer Restricted Securities,
such Holder shall have the rights and duties given the Company, and each of
the Company or its directors or officers of such controlling person shall
have the rights and duties given to each Holder by the proceeding paragraph.
In no event shall the liability of any selling Holder hereunder be greater in
amount than the dollar amount of the proceeds received by such Holder upon
the sale of the securities registered pursuant to provisions hereof giving
rise to such indemnification obligation.
(d) If the indemnification provided for in this Section 6 is
unavailable to a party entitled to indemnification in respect of any Losses
referred to herein, then each indemnifying party, in lieu of indemnifying
such indemnified party, shall contribute to the amount paid or payable by
such indemnified party as a result of such Losses (i) in such proportion as
is appropriate to reflect the relative benefits received by the Company on
the one hand and the Holders on the other hand from their sale of Transfer
Restricted Securities or (ii) if such allocation is not permitted by
applicable law,
-18-
<PAGE>
the relative fault of the Company on the one hand and of the Indemnified
Holder on the other in connection with the statements or omissions that
resulted in such Losses as well as any other relevant equitable
considerations. The relative fault of the Company on the one hand and of the
Indemnified Holder on the other shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or by the Indemnified Holder and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The indemnity and
contribution obligations of each indemnifying party set forth herein shall be
in addition to any liability or obligation such indemnifying party may
otherwise have to any indemnified party, including under this Agreement.
The Company and each Holder of Transfer Restricted Securities agree that
it would not be just and equitable if contribution pursuant to this Section
6(d) were determined by pro rata allocation (even if the Holders were treated
as one entity for such purpose) or by any other method of allocation which
does not take account of the equitable considerations referred to in the
immediately preceding paragraph. The amount paid or payable by an
indemnified party as a result of the Losses referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations
set forth above, any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 6, none of
the Holders (and their related Indemnified Holders) shall be required to
contribute, in the aggregate, any amount in excess of the amount by which the
total proceeds received by such Holder with respect to the Notes exceeds the
amount of any damages which such Holder has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Holders' obligations to contribute pursuant to this
Section 6(d) are several in proportion to the respective principal amount of
Notes held by each of the Holders hereunder and not joint.
-19-
<PAGE>
7. RULE 144A
The Company hereby agrees with each Holder, for so long as any Transfer
Restricted Securities remain outstanding, to make available to any Holder or
beneficial owner of Transfer Restricted Securities in connection with any
sale thereof and any prospective purchase of such Transfer Restricted
Securities from such Holder or beneficial owner, any information required to
be supplied to a Holder by Rule 144A(d)(4) under the Securities Act in order
to permit offers and sales of such Transfer Restricted Securities pursuant to
Rule 144A.
8. MISCELLANEOUS
(a) REMEDIES. Each party agrees that monetary damages would not be
adequate compensation for any loss incurred by reason of a breach by such
party of the provisions of this Agreement and hereby agrees to waive the
defense in any action for specific performance that a remedy at law would be
adequate.
(b) NO INCONSISTENT AGREEMENTS. The Company shall not, on or after the
date of this Agreement, enter into any agreement with respect to its
securities that is inconsistent with the rights granted to the Holders in
this Agreement or otherwise conflicts with the provisions hereof. The rights
granted to the Holders hereunder are not inconsistent with the rights granted
to the holders of the Company's securities under any agreement in effect on
the date hereof.
(c) AMENDMENTS AND WAIVERS. The provisions of this Agreement may not
be amended, modified or supplemented, and waivers or consents to or
departures from the provisions hereof may not be given, unless the Company
has obtained the written consent of Holders of (i) a majority of the
outstanding principal amount of Notes, (ii) a majority of outstanding
principal amount of New Notes and (iii) a majority of the outstanding
Conversion Shares.
(d) NOTICES. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, first-class
mail (registered or certified, return-receipt requested), or courier
guaranteeing overnight delivery;
-20-
<PAGE>
(i) if to a Holder, at the address set forth on the records of the
Registrar under the Indenture, with a copy to the Registrar under the
Indenture; and
(ii) if to the Company, to RAC Financial Group, Inc., 1250 West
Mockingbird Lane, Dallas, Texas, 75247.
All such notices and communications shall be deemed to have been duly given
when delivered.
Copies of all such notices, demands or other communications shall be
concurrently delivered by the Person giving the same to the Trustee at the
address specified in the Indenture.
(e) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit
of and be binding upon the successors and assigns of each of the parties,
including without limitation and without the need for an express assignment,
subsequent Holders of Transfer Restricted Securities; PROVIDED that this
Agreement shall not inure to the benefit of or be binding upon a successor or
assign of a Holder unless and to the extent such successor or assign acquired
Transfer Restricted Securities from such Holder.
(f) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
(g) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
(i) SEVERABILITY. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability
of any such provision in every other respect and the remaining provisions
contained herein shall not be affected or impaired thereby.
-21-
<PAGE>
(j) ENTIRE AGREEMENT. This Agreement, together with the other
Transaction Agreements (as defined in the Purchase Agreement), is intended by
the parties as a final expression of their agreement and intended to be a
complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein. There are
no restrictions, promises, warranties or undertakings, other than those set
forth or referred to herein with respect to the registration rights granted
by the Company with respect to the Transfer Restricted Securities. This
Agreement supersedes all prior agreements and understandings between the
parties with respect to such subject matter.
-22-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
RAC FINANCIAL GROUP, INC.
By:_______________________
Name:
Title:
BEAR, STEARNS & CO. INC.
By:_______________________
Name:
Title:
On behalf of itself and the other
Purchasers named herein.
-23-
<PAGE>
EXHIBIT 4.4
DEFINITIVE NOTE
No. A-1 $150,000.00
CUSIP 749-207-AC0
RAC FINANCIAL GROUP, INC.
7.25% Convertible Subordinated Notes Due 2003
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN
DEFINITIVE FORM, THIS DEFINITIVE NOTE MAY NOT BE TRANSFERRED EXCEPT AS A
WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE
OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY
OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A
NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS CERTIFICATE IS
PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY, A NEW YORK CORPORATION (THE "DEPOSITARY" or "DTC"), TO THE
ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT,
AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR
SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND
ANY PAYMENT IS MADE TO CEDE & CO. OR SUCH OTHER ENTITY AS IS REQUESTED
BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER
USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL
INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.
THE NOTE EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE U.S.
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES
OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET
FORTH IN THE FOLLOWING SENTENCE. BY ACQUISITION HEREOF, THE HOLDER (1)
REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED
IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL
"ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A) (1), (2), (3) OR (7)
UNDER THE SECURITIES ACT) ("INSTITUTIONAL ACCREDITED INVESTOR") OR (C)
IT IS NOT A U.S. PERSON AND IS ACQUIRING THE NOTE EVIDENCED HEREBY IN AN
OFFSHORE TRANSACTION; (2) AGREES THAT IT WILL NOT PRIOR TO THE DATE THAT
IS THREE YEARS AFTER THE LATER OF THE ORIGINAL ISSUANCE OF THE NOTE
EVIDENCED HEREBY AND THE LAST DATE ON WHICH RAC FINANCIAL GROUP, INC.
(THE "COMPANY") OR ANY "AFFILIATE" (AS DEFINED IN RULE 144 UNDER THE
SECURITIES ACT) OF THE COMPANY WAS THE OWNER OF THE NOTE (THE
<PAGE>
"RESTRICTION TERMINATION DATE") RESELL OR OTHERWISE TRANSFER THE NOTE
EVIDENCED HEREBY OR THE COMMON STOCK ISSUABLE UPON CONVERSION OF SUCH
NOTE EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) TO A
QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE
SECURITIES ACT, (C) TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR
TO SUCH TRANSFER, FURNISHES TO BANK ONE, COLUMBUS, N.A., AS TRUSTEE, A
SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING
TO THE RESTRICTIONS ON TRANSFER OF THE NOTE EVIDENCED HEREBY (THE FORM
OF WHICH LETTER CAN BE OBTAINED FROM SUCH TRUSTEE), (D) OUTSIDE THE
UNITED STATES IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E)
PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER
THE SECURITIES ACT (IF AVAILABLE) OR (F) PURSUANT TO A REGISTRATION
STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT;
AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THE NOTE
EVIDENCED HEREBY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF
THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THE NOTE EVIDENCED
HEREBY BEFORE THE RESTRICTION TERMINATION DATE, THE HOLDER MUST CHECK
THE APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF RELATING TO THE
MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO BANK ONE,
COLUMBUS, N.A, AS TRUSTEE. IF THE PROPOSED TRANSFER IS PURSUANT TO
CLAUSE (C), (D) OR (E) ABOVE, THE HOLDER MUST, PRIOR TO SUCH TRANSFER,
FURNISH TO BANK ONE, COLUMBUS, N.A., AS TRUSTEE, SUCH CERTIFICATIONS,
LEGAL OPINIONS OR OTHER INFORMATION AS THE COMPANY MAY REASONABLY
REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT. THIS LEGEND WILL BE REMOVED UPON
THE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE
TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN
TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
RAC FINANCIAL GROUP, INC., a corporation duly organized and validly
existing under the laws of the State of Nevada (the "Company"), which term
includes any Successor Company under the Indenture referred to on the reverse
hereof, for value received hereby promises to pay to Cede & Co., or
registered assigns, the principal sum of One Hundred Fifty Thousand Dollars
on August 15, 2003, at the office or agency of the Company maintained for
that purpose in the Borough of Manhattan, The City of New York, or, at the
option of the holder of this Note, at the Corporate Trust Office of the
Trustee, in such coin or currency of the United States of America as at the
time of payment shall be legal tender
-2-
<PAGE>
for the payment of public and private debts, and to pay interest,
semi-annually on February 15 and August 15 of each year, commencing February
15, 1997, on said principal sum at said office or agency, in like coin or
currency, at the rate per annum specified in the title of this Note, from the
February 15 or August 15, as the case may be, next preceding the date of this
Note to which interest has been paid or duly provided for, unless the date
hereof is a date to which interest has been paid or duly provided for, in
which case from the date of this Note, or unless no interest has been paid or
duly provided for on the Notes, in which case from August 20, 1996, until
payment of said principal sum has been made or duly provided for; provided
that if the Company shall default in the payment of interest due on such
February 15 or August 15, then this Note shall bear interest from the next
preceding February 15 or August 15 to which interest has been paid or duly
provided for or, if no interest has been paid or duly provided for on such
Note, from August 20, 1996. The interest so payable on any February 15 or
August 15 will be paid to the person in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on the record date,
which shall be the February 1 or August 1 (whether or not a Business Day)
next preceding such February 15 or August 15, respectively; provided that any
such interest not punctually paid or duly provided for shall be payable as
provided in the Indenture. Interest shall be paid by check mailed to the
registered holder at the registered address of such person unless other
arrangements are made in accordance with the provisions of the Indenture.
Reference is made to the further provisions of this Note set forth
on the reverse hereof, including, without limitation, provisions giving the
holder of this Note the right to convert this Note into Common Stock of the
Company on the terms and subject to the limitations referred to on the
reverse hereof and as more fully specified in the Indenture. Such further
provisions shall for all purposes have the same effect as though fully set
forth at this place.
This Note shall be deemed to be a contract made under the laws of
the State of New York, and for all purposes shall be construed in accordance
with and governed by the laws of said State, without regard to conflicts of
laws principles thereof.
This Note shall not be valid or become obligatory for any purpose
until the certificate of authentication hereon shall have been manually
signed by the Trustee, or a duly authorized authenticating agent under the
Indenture.
-3-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be duly
executed under its corporate seal.
RAC FINANCIAL GROUP, INC.
By:_____________________________________
Name:
Title:
Attest:
______________________________________
Secretary
CERTIFICATE OF AUTHENTICATION
Dated:
This is one of the Notes described in the within-named indenture.
BANK ONE, COLUMBUS, N.A., as Trustee
By:_____________________________________
Authorized Signatory
-4-
<PAGE>
RAC FINANCIAL GROUP, INC.
7.25% Convertible Subordinated Notes Due 2003
This Note is one of a duly authorized issue of Notes of the
Company, designated as its 7.25% Convertible Subordinated Notes Due 2003
(herein called the "Notes"), limited to the aggregate principal amount of
$115,000,000 all issued or to be issued under and pursuant to an Indenture
dated as of August 20, 1996 (the "Indenture"), between the Company and Bank
One, Columbus, N.A., as trustee (the "Trustee"), to which Indenture and all
indentures supplemental thereto reference is hereby made for a complete
description of the rights, limitations of rights, obligations, duties and
immunities thereunder of the Trustee, the Company and the holders of the
Notes. Each Note is subject to, and qualified by, all such terms as set
forth in the Indenture certain of which are summarized hereon and each holder
of a Note is referred to the corresponding provisions of the Indenture for a
complete statement of such terms. To the extent that there is any
inconsistency between the summary provisions set forth in the Notes and the
Indenture, the provisions of the Indenture shall govern. Capitalized terms
used but not defined in this Note shall have the meanings ascribed to them in
the Indenture.
In case an Event of Default, as defined in the Indenture, shall
have occurred and be continuing, the principal of, premium, if any, and
accrued interest on all Notes may be declared, and upon said declaration
shall become, due and payable, in the manner, with the effect and subject to
the conditions provided in the Indenture.
The payment of principal of, premium, if any, and interest on the
Notes will, to the extent set forth in the Indenture, be subordinated in
right of payment to the prior payment in full of all Senior Indebtedness (as
defined in the Indenture). Upon any distribution to creditors of the Company
in a liquidation or dissolution of the Company or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding related to the
Company or its property, in an assignment for the benefit of creditors or any
marshalling of the Company's assets and liabilities, the holders of all
Senior Indebtedness will first be entitled to receive payments in full of all
amounts due or to become due thereon before the holders of the Notes will be
entitled to receive any payment in respect of the principal of, premium, if
any, or interest on the Notes (except that holders of Notes may receive
securities that are subordinated at least to the same extent as the Notes to
Senior Indebtedness and any securities issued in exchange for Senior
Indebtedness).
-5-
<PAGE>
The Company also may not make any payment upon or in respect of the
Notes (except in such subordinated securities) if (a) a default in the
payment of the principal of, premium, if any, or interest on Senior
Indebtedness occurs and is continuing beyond any applicable period of grace
or (b) any other default occurs and is continuing with respect to Senior
Indebtedness that permits holders of the Senior Indebtedness as to which such
default relates to accelerate its maturity and the Trustee receives a notice
of such default (a "Payment Blockage Notice") from the representative or
representatives of holders of at least a majority in principal amount of
Senior Indebtedness then outstanding. Payments on the Notes may and shall be
resumed (i) in the case of a payment default, upon the date on which such
default is cured or waived, or (ii) in the case of a non-payment default, 179
days after the date on which the applicable Payment Blockage Notice is
received, unless the maturity of any Senior Indebtedness has been
accelerated. No new period of payment blockage may be commenced within 360
days after the receipt by the Trustee of any prior Payment Blockage Notice.
No nonpayment default that existed or was continuing on the date of delivery
of any Payment Blockage Notice to the Trustee shall be, or be made, the basis
for a subsequent Payment Blockage Notice unless such default shall have been
cured or waived for a period of not less than 180 days.
In the event that the Trustee (or paying agent if other than the
Trustee) or any holder of the Notes receives any payment of principal or
interest with respect to the Notes at a time when such payment is prohibited
under the Indenture, such payment shall be held in trust for the benefit of,
and shall be paid over and delivered to, the holders of Senior Indebtedness
or their representative as their respective interests may appear. After all
Senior Indebtedness is paid in full and until the Notes are paid in full, the
holders of the Notes shall be subrogated (equally and ratably with all other
Indebtedness pari passu with the Notes) to the rights of holders of Senior
Indebtedness to receive distributions applicable to Senior Indebtedness to
the extent that distributions otherwise payable to the holders of the Notes
have been applied to the payment of Senior Indebtedness.
The Indenture contains provisions permitting the Company and the
Trustee, with the consent of the holders of not less than a majority in
aggregate principal amount of the Notes at the time outstanding, evidenced as
in the Indenture provided, to execute supplemental indentures adding any
provisions to or changing in any manner or eliminating any of the provisions
of the Indenture or of any supplemental indenture or modifying in any manner
the rights of the holders of the Notes; provided that no such supplemental
indenture shall (i) extend the fixed maturity of any Note, or reduce the rate
or extend the time of payment of interest thereon,
-6-
<PAGE>
or reduce the principal amount thereof or premium, if any, thereon, or reduce
any amount payable on redemption thereof, alter the obligation of the Company
to redeem the Notes at the option of the holders upon the occurrence of a
Change of Control or impair or affect the right of any Noteholder to
institute suit for the payment thereof, or make the principal thereof or
interest or premium, if any, thereon payable in any coin or currency other
than that provided in the Notes, modify the subordination provisions in a
manner adverse to the holders of the Notes, or impair the right to convert
the Notes into Common Stock subject to the terms set forth in the Indenture
without the consent of the holder of each Note so affected or (ii) reduce the
aforesaid percentage of Notes, the holders of which are required to consent
to any such supplemental indenture, without the consent of the holders of all
Notes then outstanding. It is also provided in the Indenture that, prior to
any declaration accelerating the maturity of the Notes, the holders of a
majority in aggregate principal amount of the Notes at the time outstanding
may on behalf of the holders of all of the Notes waive any past default or
Event of Default under the Indenture and its consequences except a default in
the payment of interest or any premium on or the principal of any of the
Notes, a failure by the Company to convert any Notes into Common Stock of the
Company or a default in respect of a covenant or provision of the Indenture
that under Article X thereof cannot be modified or amended without the
consent of the holders of all Notes then outstanding. Any such consent or
waiver by the holder of this Note (unless revoked as provided in the
Indenture) shall be conclusive and binding upon such holder and upon all
future holders and owners of this Note and any Notes that may be issued in
exchange or substitution hereof, irrespective of whether or not any notation
thereof is made upon this Note or such other Notes.
No reference herein to the Indenture and no provision of this Note
or of the Indenture shall alter or impair the obligation of the Company,
which is absolute and unconditional, to pay the principal of and any premium
and interest on this Note at the place, at the respective times, at the rate
and in the coin or currency herein prescribed.
Interest on the Notes shall be computed on the basis of a 360-day
year composed of twelve 30-day months.
The Notes are issuable in registered form without coupons in
denominations of $1,000 principal amount and integral multiples thereof. At
the office or agency of the Company referred to on the face hereof, and in
the manner and subject to the limitations provided in the Indenture, without
payment of any service charge but with payment of a sum sufficient to cover
any tax or other governmental charge that may be imposed in connection with
any
-7-
<PAGE>
registration or exchange of Notes, Notes may be exchanged for a like
aggregate principal amount of Notes of other authorized denominations.
The Notes are not redeemable at the option of the Company prior to
August 17, 1999. At any time on or after that date, the Notes may be
redeemed at the Company's option, upon notice as set forth in the Indenture,
in whole at any time or in part from time to time, at the optional redemption
prices set forth below, together with accrued interest to the date fixed for
redemption.
If redeemed during the period beginning:
DATE PERCENTAGE
---- ----------
August 17, 1999 103.63%
August 15, 2000 102.42%
August 15, 2001 101.21%
and 100% after August 14, 2002; provided that if the date fixed for
redemption is a date on or after the record date and on or before the next
following interest payment date, then the interest payable on such date shall
be paid to the holder of record on the next preceding February 15 or August
15, respectively.
If a Change of Control (as defined in the Indenture) shall occur at
any time, then each holder of Notes shall have the right to require that the
Company purchase such holder's Notes in whole or in part in integral
multiples of $1,000, at a purchase price in cash in an amount equal to 101%
of the principal amount of such Notes, plus accrued and unpaid interest, if
any, to the repurchase date pursuant to an offer to be made by the Company
and in accordance with the procedures set forth in the Indenture.
Subject to the provisions of the Indenture, the holder hereof has
the right, at its option, at any time after 60 days following the latest date
of original issuance of the Notes and prior to the close of business on
August 15, 2003, or, as to all or any portion hereof called for redemption,
prior to the close of business on the Trading Day next preceding the date
fixed for redemption (unless the Company shall default in payment due upon
redemption thereof), to convert the principal hereof or any portion of such
principal that is $1,000 or an integral multiple thereof, into that number of
fully paid and non-assessable shares of Company's Common Stock, as said
shares shall be constituted at the date of conversion, obtained by dividing
the principal amount of this Note or portion thereof to be converted by the
conversion price of $32.60 or such conversion price as adjusted from time to
time as provided in the Indenture, upon surrender of this Note,
-8-
<PAGE>
together with a conversion notice as provided in the Indenture, to the
Company at the office or agency of the Company maintained for that purpose in
the Borough of Manhattan, The City of New York, or at the option of such
holder, the Corporate Trust Office of the Trustee, and, unless the shares
issuable on conversion are to be issued in the same name as this Note, duly
endorsed by, or accompanied by instruments of transfer in form satisfactory
to the Company duly executed by, the holder or by his duly authorized
attorney. No adjustment in respect of interest or dividends will be made
upon any conversion; provided that if this Note shall be surrendered for
conversion during the period from the close of business on any record date
for the payment of interest through the opening of business on the next
succeeding interest payment date, this Note (unless it or the portion being
converted shall have been called for redemption) must be accompanied by an
amount, in funds acceptable to the Company, equal to the interest payable on
such interest payment date on the principal amount being converted. The
interest payment with respect to a Note called for redemption on a date
during the period from the close of business on or after any record date to
the opening of business on the business day following the corresponding
payment date will be payable on the corresponding interest payment date to
the registered Holder at the close of business on that record date
(notwithstanding the conversion of such Note before the corresponding
interest payment date) and a Holder who elects to convert need not include
funds equal to the interest paid. No fractional shares will be issued upon
any conversion, but an adjustment in cash will be made, as provided in the
Indenture, in respect of any fraction of a share that would otherwise be
issuable upon the surrender of any Note or Notes for conversion.
Upon due presentment for registration of transfer of this Note at
the office or agency of the Company in the Borough of Manhattan, The City of
New York, or at the option of the holder of this Note, at the Corporate Trust
Office of the Trustee, a new Note or Notes of authorized denominations for an
equal aggregate principal amount will be issued to the transferee in exchange
thereof, subject to the conditions and limitations provided in the Indenture,
without charge except for any tax or other governmental charge imposed in
connection therewith.
The Company, the Trustee, any authenticating agent, any paying
agent, any conversion agent and any Note registrar may deem and treat the
registered holder hereof as the absolute owner of this Note (whether or not
this Note shall be overdue and notwithstanding any notation of ownership or
other writing hereon made by anyone other than the Company or any Note
registrar), for the purpose of receiving payment hereof, or on account
hereof, for the conversion hereof and for all other purposes, and neither the
-9-
<PAGE>
Company nor the Trustee nor any other authenticating agent nor any paying
agent nor any other conversion agent nor any Note registrar shall be affected
by any notice to the contrary. All payments made to or upon the order of
such registered holder shall, to the extent of the sum or sums paid, satisfy
and discharge liability for monies payable on this Note.
No recourse for the payment of the principal of or any premium or
interest on this Note, or for any claim based hereon or otherwise in respect
hereof, and no recourse under or upon any obligation, covenant or agreement
of the Company in the Indenture or any indenture supplemental thereto or in
any Note, or because of the creation of any indebtedness represented thereby,
shall be had against any incorporator, stockholder, officer or director, as
such, past, present or future, of the Company or of any Successor Company,
either directly or through the Company or any Successor Company, whether by
virtue of any constitution, statute or rule of law or by the enforcement of
any assessment or penalty or otherwise, all such liability being, by the
acceptance hereof and as part of the consideration for the issue hereof,
expressly waived and released.
-10-
<PAGE>
ABBREVIATIONS
The following abbreviations, when used in the inscription of the
face of this Note, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -
TEN ENT - as tenants by the ___________________ Custodian
entireties (Cust)
JT TEN - as joint tenants with ___________________ under
right of survivorship (Minor)
and not as tenants in
common
Uniform Gifts to
Minors Act______________________________
(State)
Additional abbreviations may also be used
though not in the above list.
-11-
<PAGE>
CONVERSION NOTICE
To: RAC Financial Group, Inc.
The undersigned registered owner of this Note hereby irrevocably
exercises the option to convert this Note, or the portion hereof (which is
$1,000 principal amount or an integral multiple thereof) below designated,
into shares of Common Stock, par value $.01 per share, of the Company in
accordance with the terms of the Indenture referred to in this Note, and
directs that the shares issuable and deliverable upon such conversion,
together with any check in payment for fractional shares and any Notes
representing any unconverted principal amount hereof, be issued and delivered
to the registered holder hereof unless a different name has been indicated
below. If shares or any portion of this Note not converted are to be issued
in the name of a person other than the undersigned, the undersigned will
check the appropriate box below and pay all transfer taxes payable with
respect thereto. Any amount required to be paid to the undersigned on
account of interest accompanies this Note.
Dated:________________________________
________________________________________
________________________________________
Signature(s)
Signature(s) must be guaranteed by an
eligible Guarantor Institution
(banks, stock brokers, savings and
loan associations and credit unions)
with membership in an approved
signature guarantee medallion program
pursuant to Securities and Exchange
Commission Rule 17Ad-15 if shares of
Common Stock are to be issued, or
Notes to be delivered, other than to
and in the name of the registered
holder.
______________________________________
Signature Guarantee
-12-
<PAGE>
Fill in for registration of shares if
to be issued, and Notes if to be
delivered, other than to and in the
name of the registered holder:
______________________________________
(Name)
______________________________________
(Street Address)
______________________________________
(City, State and Zip Code)
Please print name and address
Principal amount to be converted (if
less than all) $________________________
________________________________________
Social Security or other Taxpayer
Identification Number
-13-
<PAGE>
FORM OF OPTION TO ELECT REPAYMENT
UPON A CHANGE OF CONTROL
To: RAC Financial Group, Inc.
The undersigned registered owner of this Note hereby irrevocably
acknowledges receipt of a notice from RAC Financial Group, Inc. (the
"Company") as to the occurrence of a Change of Control with respect to the
Company and requests and instructs the Company to repay the entire principal
amount of this Note, or the portion thereof (which is $1,000 principal amount
or an integral multiple thereof) below designated, in accordance with the
terms of the Indenture referred to in this Note, together with accrued
interest to such date, to the registered holder hereof.
Dated:________________________________
________________________________________
________________________________________
Signature(s)
________________________________________
Social Security or Other Taxpayer
Identification Number
Principal amount to be repaid (if
less than all): $______________________
-14-
<PAGE>
ASSIGNMENT
For value received _____________________________ hereby sell(s),
assign(s) and transfer(s) unto _________________________ (Please insert
social security or other identifying number of assignee) the within Note, and
hereby irrevocably constitutes and appoints ________________________________
attorney to transfer the said Note on the books of the Company, with full
power of substitution in the premises.
In connection with any transfer of the within Note (or any issuance
of shares of Common Stock upon conversion of the within Note) occurring prior
to the third anniversary of the date of original issuance of such Note, the
undersigned confirms that such Note (or shares of Common Stock, as the case
may be) are being transferred:
/ / To RAC Financial Group, Inc. or a subsidiary thereof; or
/ / Pursuant to and in compliance with Rule 144A under the Securities Act of
1933, as amended; or
/ / To an Institutional Accredited Investor pursuant to and in compliance with
the Securities Act of 1933, as amended; or
/ / Pursuant to and in compliance with Regulation S under the Securities Act of
1933, as amended; or
/ / Pursuant to and in compliance with Rule 144 under the Securities Act of
1933, as amended.
Unless one of the boxes above is checked, the Trustee will refuse
to register any of the within Notes (or such shares of Common Stock, as the
case may be) in the name of any person other than the registered holder
thereof (or hereof); provided, however, that the Trustee may, in its sole
discretion, register the transfer of such Notes (or such shares of Common
Stock, as the case may be) if it has received such certifications, legal
opinions and/or other information as the Company has reasonably requested to
confirm that such transfer is being made pursuant to an exemption from, or in
a transaction not subject to, the registration requirements of the Securities
Act of 1933, as amended.
In addition, if the transferee is an institutional accredited
investor or a purchaser who is not a U.S. person, the holder must furnish to
the Trustee (i) in the case of an institutional accredited investor, a signed
letter containing certain representations and agreements relating to the
restrictions
-15-
<PAGE>
on transfer of the security evidenced hereby in substantially the form of
Exhibit D to the Indenture and (ii) such other certifications, legal opinions
or other information as it may reasonably require to confirm that such
transfer is being made pursuant to an exemption from, or in a transaction not
subject to, the registration requirements of the Securities Act of 1933, as
amended.
Dated:________________________________
______________________________________
______________________________________
Signature(s)
Signature(s) must be guaranteed by an
eligible Guarantor Institution
(banks, stock brokers, savings and
loan associations and credit unions)
with membership in an approved
signature guarantee medallion program
pursuant to Securities and Exchange
Commission Rule 17Ad-15.
______________________________________
Signature Guarantee
NOTICE: The signature on the conversion notice, the option to elect
payment upon a Change of Control or the assignment must correspond with
the name as written upon the face of the Note in every particular
without alteration or enlargement or any change whatever.
-16-
<PAGE>
EXHIBIT 4.5
RESTRICTED GLOBAL NOTE
No. B-1 $94,600,000.00
CUSIP 749-207-AB2
RAC FINANCIAL GROUP, INC.
7.25% Convertible Subordinated Notes Due 2003
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN
DEFINITIVE FORM, THIS RESTRICTED GLOBAL NOTE MAY NOT BE TRANSFERRED
EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY
A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE
DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR
DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS
CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (THE "DEPOSITARY" or
"DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE
NAME OF CEDE & CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR SUCH
OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC),
ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO
ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE &
CO., HAS AN INTEREST HEREIN.
THE NOTE EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE U.S.
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES
OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET
FORTH IN THE FOLLOWING SENTENCE. BY ACQUISITION HEREOF, THE HOLDER (1)
REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED
IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL
"ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7)
UNDER THE SECURITIES ACT) ("INSTITUTIONAL ACCREDITED INVESTOR") OR (C)
IT IS NOT A U.S. PERSON AND IS ACQUIRING THE NOTE EVIDENCED HEREBY IN AN
OFFSHORE TRANSACTION; (2) AGREES THAT IT WILL NOT PRIOR TO THE DATE THAT
IS THREE YEARS AFTER THE LATER OF THE ORIGINAL ISSUANCE OF THE NOTE
EVIDENCED HEREBY AND THE LAST DATE ON WHICH RAC FINANCIAL GROUP, INC.
(THE "COMPANY") OR ANY "AFFILIATE" (AS DEFINED IN RULE 144 UNDER THE
SECURITIES ACT) OF THE COMPANY WAS THE OWNER OF THE NOTE (THE
-1-
<PAGE>
"RESTRICTION TERMINATION DATE") RESELL OR OTHERWISE TRANSFER THE NOTE
EVIDENCED HEREBY OR THE COMMON STOCK ISSUABLE UPON CONVERSION OF SUCH
NOTE EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) TO A
QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE
SECURITIES ACT, (C) TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR
TO SUCH TRANSFER, FURNISHES TO BANK ONE, COLUMBUS, N.A., AS TRUSTEE, A
SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING
TO THE RESTRICTIONS ON TRANSFER OF THE NOTE EVIDENCED HEREBY (THE FORM
OF WHICH LETTER CAN BE OBTAINED FROM SUCH TRUSTEE), (D) OUTSIDE THE
UNITED STATES IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E)
PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER
THE SECURITIES ACT (IF AVAILABLE) OR (F) PURSUANT TO A REGISTRATION
STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT;
AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THE NOTE
EVIDENCED HEREBY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF
THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THE NOTE EVIDENCED
HEREBY BEFORE THE RESTRICTION TERMINATION DATE, THE HOLDER MUST CHECK
THE APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF RELATING TO THE
MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO BANK ONE,
COLUMBUS, N.A., AS TRUSTEE. IF THE PROPOSED TRANSFER IS PURSUANT TO
CLAUSE (C), (D) OR (E) ABOVE, THE HOLDER MUST, PRIOR TO SUCH TRANSFER,
FURNISH TO BANK ONE, COLUMBUS, N.A., AS TRUSTEE, SUCH CERTIFICATIONS,
LEGAL OPINIONS OR OTHER INFORMATION AS THE COMPANY MAY REASONABLY
REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT. THIS LEGEND WILL BE REMOVED UPON
THE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE
TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN
TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
RAC FINANCIAL GROUP, INC., a corporation duly organized and validly
existing under the laws of the State of Nevada (the "Company"), which term
includes any Successor Company under the Indenture referred to on the reverse
hereof, for value received hereby promises to pay to Cede & Co., or
registered assigns, the principal sum of Ninety Four Million Six Hundred
Thousand Dollars (subject to adjustment as set forth in the next paragraph
hereof) on August 15, 2003, at the office or agency of the Company maintained
for that purpose in the Borough of Manhattan, The City of New York, or, at
the option of the holder of this Restricted Global Note, at the Corporate
Trust Office of the Trustee, in such coin or currency of the United States of
America as at the time of
-2-
<PAGE>
payment shall be legal tender for the payment of public and private debts,
and to pay interest, semi-annually on February 15 and August 15 of each year,
commencing February 15, 1997, on said principal sum at said office or agency,
in like coin or currency, at the rate per annum specified in the title of
this Restricted Global Note, from the February 15 or August 15, as the case
may be, next preceding the date of this Restricted Global Note to which
interest has been paid or duly provided for, unless the date hereof is a date
to which interest has been paid or duly provided for, in which case from the
date of this Restricted Global Note, or unless no interest has been paid or
duly provided for on the Notes, in which case from August 20, 1996, until
payment of said principal sum has been made or duly provided for; provided
that if the Company shall default in the payment of interest due on such
February 15 or August 15, then this Restricted Global Note shall bear
interest from the next preceding February 15 or August 15, to which interest
has been paid or duly provided for or, if no interest has been paid or duly
provided for on such Note, from August 20, 1996. The interest so payable on
any February 15 or August 15 will be paid to the person in whose name this
Restricted Global Note (or one or more Predecessor Notes) is registered at
the close of business on the record date, which shall be the February 1 or
August 1 (whether or not a Business Day) next preceding such February 15 or
August 15, respectively; provided that any such interest not punctually paid
or duly provided for shall be payable as provided in the Indenture. Interest
shall be paid by check mailed to the registered holder at the registered
address of such person unless other arrangements are made in accordance with
the provisions of the Indenture.
The aggregate principal amount of this Restricted Global Note
represented hereby may from time to time be reduced or increased to reflect
exchanges of a part of this Restricted Global Note for interests in the
Regulation S Global Note or definitive Notes or exchanges of interests in the
Regulation S Global Note or definitive Notes for a part of this Restricted
Global Note or conversions or redemptions of a part of this Restricted Global
Note or cancellations of a part of this Restricted Global Note or transfers
of interests in the Regulation S Global Note or definitive Notes in return
for a part of this Restricted Global Note or transfers of a part of this
Restricted Global Note effected by delivery of interests in the Regulation S
Global Note or definitive Notes, in each case, and in any such case, by means
of notations on the Schedule of Exchanges, Conversions, Redemptions,
Cancellations and Transfers on the last page hereof. Notwithstanding any
provision of this Restricted Global Note to the contrary, (i) exchanges of a
part of this Restricted Global Note for interests in the Regulation S Global
Note or definitive Notes, (ii) exchanges of interests in the Regulation S
Global Note or
-3-
<PAGE>
definitive Notes for a part of this Restricted Global Note, (iii) conversions
or redemptions of a part of this Restricted Global Note, (iv) cancellations
of a part of this Restricted Global Note, (v) transfers of interests in the
Regulation S Global Note or definitive Notes in return for a part of this
Restricted Global Note and (vi) transfers of a part of this Restricted Global
Note effected by delivery of interests in the Regulation S Global Note or
definitive Notes may be effected without the surrendering of this Restricted
Global Note, provided that appropriate notations on the Schedule of
Exchanges, Conversions, Redemptions, Cancellations and Transfers are made by
the Trustee, or the Custodian at the direction of the Trustee, to reflect the
appropriate reduction or increase, as the case may be, in the aggregate
principal amount of this Restricted Global Note resulting therefrom or as a
consequence thereof.
Reference is made to the further provisions of this Restricted
Global Note set forth on the reverse hereof, including, without limitation,
provisions giving the holder of this Restricted Global Note the right to
convert this Restricted Global Note into Common Stock of the Company on the
terms and subject to the limitations referred to on the reverse hereof and as
more fully specified in the Indenture. Such further provisions shall for all
purposes have the same effect as though fully set forth at this place.
This Restricted Global Note shall be deemed to be a contract made
under the laws of the State of New York, and for all purposes shall be
construed in accordance with and governed by the laws of said State, without
regard to conflicts of laws principles thereof.
This Restricted Global Note shall not be valid or become obligatory
for any purpose until the certificate of authentication hereon shall have
been manually signed by the Trustee or a duly authorized authenticating agent
under the Indenture.
-4-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Restricted Global
Note to be duly executed under its corporate seal.
RAC FINANCIAL GROUP, INC.
By: ____________________________________
Name:
Title:
Attest:
______________________________________
Secretary
CERTIFICATE OF AUTHENTICATION
Dated:
This is one of the Notes described in the within-named indenture.
BANK ONE, COLUMBUS, N.A., as Trustee
By: ____________________________________
Authorized Signatory
-5-
<PAGE>
RAC FINANCIAL GROUP, INC.
7.25% Convertible Subordinated Notes Due 2003
This Restricted Global Note is one of a duly authorized issue of
Notes of the Company, designated as its 7.25% Convertible Subordinated Notes
Due 2003 (herein called the "Notes"), limited to the aggregate principal
amount of $115,000,000 all issued or to be issued under and pursuant to an
Indenture dated as of August 20, 1996 (the "Indenture"), between the Company
and Bank One, Columbus, N.A., as trustee (the "Trustee"), to which Indenture
and all indentures supplemental thereto reference is hereby made for a
complete description of the rights, limitations of rights, obligations,
duties and immunities thereunder of the Trustee, the Company and the holders
of the Notes. Each Note is subject to, and qualified by, all such terms as
set forth in the Indenture certain of which are summarized hereon and each
holder of a Note is referred to the corresponding provisions of the Indenture
for a complete statement of such terms. To the extent that there is any
inconsistency between the summary provisions set forth in the Notes and the
Indenture, the provisions of the Indenture shall govern. Capitalized terms
used but not defined in this Note shall have the meanings ascribed to them in
the Indenture.
In case an Event of Default, as defined in the Indenture, shall
have occurred and be continuing, the principal of, premium, if any, and
accrued interest on all Notes may be declared, and upon said declaration
shall become, due and payable, in the manner, with the effect and subject to
the conditions provided in the Indenture.
The payment of principal of, premium, if any, and interest on the
Notes will, to the extent set forth in the Indenture, be subordinated in
right of payment to the prior payment in full of all Senior Indebtedness (as
defined in the Indenture). Upon any distribution to creditors of the Company
in a liquidation or dissolution of the Company or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding related to the
Company or its property, in an assignment for the benefit of creditors or any
marshalling of the Company's assets and liabilities, the holders of all
Senior Indebtedness will first be entitled to receive payments in full of all
amounts due or to become due thereon before the holders of the Notes will be
entitled to receive any payment in respect of the principal of, premium, if
any, or interest on the Notes (except that holders of Notes may receive
securities that are subordinated at least to the same extent as the Notes to
Senior Indebtedness and any securities issued in exchange for Senior
Indebtedness).
-6-
<PAGE>
The Company also may not make any payment upon or in respect of the
Notes (except in such subordinated securities) if (a) a default in the
payment of the principal of, premium, if any, or interest on Senior
Indebtedness occurs and is continuing beyond any applicable period of grace
or (b) any other default occurs and is continuing with respect to Senior
Indebtedness that permits holders of the Senior Indebtedness as to which such
default relates to accelerate its maturity and the Trustee receives a notice
of such default (a "Payment Blockage Notice") from the representative or
representatives of holders of at least a majority in principal amount of
Senior Indebtedness then outstanding. Payments on the Notes may and shall be
resumed (i) in the case of a payment default, upon the date on which such
default is cured or waived, or (ii) in the case of a non-payment default, 179
days after the date on which the applicable Payment Blockage Notice is
received, unless the maturity of any Senior Indebtedness has been
accelerated. No new period of payment blockage may be commenced within 360
days after the receipt by the Trustee of any prior Payment Blockage Notice.
No nonpayment default that existed or was continuing on the date of delivery
of any Payment Blockage Notice to the Trustee shall be, or be made, the basis
for a subsequent Payment Blockage Notice unless such default shall have been
cured or waived for a period of not less than 180 days.
In the event that the Trustee (or paying agent if other than the
Trustee) or any holder of the Notes receives any payment of principal or
interest with respect to the Notes at a time when such payment is prohibited
under the Indenture, such payment shall be held in trust for the benefit of,
and shall be paid over and delivered to, the holders of Senior Indebtedness
or their representative as their respective interests may appear. After all
Senior Indebtedness is paid in full and until the Notes are paid in full, the
holders of the Notes shall be subrogated (equally and ratably with all other
Indebtedness pari passu with the Notes) to the rights of holders of Senior
Indebtedness to receive distributions applicable to Senior Indebtedness to
the extent that distributions otherwise payable to the holders of the Notes
have been applied to the payment of Senior Indebtedness.
The Indenture contains provisions permitting the Company and the
Trustee, with the consent of the holders of not less than a majority in
aggregate principal amount of the Notes at the time outstanding, evidenced as
in the Indenture provided, to execute supplemental indentures adding any
provisions to or changing in any manner or eliminating any of the provisions
of the Indenture or of any supplemental indenture or modifying in any manner
the rights of the holders of the Notes; provided that no such supplemental
indenture shall (i) extend the fixed maturity of any Note, or reduce the rate
or extend the time of payment of interest thereon,
-7-
<PAGE>
or reduce the principal amount thereof or premium, if any, thereon, or reduce
any amount payable on redemption thereof, alter the obligation of the Company
to redeem the Notes at the option of the holders upon the occurrence of a
Change of Control or impair or affect the right of any Noteholder to
institute suit for the payment thereof, or make the principal thereof or
interest or premium, if any, thereon payable in any coin or currency other
than that provided in the Notes, modify the subordination provisions in a
manner adverse to the holders of the Notes, or impair the right to convert
the Notes into Common Stock subject to the terms set forth in the Indenture
without the consent of the holder of each Note so affected or (ii) reduce the
aforesaid percentage of Notes, the holders of which are required to consent
to any such supplemental indenture, without the consent of the holders of all
Notes then outstanding. It is also provided in the Indenture that, prior to
any declaration accelerating the maturity of the Notes, the holders of a
majority in aggregate principal amount of the Notes at the time outstanding
may on behalf of the holders of all of the Notes waive any past default or
Event of Default under the Indenture and its consequences except a default in
the payment of interest or any premium on or the principal of any of the
Notes, a failure by the Company to convert any Notes into Common Stock of the
Company or a default in respect of a covenant or provision of the Indenture
that under Article X thereof cannot be modified or amended without the
consent of the holders of all Notes then outstanding. Any such consent or
waiver by the holder of this Restricted Global Note (unless revoked as
provided in the Indenture) shall be conclusive and binding upon such holder
and upon all future holders and owners of this Restricted Global Note and any
Notes that may be issued in exchange or substitution hereof, irrespective of
whether or not any notation thereof is made upon this Restricted Global Note
or such other Notes.
No reference herein to the Indenture and no provision of this
Restricted Global Note or of the Indenture shall alter or impair the
obligation of the Company, which is absolute and unconditional, to pay the
principal of and any premium and interest on this Restricted Global Note at
the place, at the respective times, at the rate and in the coin or currency
herein prescribed.
Interest on the Notes shall be computed on the basis of a 360-day
year composed of twelve 30-day months.
The Notes are issuable in registered form without coupons in
denominations of $1,000 principal amount and integral multiples thereof. At
the office or agency of the Company referred to on the face hereof, and in
the manner and subject to the limitations provided in the Indenture, without
payment of any service charge but with payment of a sum sufficient to cover
any tax or other
-8-
<PAGE>
governmental charge that may be imposed in connection with any registration
or exchange of Notes, Notes may be exchanged for a like aggregate principal
amount of Notes of other authorized denominations.
The Notes are not redeemable at the option of the Company prior to
August 17, 1999. At any time on or after that date, the Notes may be
redeemed at the Company's option, upon notice as set forth in the Indenture,
in whole at any time or in part from time to time, at the optional redemption
prices set forth below together with accrued interest to the date fixed for
redemption.
If redeemed during the period beginning:
DATE PERCENTAGE
---- ----------
August 17, 1999 103.63%
August 15, 2000 102.42%
August 15, 2001 101.21%
and 100% after August 14, 2002; provided that if the date fixed for
redemption is on a date or after the record date and on or before the next
following interest payment date, then the interest payable on such date shall
be paid to the holder of record on the next preceding February 1 or August 1,
respectively.
If a Change of Control (as defined in the Indenture) shall occur at
any time, then each holder of Notes shall have the right to require that the
Company purchase such holder's Notes in whole or in part in integral
multiples of $1,000, at a purchase price in cash in an amount equal to 101%
of the principal amount of such Notes, plus accrued and unpaid interest, if
any, to the repurchase date pursuant to an offer to be made by the Company
and in accordance with the procedures set forth in the Indenture.
Subject to the provisions of the Indenture, the holder hereof has
the right, at its option, at any time after 60 days following the latest date
of original issuance of the Notes and prior to the close of business on
August 15, 2003, or, as to all or any portion hereof called for redemption,
prior to the close of business on the date fixed for redemption (unless the
Company shall default in payment due upon redemption thereof), to convert the
principal hereof or any portion of such principal that is $1,000 or an
integral multiple thereof, into that number of fully paid and non-assessable
shares of Company's Common Stock, as said shares shall be constituted at the
date of conversion, obtained by dividing the principal amount of this
Restricted Global Note or portion thereof to be converted by the conversion
price of $32.60 or such conversion price as adjusted from time to time as
provided
-9-
<PAGE>
in the Indenture, upon surrender of this Restricted Global Note, together
with a conversion notice as provided in the Indenture, to the Company at the
office or agency of the Company maintained for that purpose in the Borough of
Manhattan, The City of New York, or at the option of such holder, the
Corporate Trust Office of the Trustee, and, unless the shares issuable on
conversion are to be issued in the same name as this Restricted Global Note,
duly endorsed by, or accompanied by instruments of transfer in form
satisfactory to the Company duly executed by, the holder or by his duly
authorized attorney. No adjustment in respect of interest or dividends will
be made upon any conversion; provided that if this Restricted Global Note
shall be surrendered for conversion during the period from the close of
business on any record date for the payment of interest and through the
opening of business on the next succeeding interest payment date, this
Restricted Global Note (unless it or the portion being converted shall have
been called for redemption) must be accompanied by an amount, in funds
acceptable to the Company, equal to the interest payable on such interest
payment date on the principal amount being converted. The interest payment
with respect to a Note called for redemption on a date during the period from
the close of business on or after any record date to the opening of business
on the business day following the corresponding payment date will be payable
on the corresponding interest payment date to the registered Holder at the
close of business on that record date (notwithstanding the conversion of such
Note before the corresponding interest payment date) and a Holder who elects
to convert need not include funds equal to the interest paid. No fractional
shares will be issued upon any conversion, but an adjustment in cash will be
made, as provided in the Indenture, in respect of any fraction of a share
that would otherwise be issuable upon the surrender of any Note or Notes for
conversion.
Upon due presentment for registration of transfer of this
Restricted Global Note at the office or agency of the Company in the Borough
of Manhattan, The City of New York, or at the option of the holder of this
Restricted Global Note, at the Corporate Trust Office of the Trustee, a new
Note or Notes of authorized denominations for an equal aggregate principal
amount will be issued to the transferee in exchange thereof, subject to the
conditions and limitations provided in the Indenture, without charge except
for any tax or other governmental charge imposed in connection therewith.
The Company, the Trustee, any authenticating agent, any paying
agent, any conversion agent and any Note registrar may deem and treat the
registered holder hereof as the absolute owner of this Restricted Global Note
(whether or not this Restricted Global Note shall be overdue and
notwithstanding any notation of ownership
-10-
<PAGE>
or other writing hereon made by anyone other than the Company or any Note
registrar), for the purpose of receiving payment hereof, or on account
hereof, for the conversion hereof and for all other purposes, and neither the
Company nor the Trustee nor any other authenticating agent nor any paying
agent nor any other conversion agent nor any Note registrar shall be affected
by any notice to the contrary. All payments made to or upon the order of
such registered holder shall, to the extent of the sum or sums paid, satisfy
and discharge liability for monies payable on this Restricted Global Note.
No recourse for the payment of the principal of or any premium or
interest on this Restricted Global Note, or for any claim based hereon or
otherwise in respect hereof, and no recourse under or upon any obligation,
covenant or agreement of the Company in the Indenture or any indenture
supplemental thereto or in any Note, or because of the creation of any
indebtedness represented thereby, shall be had against any incorporator,
stockholder, officer or director, as such, past, present or future, of the
Company or of any Successor Company, either directly or through the Company
or any Successor Company, whether by virtue of any constitution, statute or
rule of law or by the enforcement of any assessment or penalty or otherwise,
all such liability being, by the acceptance hereof and as part of the
consideration for the issue hereof, expressly waived and released.
-11-
<PAGE>
ABBREVIATIONS
The following abbreviations, when used in the inscription of the face
of this Restricted Global Note, shall be construed as though they were written
out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -
TEN ENT - as tenants by the ___________________ Custodian
entireties (Cust)
JT TEN - as joint tenants with ___________________ under
right of survivorship (Minor)
and not as tenants in
common
Uniform Gifts to
Minors Act______________________________
(State)
Additional abbreviations may also be used
though not in the above list.
-12-
<PAGE>
CONVERSION NOTICE
To: RAC Financial Group, Inc.
The undersigned registered owner of this Restricted Global Note hereby
irrevocably exercises the option to convert this Restricted Global Note, or
the portion hereof (which is $1,000 principal amount or an integral multiple
thereof) below designated, into shares of Common Stock in accordance with the
terms of the Indenture referred to in this Restricted Global Note, and
directs that the shares issuable and deliverable upon such conversion,
together with any check in payment for fractional shares and any Notes
representing any unconverted principal amount hereof, be issued and delivered
to the registered holder hereof unless a different name has been indicated
below. If shares or any portion of this Restricted Global Note not converted
are to be issued in the name of a person other than the undersigned, the
undersigned will check the appropriate box below and pay all transfer taxes
payable with respect thereto. Any amount required to be paid to the
undersigned on account of interest accompanies this Restricted Global Note.
Dated:________________________________
________________________________________
________________________________________
Signature(s)
Signature(s) must be guaranteed by an
eligible Guarantor Institution
(banks, stock brokers, savings and
loan associations and credit unions)
with membership in an approved
signature guarantee medallion program
pursuant to Securities and Exchange
Commission Rule 17Ad-15 if shares of
Common Stock are to be issued, or
Notes to be delivered, other than to
and in the name of the registered
holder.
______________________________________
Signature Guarantee
-13-
<PAGE>
Fill in for registration of shares if
to be issued, and Notes if to be
delivered, other than to and in the
name of the registered holder:
______________________________________
(Name)
______________________________________
(Street Address)
______________________________________
(City, State and Zip Code)
Please print name and address
Principal amount to be converted (if
less than all) $_________________________
_________________________________________
-14-
<PAGE>
OPTION TO ELECT REPAYMENT
UPON A CHANGE OF CONTROL
To: RAC Financial Group, Inc.
The undersigned registered owner of this Restricted Global Note
hereby irrevocably acknowledges receipt of a notice from RAC Financial Group,
Inc. (the "Company") as to the occurrence of a Change of Control with respect
to the Company and requests and instructs the Company to repay the entire
principal amount of this Restricted Global Note, or the portion thereof
(which is $1,000 principal amount or an integral multiple thereof) below
designated, in accordance with the terms of the Indenture referred to in this
Restricted Global Note, together with accrued interest to such date, to the
registered holder hereof.
Dated:________________________________
________________________________________
________________________________________
Signature(s)
________________________________________
Social Security or Other Taxpayer
Identification Number
Principal amount to be repaid (if
less than all): $_______________________
-15-
<PAGE>
ASSIGNMENT
For value received __________________________________hereby
sell(s), assign(s) and transfer(s) unto _____________________(please insert
social security or other identifying number of assignee) the within Note, and
hereby irrevocably constitutes and appoints ________________________________
attorney to transfer the said Note on the books of the Company, with full
power of substitution in the premises.
In connection with any transfer of the within Note (or any issuance
of shares of Common Stock upon conversion of the within Note) occurring prior
to the third anniversary of the date of original issuance of such Note, the
undersigned confirms that such Note (or shares of Common Stock, as the case
may be) are being transferred:
/ / To RAC Financial Group, Inc. or a subsidiary thereof; or
/ / Pursuant to and in compliance with Rule 144A under the Securities Act
of 1933, as amended; or
/ / To an Institutional Accredited Investor pursuant to and in compliance
with the Securities Act of 1933, as amended; or
/ / Pursuant to and in compliance with Regulation S under the Securities
Act of 1933, as amended; or
/ / Pursuant to and in compliance with Rule 144 under the Securities Act
of 1933, as amended.
Unless one of the boxes above is checked, the Trustee will refuse
to register any of the within Notes (or such shares of Common Stock, as the
case may be) in the name of any person other than the registered holder
thereof (or hereof); provided, however, that the Trustee may, in its sole
discretion, register the transfer of such Notes (or such shares of Common
Stock, as the case may be) if it has received such certifications, legal
opinions and/or other information as the Company has reasonably requested to
confirm that such transfer is being made pursuant to an exemption from, or in
a transaction not subject to, the registration requirements of the Securities
Act of 1933, as amended.
In addition, if the transferee is an institutional accredited
investor or a purchaser who is not a U.S. person, the holder must furnish to
the Trustee (i) in the case of an institutional accredited investor, a signed
letter containing certain representations and agreements relating to the
restrictions
-16-
<PAGE>
on transfer of the security evidenced hereby in substantially the form of
Exhibit D to the Indenture, and (ii) such other certifications, legal
opinions or other information as it may reasonably require to confirm that
such transfer is being made pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities
Act of 1933, as amended.
Dated:________________________________
______________________________________
______________________________________
Signature(s)
Signature(s) must be guaranteed by an
eligible Guarantor Institution
(banks, stock brokers, savings and
loan associations and credit unions)
with membership in an approved
signature guarantee medallion program
pursuant to Securities and Exchange
Commission Rule 17Ad-15.
______________________________________
Signature Guarantee
NOTICE: The signature on the conversion notice, the option to elect payment
upon a Change of Control or the assignment must correspond with the name as
written upon the face of the Note in every particular without alteration or
enlargement or any change whatever.
-17-
<PAGE>
SCHEDULE A
SCHEDULE OF EXCHANGES
The initial principal amount of this Restricted Global Note is U.S.
$94,600,000.00. The following additions to principal, redemptions, exchanges of
a part of this Restricted Global Note for an interest in the Regulation S Global
Note or definitive Note and conversions into Common Shares have been made:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
REDEEMED,
EXCHANGED FOR
PRINCIPAL INTEREST IN THE
DATE OF AMOUNT ADDED REGULATION S REMAINING
ADDITION TO ON EXCHANGE OF GLOBAL NOTE PRINCIPAL
PRINCIPAL, INTEREST IN OR DEFINITIVE AMOUNT NOTATION
REDEMPTION, THE REGULATION S NOTES OR OUTSTANDING MADE BY OR
EXCHANGE OR GLOBAL NOTE OR CONVERTED INTO FOLLOWING ON BEHALF OF
CONVERSION DEFINITIVE NOTES COMMON SHARES SUCH TRANSACTION THE TRUSTEE
<S> <C> <C> <C> <C>
</TABLE>
-18-
<PAGE>
EXHIBIT 4.6
REGULATION S GLOBAL NOTE
No. C-1 $5,250,000.00
CUSIP U74-914-AA7
RAC FINANCIAL GROUP, INC.
7.25% Convertible Subordinated Notes Due 2003
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN
DEFINITIVE FORM, THIS REGULATION S GLOBAL NOTE MAY NOT BE TRANSFERRED
EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY
A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE
DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR
DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS
REGULATION S GLOBAL NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (THE "DEPOSITARY"
or "DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE
NAME OF CEDE & CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR SUCH
OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC),
ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO
ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE &
CO., HAS AN INTEREST HEREIN.
THE NOTE EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE U.S.
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES
OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET
FORTH IN THE FOLLOWING SENTENCE. BY ACQUISITION HEREOF, THE HOLDER (1)
REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED
IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL
"ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A) (1), (2), (3) OR (7)
UNDER THE SECURITIES ACT) ("INSTITUTIONAL ACCREDITED INVESTOR") OR (C)
IT IS NOT A U.S. PERSON AND IS ACQUIRING THE NOTE EVIDENCED HEREBY IN AN
OFFSHORE TRANSACTION; (2) AGREES THAT IT WILL NOT PRIOR TO THE DATE THAT
IS THREE YEARS AFTER THE LATER OF THE ORIGINAL ISSUANCE OF THE NOTE
EVIDENCED HEREBY AND THE LAST DATE ON WHICH RAC FINANCIAL GROUP, INC.
(THE "COMPANY") OR ANY "AFFILIATE" (AS DEFINED IN RULE 144 UNDER THE
SECURITIES
-1-
<PAGE>
ACT) OF THE COMPANY WAS THE OWNER OF THE NOTE (THE "RESTRICTION
TERMINATION DATE") RESELL OR OTHERWISE TRANSFER THE NOTE EVIDENCED
HEREBY OR THE COMMON STOCK ISSUABLE UPON CONVERSION OF SUCH NOTE EXCEPT
(A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) TO A QUALIFIED
INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES
ACT, (C) TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH
TRANSFER, FURNISHES TO BANK ONE, COLUMBUS, N.A., AS TRUSTEE, A SIGNED
LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE
RESTRICTIONS ON TRANSFER OF THE NOTE EVIDENCED HEREBY (THE FORM OF WHICH
LETTER CAN BE OBTAINED FROM SUCH TRUSTEE), (D) OUTSIDE THE UNITED STATES
IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E) PURSUANT TO
THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE
SECURITIES ACT (IF AVAILABLE) OR (F) PURSUANT TO A REGISTRATION
STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT;
AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THE NOTE
EVIDENCED HEREBY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF
THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THE NOTE EVIDENCED
HEREBY BEFORE THE RESTRICTION TERMINATION DATE, THE HOLDER MUST CHECK
THE APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF RELATING TO THE
MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO BANK ONE,
COLUMBUS, N.A., AS TRUSTEE. IF THE PROPOSED TRANSFER IS PURSUANT TO
CLAUSE (C), (D) OR (E) ABOVE, THE HOLDER MUST, PRIOR TO SUCH TRANSFER,
FURNISH TO BANK ONE, COLUMBUS, N.A., AS TRUSTEE, SUCH CERTIFICATIONS,
LEGAL OPINIONS OR OTHER INFORMATION AS THE COMPANY MAY REASONABLY
REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT. THIS LEGEND WILL BE REMOVED UPON
THE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE
TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN
TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
RAC FINANCIAL GROUP, INC., a corporation duly organized and validly
existing under the laws of the State of Nevada (the "Company"), which term
includes any Successor Company under the Indenture referred to on the reverse
hereof, for value received hereby promises to pay to Cede & Co., or
registered assigns, the principal sum of Five Million Two Hundred Fifty
Thousand Dollars (subject to adjustment as set forth in the next paragraph
hereof) on August 15, 2003, at the office or agency of the Company maintained
for that purpose in the Borough of Manhattan, The City of New York, or, at
the option of the holder of this Regulation S
-2-
<PAGE>
Global Note, at the Corporate Trust Office of the Trustee, in such coin or
currency of the United States of America as at the time of payment shall be
legal tender for the payment of public and private debts, and to pay
interest, semi-annually on February 15 and August 15 of each year, commencing
February 15, 1997, on said principal sum at said office or agency, in like
coin or currency, at the rate per annum specified in the title of this
Regulation S Global Note, from the February 1 or August 1, as the case may
be, next preceding the date of this Regulation S Global Note to which
interest has been paid or duly provided for, unless the date hereof is a date
to which interest has been paid or duly provided for, in which case from the
date of this Regulation S Global Note, or unless no interest has been paid or
duly provided for on the Notes, in which case from August 20, 1996, until
payment of said principal sum has been made or duly provided for; provided
that if the Company shall default in the payment of interest due on such
February 15 or August 15, then this Regulation S Global Note shall bear
interest from the next preceding February 15 or August 15, to which interest
has been paid or duly provided for or, if no interest has been paid or duly
provided for on such Note, from August 20, 1996. The interest so payable on
any February 15 or August 15 will be paid to the person in whose name this
Regulation S Global Note (or one or more Predecessor Notes) is registered at
the close of business on the record date, which shall be the February 1 or
August 1 (whether or not a Business Day) next preceding such February 15 or
August 15, respectively; provided that any such interest not punctually paid
or duly provided for shall be payable as provided in the Indenture. Interest
shall be paid by check mailed to the registered holder at the registered
address of such person unless other arrangements are made in accordance with
the provisions of the Indenture.
The aggregate principal amount of this Regulation S Global Note
represented hereby may from time to time be reduced or increased to reflect
exchanges of a part of this Regulation S Global Note for interests in the
Restricted Global Note or definitive Notes or exchanges of interests in the
Restricted Global Note or definitive Notes for a part of this Regulation S
Global Note or conversions or redemptions of a part of this Regulation S
Global Note or cancellations of a part of this Regulation S Global Note or
transfers of interests in the Restricted Global Note or definitive Notes in
return for a part of this Regulation S Global Note or transfers of a part of
this Regulation S Global Note effected by delivery of interests in the
Restricted Global Note or definitive Notes, in each case, and in any such
case, by means of notations on the Schedule of Exchanges, Conversions,
Redemptions, Cancellations and Transfers on the last page hereof.
Notwithstanding any provision of this Regulation S Global Note to the
contrary, (i) exchanges of a part of this Regulation S Global
-3-
<PAGE>
Note for interests in the Restricted Global Note or definitive Notes, (ii)
exchanges of interests in the Restricted Global Note or definitive Notes for
a part of this Regulation S Global Note, (iii) conversions or redemptions of
a part of this Regulation S Global Note, (iv) cancellations of a part of this
Regulation S Global Note, (v) transfers of interests in the Restricted Global
Note or definitive Notes in return for a part of this Regulation S Global
Note and (vi) transfers of a part of this Regulation S Global Note effected
by delivery of interests in the Restricted Global Note or definitive Notes
may be effected without the surrendering of this Regulation S Global Note,
provided that appropriate notations on the Schedule of Exchanges,
Conversions, Redemptions, Cancellations and Transfers are made by the
Trustee, or the Custodian at the direction of the Trustee, to reflect the
appropriate reduction or increase, as the case may be, in the aggregate
principal amount of this Regulation S Global Note resulting therefrom or as a
consequence thereof.
Reference is made to the further provisions of this Regulation S
Global Note set forth on the reverse hereof, including, without limitation,
provisions giving the holder of this Regulation S Global Note the right to
convert this Regulation S Global Note into Common Stock of the Company on the
terms and subject to the limitations referred to on the reverse hereof and as
more fully specified in the Indenture. Such further provisions shall for all
purposes have the same effect as though fully set forth at this place.
This Regulation S Global Note shall be deemed to be a contract made
under the laws of the State of New York, and for all purposes shall be
construed in accordance with and governed by the laws of said State, without
regard to conflicts of laws principles thereof.
This Regulation S Global Note shall not be valid or become
obligatory for any purpose until the certificate of authentication hereon
shall have been manually signed by the Trustee or a duly authorized
authenticating agent under the Indenture.
-4-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Regulation S Global
Note to be duly executed under its corporate seal.
RAC FINANCIAL GROUP, INC.
By: _____________________________________
Name:
Title:
Attest:
______________________________________
Secretary
CERTIFICATE OF AUTHENTICATION
Dated:
This is one of the Notes described in the within-named indenture.
BANK ONE, COLUMBUS, N.A., as Trustee
By:_____________________________________
Authorized Signatory
As Authenticating Agent
(if different from Trustee)
-5-
<PAGE>
RAC FINANCIAL GROUP, INC.
7.25% Convertible Subordinated Notes Due 2003
This Regulation S Global Note is one of a duly authorized issue of
Notes of the Company, designated as its 7.25% Convertible Subordinated Notes
Due 2003 (herein called the "Notes"), limited to the aggregate principal
amount of $115,000,000 all issued or to be issued under and pursuant to an
Indenture dated as of August 20, 1996 (the "Indenture"), between the Company
and Bank One, Texas, N.A., the trustee (the "Trustee"), to which Indenture
and all indentures supplemental thereto reference is hereby made for a
complete description of the rights, limitations of rights, obligations,
duties and immunities thereunder of the Trustee, the Company and the holders
of the Notes. Each Note is subject to, and qualified by, all such terms as
set forth in the Indenture certain of which are summarized hereon and each
holder of a Note is referred to the corresponding provisions of the Indenture
for a complete statement of such terms. To the extent that there is any
inconsistency between the summary provisions set forth in the Notes and the
Indenture, the provisions of the Indenture shall govern. Capitalized terms
used but not defined in this Note shall have the meanings ascribed to them in
the Indenture.
In case an Event of Default, as defined in the Indenture, shall
have occurred and be continuing, the principal of, premium, if any, and
accrued interest on all Notes may be declared, and upon said declaration
shall become, due and payable, in the manner, with the effect and subject to
the conditions provided in the Indenture.
The payment of principal of, premium, if any, and interest on the
Notes will, to the extent set forth in the Indenture, be subordinated in
right of payment to the prior payment in full of all Senior Indebtedness (as
defined in the Indenture). Upon any distribution to creditors of the Company
in a liquidation or dissolution of the Company or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding related to the
Company or its property, in an assignment for the benefit of creditors or any
marshalling of the Company's assets and liabilities, the holders of all
Senior Indebtedness will first be entitled to receive payments in full of all
amounts due or to become due thereon before the holders of the Notes will be
entitled to receive any payment in respect of the principal of, premium, if
any, or interest on the Notes (except that holders of Notes may receive
securities that are subordinated at least to the same extent as the Notes to
Senior Indebtedness and any securities issued in exchange for Senior
Indebtedness).
-6-
<PAGE>
The Company also may not make any payment upon or in respect of the
Notes (except in such subordinated securities) if (a) a default in the
payment of the principal of, premium, if any, or interest on Senior
Indebtedness occurs and is continuing beyond any applicable period of grace
or (b) any other default occurs and is continuing with respect to Senior
Indebtedness that permits holders of the Senior Indebtedness as to which such
default relates to accelerate its maturity and the Trustee receives a notice
of such default (a "Payment Blockage Notice") from the representative or
representatives of holders of at least a majority in principal amount of
Senior Indebtedness then outstanding. Payments on the Notes may and shall be
resumed (i) in the case of a payment default, upon the date on which such
default is cured or waived, or (ii) in the case of a non-payment default, 179
days after the date on which the applicable Payment Blockage Notice is
received, unless the maturity of any Senior Indebtedness has been
accelerated. No new period of payment blockage may be commenced within 360
days after the receipt by the Trustee of any prior Payment Blockage Notice.
No nonpayment default that existed or was continuing on the date of delivery
of any Payment Blockage Notice to the Trustee shall be, or be made, the basis
for a subsequent Payment Blockage Notice unless such default shall have been
cured or waived for a period of not less than 180 days.
In the event that the Trustee (or paying agent if other than the
Trustee) or any holder of the Notes receives any payment of principal or
interest with respect to the Notes at a time when such payment is prohibited
under the Indenture, such payment shall be held in trust for the benefit of,
and shall be paid over and delivered to, the holders of Senior Indebtedness
or their representative as their respective interests may appear. After all
Senior Indebtedness is paid in full and until the Notes are paid in full, the
holders of the Notes shall be subrogated (equally and ratably with all other
Indebtedness pari passu with the Notes) to the rights of holders of Senior
Indebtedness to receive distributions applicable to Senior Indebtedness to
the extent that distributions otherwise payable to the holders of the Notes
have been applied to the payment of Senior Indebtedness.
The Indenture contains provisions permitting the Company and the
Trustee, with the consent of the holders of not less than a majority in
aggregate principal amount of the Notes at the time outstanding, evidenced as
in the Indenture provided, to execute supplemental indentures adding any
provisions to or changing in any manner or eliminating any of the provisions
of the Indenture or of any supplemental indenture or modifying in any manner
the rights of the holders of the Notes; provided that no such supplemental
indenture shall (i) extend the fixed maturity of any Note, or reduce the rate
or extend the time of payment of interest thereon,
-7-
<PAGE>
or reduce the principal amount thereof or premium, if any, thereon, or reduce
any amount payable on redemption thereof, alter the obligation of the Company
to redeem the Notes at the option of the holders upon the occurrence of a
Change of Control or impair or affect the right of any Noteholder to
institute suit for the payment thereof, or make the principal thereof or
interest or premium, if any, thereon payable in any coin or currency other
than that provided in the Notes, modify the subordination provisions in a
manner adverse to the holders of the Notes, or impair the right to convert
the Notes into Common Stock subject to the terms set forth in the Indenture
without the consent of the holder of each Note so affected or (ii) reduce the
aforesaid percentage of Notes, the holders of which are required to consent
to any such supplemental indenture, without the consent of the holders of all
Notes then outstanding. It is also provided in the Indenture that, prior to
any declaration accelerating the maturity of the Notes, the holders of a
majority in aggregate principal amount of the Notes at the time outstanding
may on behalf of the holders of all of the Notes waive any past default or
Event of Default under the Indenture and its consequences except a default in
the payment of interest or any premium on or the principal of any of the
Notes, a failure by the Company to convert any Notes into Common Stock of the
Company or a default in respect of a covenant or provision of the Indenture
that under Article X thereof cannot be modified or amended without the
consent of the holders of all Notes then outstanding. Any such consent or
waiver by the holder of this Regulation S Global Note (unless revoked as
provided in the Indenture) shall be conclusive and binding upon such holder
and upon all future holders and owners of this Regulation S Global Note and
any Notes that may be issued in exchange or substitution hereof, irrespective
of whether or not any notation thereof is made upon this Regulation S Global
Note or such other Notes.
No reference herein to the Indenture and no provision of this
Regulation S Global Note or of the Indenture shall alter or impair the
obligation of the Company, which is absolute and unconditional, to pay the
principal of and any premium and interest on this Regulation S Global Note at
the place, at the respective times, at the rate and in the coin or currency
herein prescribed.
Interest on the Notes shall be computed on the basis of a 360-day
year composed of twelve 30-day months.
The Notes are issuable in registered form without coupons in
denominations of $1,000 principal amount and integral multiples thereof. At
the office or agency of the Company referred to on the face hereof, and in
the manner and subject to the limitations provided in the Indenture, without
payment of any service charge but with payment of a sum sufficient to cover
any tax or other
-8-
<PAGE>
governmental charge that may be imposed in connection with any registration
or exchange of Notes, Notes may be exchanged for a like aggregate principal
amount of Notes of other authorized denominations.
The Notes are not redeemable at the option of the Company prior to
August 17, 1999. At any time on or after that date, the Notes may be
redeemed at the Company's option, upon notice as set forth in the Indenture,
in whole at any time or in part from time to time, at the optional redemption
prices set forth below, together with accrued interest to the date fixed for
redemption.
If redeemed during the period beginning:
DATE PERCENTAGE
---- ----------
August 17, 1999 103.63%
August 15, 2000 102.42%
August 15, 2001 101.21%
and 100% after August 14, 2002; provided that if the date fixed for
redemption is on a date or after the record date and on or before the next
following interest payment date, then the interest payable on such date shall
be paid to the holder of record on the next preceding February 1 or August 1,
respectively.
If a Change of Control (as defined in the Indenture) shall occur at
any time, then each holder of Notes shall have the right to require that the
Company purchase such holder's Notes in whole or in part in integral
multiples of $1,000, at a purchase price in cash in an amount equal to 101%
of the principal amount of such Notes, plus accrued and unpaid interest, if
any, to the repurchase date pursuant to an offer to be made by the Company
and in accordance with the procedures set forth in the Indenture.
Subject to the provisions of the Indenture, the holder hereof has
the right, at its option, at any time after 60 days following the latest date
of original issuance of the Notes and prior to the close of business on
August 15, 2003, or, as to all or any portion hereof called for redemption,
prior to the close of business on the date fixed for redemption (unless the
Company shall default in payment due upon redemption thereof), to convert the
principal hereof or any portion of such principal that is $1,000 or an
integral multiple thereof, into that number of fully paid and non-assessable
shares of Company's Common Stock, as said shares shall be constituted at the
date of conversion, obtained by dividing the principal amount of this
Regulation S Global Note or portion thereof to be converted by the conversion
price of $32.60 or such conversion price as adjusted from time to time as
provided
-9-
<PAGE>
in the Indenture, upon surrender of this Regulation S Global Note, together
with a conversion notice as provided in the Indenture, to the Company at the
office or agency of the Company maintained for that purpose in the Borough of
Manhattan, The City of New York, or at the option of such holder, the
Corporate Trust Office of the Trustee, and, unless the shares issuable on
conversion are to be issued in the same name as this Regulation S Global
Note, duly endorsed by, or accompanied by instruments of transfer in form
satisfactory to the Company duly executed by, the holder or by his duly
authorized attorney. No adjustment in respect of interest or dividends will
be made upon any conversion; provided that if this Regulation S Global Note
shall be surrendered for conversion during the period from the close of
business on any record date for the payment of interest and through the
opening of business on the next succeeding interest payment date, this
Regulation S Global Note (unless it or the portion being converted shall have
been called for redemption) must be accompanied by an amount, in funds
acceptable to the Company, equal to the interest payable on such interest
payment date on the principal amount being converted. The interest payment
with respect to a Note called for redemption on a date during the period from
the close of business on or after any record date to the opening of business
on the business day following the corresponding payment date will be payable
on the corresponding interest payment date to the registered Holder at the
close of business on that record date (notwithstanding the conversion of such
Note before the corresponding interest payment date) and a Holder who elects
to convert need not include funds equal to the interest paid. No fractional
shares will be issued upon any conversion, but an adjustment in cash will be
made, as provided in the Indenture, in respect of any fraction of a share
that would otherwise be issuable upon the surrender of any Note or Notes for
conversion.
Upon due presentment for registration of transfer of this
Regulation S Global Note at the office or agency of the Company in the
Borough of Manhattan, The City of New York, or at the option of the holder of
this Regulation S Global Note, at the Corporate Trust Office of the Trustee,
a new Note or Notes of authorized denominations for an equal aggregate
principal amount will be issued to the transferee in exchange thereof,
subject to the conditions and limitations provided in the Indenture, without
charge except for any tax or other governmental charge imposed in connection
therewith.
The Company, the Trustee, any authenticating agent, any paying
agent, any conversion agent and any Note registrar may deem and treat the
registered holder hereof as the absolute owner of this Regulation S Global
Note (whether or not this Regulation S Global Note shall be overdue and
notwithstanding any notation of
-10-
<PAGE>
ownership or other writing hereon made by anyone other than the Company or
any Note registrar), for the purpose of receiving payment hereof, or on
account hereof, for the conversion hereof and for all other purposes, and
neither the Company nor the Trustee nor any other authenticating agent nor
any paying agent nor any other conversion agent nor any Note registrar shall
be affected by any notice to the contrary. All payments made to or upon the
order of such registered holder shall, to the extent of the sum or sums paid,
satisfy and discharge liability for monies payable on this Regulation S
Global Note.
No recourse for the payment of the principal of or any premium or
interest on this Regulation S Global Note, or for any claim based hereon or
otherwise in respect hereof, and no recourse under or upon any obligation,
covenant or agreement of the Company in the Indenture or any indenture
supplemental thereto or in any Note, or because of the creation of any
indebtedness represented thereby, shall be had against any incorporator,
stockholder, officer or director, as such, past, present or future, of the
Company or of any Successor Company, either directly or through the Company
or any Successor Company, whether by virtue of any constitution, statute or
rule of law or by the enforcement of any assessment or penalty or otherwise,
all such liability being, by the acceptance hereof and as part of the
consideration for the issue hereof, expressly waived and released.
-11-
<PAGE>
ABBREVIATIONS
The following abbreviations, when used in the inscription of the
face of this Regulation S Global Note, shall be construed as though they were
written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -
TEN ENT - as tenants by the ___________________ Custodian
entireties (Cust)
JT TEN - as joint tenants with ___________________ under
right of survivorship (Minor)
and not as tenants in
common
Uniform Gifts to
Minors Act______________________________
(State)
Additional abbreviations may also be used
though not in the above list.
-12-
<PAGE>
CONVERSION NOTICE
To: RAC Financial Group, Inc.
The undersigned registered owner of this Regulation S Global Note
hereby irrevocably exercises the option to convert this Regulation S Global
Note, or the portion hereof (which is $1,000 principal amount or an integral
multiple thereof) below designated, into shares of Common Stock in accordance
with the terms of the Indenture referred to in this Regulation S Global Note,
and directs that the shares issuable and deliverable upon such conversion,
together with any check in payment for fractional shares and any Notes
representing any unconverted principal amount hereof, be issued and delivered
to the registered holder hereof unless a different name has been indicated
below. If shares or any portion of this Regulation S Global Note not
converted are to be issued in the name of a person other than the
undersigned, the undersigned will check the appropriate box below and pay all
transfer taxes payable with respect thereto. Any amount required to be paid
to the undersigned on account of interest accompanies this Regulation S
Global Note.
Dated:________________________________
______________________________________
______________________________________
Signature(s)
Signature(s) must be guaranteed by an
eligible Guarantor Institution
(banks, stock brokers, savings and
loan associations and credit unions)
with membership in an approved
signature guarantee medallion program
pursuant to Securities and Exchange
Commission Rule 17Ad-15 if shares of
Common Stock are to be issued, or
Notes to be delivered, other than to
and in the name of the registered
holder.
______________________________________
Signature Guarantee
-13-
<PAGE>
Fill in for registration of shares if
to be issued, and Notes if to be
delivered, other than to and in the
name of the registered holder:
_______________________________________
(Name)
_______________________________________
(Street Address)
_______________________________________
(City, State and Zip Code)
Please print name and address
Principal amount to be converted (if
less than all) $_________________________
_________________________________________
-14-
<PAGE>
OPTION TO ELECT REPAYMENT
UPON A CHANGE OF CONTROL
To: RAC Financial Group, Inc.
The undersigned registered owner of this Regulation S Global Note
hereby irrevocably acknowledges receipt of a notice from RAC Financial Group,
Inc. (the "Company") as to the occurrence of a Change of Control with respect
to the Company and requests and instructs the Company to repay the entire
principal amount of this Regulation S Global Note, or the portion thereof
(which is $1,000 principal amount or an integral multiple thereof) below
designated, in accordance with the terms of the Indenture referred to in this
Regulation S Global Note, together with accrued interest to such date, to the
registered holder hereof.
Dated:________________________________
________________________________________
________________________________________
Signature(s)
________________________________________
Social Security or Other Taxpayer
Identification Number
Principal amount to be repaid (if
less than all): $_______________________
-15-
<PAGE>
ASSIGNMENT
For value received __________________________________hereby
sell(s), assign(s) and transfer(s) unto _____________________(please insert
social security or other identifying number of assignee) the within Note, and
hereby irrevocably constitutes and appoints ________________________________
attorney to transfer the said Note on the books of the Company, with full
power of substitution in the premises.
In connection with any transfer of the within Note (or any issuance
of shares of Common Stock upon conversion of the within Note) occurring prior
to the third anniversary of the date of original issuance of such Note, the
undersigned confirms that such Note (or shares of Common Stock, as the case
may be) are being transferred:
/ / To RAC Financial Group, Inc. or a subsidiary thereof; or
/ / Pursuant to and in compliance with Rule 144A under the Securities Act
of 1933, as amended; or
/ / To an Institutional Accredited Investor pursuant to and in compliance
with the Securities Act of 1933, as amended; or
/ / Pursuant to and in compliance with Regulation S under the Securities
Act of 1933, as amended; or
/ / Pursuant to and in compliance with Rule 144 under the Securities Act
of 1933, as amended.
Unless one of the boxes above is checked, the Trustee will refuse
to register any of the within Notes (or such shares of Common Stock, as the
case may be) in the name of any person other than the registered holder
thereof (or hereof); provided, however, that the Trustee may, in its sole
discretion, register the transfer of such Notes (or such shares of Common
Stock, as the case may be) if it has received such certifications, legal
opinions and/or other information as the Company has reasonably requested to
confirm that such transfer is being made pursuant to an exemption from, or in
a transaction not subject to, the registration requirements of the Securities
Act of 1933, as amended.
In addition, if the transferee is an institutional accredited
investor or a purchaser who is not a U.S. person, the holder must furnish to
the Trustee (i) in the case of an institutional accredited investor, a signed
letter containing
-16-
<PAGE>
certain representations and agreements relating to the restrictions on
transfer of the security evidenced hereby in substantially the form of
Exhibit D to the Indenture, and (ii) such other certifications, legal
opinions or other information as it may reasonably require to confirm that
such transfer is being made pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities
Act of 1933, as amended.
Dated:________________________________
______________________________________
______________________________________
Signature(s)
Signature(s) must be guaranteed by an
eligible Guarantor Institution
(banks, stock brokers, savings and
loan associations and credit unions)
with membership in an approved
signature guarantee medallion program
pursuant to Securities and Exchange
Commission Rule 17Ad-15.
______________________________________
Signature Guarantee
NOTICE: The signature on the conversion notice, the option to elect
payment upon a Change of Control or the assignment must correspond with
the name as written upon the face of the Note in every particular
without alteration or enlargement or any change whatever.
-17-
<PAGE>
SCHEDULE A
SCHEDULE OF EXCHANGES
The initial principal amount of this Regulation S Global Note is
U.S.$5,250,000.00. The following additions to principal, redemptions,
exchanges of a part of this Regulation S Global Note for an interest in the
Restricted Global Note, definitive Note and conversions into Common Shares
have been made:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
REDEEMED,
EXCHANGED FOR
PRINCIPAL INTEREST IN THE
DATE OF AMOUNT ADDED RESTRICTED REMAINING
ADDITION TO ON EXCHANGE OF GLOBAL NOTE PRINCIPAL
PRINCIPAL, INTEREST IN OR DEFINITIVE AMOUNT NOTATION
REDEMPTION, THE RESTRICTED NOTES OR OUTSTANDING MADE BY OR
EXCHANGE OR GLOBAL NOTE OR CONVERTED INTO FOLLOWING ON BEHALF OF
CONVERSION DEFINITIVE NOTE COMMON SHARES SUCH TRANSACTION THE TRUSTEE
<S> <C> <C> <C> <C>
</TABLE>
-18-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated August 1, 1996 with respect to the financial
statements of RAC Financial Group, Inc. and our report dated January 10, 1995
with respect to the financial statements of Remodelers National Funding Corp.
included in the Registration Statement (Form S-1 to be filed on or about October
15, 1996) and related Prospectus of RAC Financial Group, Inc. for the
registration of $100,000,000 7.25% Convertible Subordinated Notes Due 2003 and
3,067,485 shares of its common stock.
/s/ ERNST & YOUNG LLP
Dallas, Texas
October 11, 1996
<PAGE>
EXHIBIT 23.2
[Letterhead]
ACCOUNTANTS' CONSENT
We consent to the inclusion in this registration statement, on Form S-1,
to be filed on or about October 11, 1996 for the issuance of $100,000,000 of
subordinated debentures due 2003 and 3,067,485 of common shares, of our
report dated February 17, 1995 on our audit of the financial statements of
First Security Mortgage Corporation for the year ended December 31, 1994. We
also consent to the reference to our firm under the caption "Experts".
/s/ SCOTT & HOLLOWAY, L.L.P.
Columbia, South Carolina
October 10, 1996
<PAGE>
EXHIBIT 25
REGISTRATION NO.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
STATEMENT OF ELIGIBILITY AND QUALIFICATION UNDER THE TRUST INDENTURE ACT OF
1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
BANK ONE, COLUMBUS, N.A.
Not Applicable 31-4148768
(State of Incorporation (I.R.S. Employer
if not a national bank) Identification No.)
100 East Broad Street, Columbus, Ohio 43271-0181
(Address of trustee's principal (Zip Code) executive offices)
Jeff Eubank
c/o Bank One Trust Company, NA
100 East Broad Street
Columbus, Ohio 43271-0181
(614) 248-5646
(Name, address and telephone number of agent for service)
RAC FINANCIAL GROUP, INC.
(Exact name of obligor as specified in its charter)
Nevada 75-2561052
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
1250 West Mockingbird Lane
Suite 600 45247
Dallas, Texas (Zip Code)
(Address of principal executive
offices)
<PAGE>
RAC FINANCIAL GROUP, INC. 7.25% CONVERTIBLE SUBORDINATED NOTES
DUE 2003
(Title of the Indenture securities)
GENERAL
1. GENERAL INFORMATION.
FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY
TO WHICH IT IS SUBJECT.
Comptroller of the Currency, Washington, D.C.
Federal Reserve Bank of Cleveland, Cleveland, Ohio
Federal Deposit Insurance Corporation, Washington, D.C.
The Board of Governors of the Federal Reserve System,
Washington, D.C.
(B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
The trustee is authorized to exercise corporate trust powers.
2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
The obligor is not an affiliate of the trustee.
16. LIST OF EXHIBITS
LIST BELOW ALL EXHIBITS FILED AS A PART OF THIS STATEMENT OF ELIGIBILITY
AND QUALIFICATION. (EXHIBITS IDENTIFIED IN PARENTHESES, ON FILE WITH THE
COMMISSION, ARE INCORPORATED HEREIN BY REFERENCE AS EXHIBITS HERETO.)
Exhibit 1 - A copy of the Articles of Association of the trustee as now in
effect.
(Exhibit 2 - A copy of the Certificate of Authority of the trustee to
commence business, see Exhibit 2 to Form T-1, filed in connection with Form
S-3 relating to Wheeling-Pittsburgh Corporation 9 3/8% Senior Notes due 2003,
Securities and Exchange Commission File No. 33-50709.)
(Exhibit 3 - A copy of the Authorization of the trustee to exercise corporate
trust powers, see Exhibit 3 to Form T-1, filed in connection with Form S-3
relating to Wheeling-Pittsburgh
1
<PAGE>
Corporation 9 3/8% Senior Notes due 2003, Securities and Exchange Commission
File No. 33-50709.)
Exhibit 4 - A copy of the Bylaws of the trustee as now in effect.
Exhibit 5 - Not applicable.
Exhibit 6 - The consent of the trustee required by Section 321(b) of the
Trust Indenture Act of 1939, as amended.
(Exhibit 7 - Report of Condition of the trustee as of the close of business
on March 31, 1996, published pursuant to the requirements of the Comptroller
of the Company, see Exhibit 7 to Form T-1, filed in connection with Form S-1
relating to Ocwen Financial Corporation 11.875% Senior Debt Securities due
2003, Securities and Exchange Commission File No. 333-05153.)
Exhibit 8 - Not applicable.
Exhibit 9 - Not applicable.
Items 3 through 15 are not answered pursuant to General Instruction B which
requires responses to Item 1, 2 and 16 only, if the obligor is not in default.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the Trustee, Bank One, Columbus, NA, a national banking association
organized under the National Banking Act, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, all in Columbus, Ohio, on October 11, 1996.
Bank One, Columbus, NA
By: /s/ Jeff Eubank
------------------------------------
Jeff Eubank
Authorized Signer
2
<PAGE>
EXHIBIT 1
BANK ONE, COLUMBUS, NATIONAL ASSOCIATION
ARTICLES OF ASSOCIATION
For the purpose of organizing an association to carry on the business of
banking under the laws of the United States, the following Articles of
Association are entered into:
FIRST. The title of this Association shall be BANK ONE, COLUMBUS, NATIONAL
ASSOCIATION.
SECOND. The main office of the Association shall be in Columbus, County
of Franklin, State of Ohio. The general business of the Association shall be
conducted at its main office and its branches.
THIRD. The Board of Directors of this Association shall consist of not
less than five nor more than twenty-five Directors, the exact number of
Directors within such minimum and maximum limits to be fixed and determined
from time-to-time by resolution of the shareholders at any annual or special
meeting thereof, provided, however, that the Board of Directors, by
resolution of a majority thereof, shall be authorized to increase the number
of its members by not more than two between regular meetings of the
shareholders. Each Director, during the full term of his directorship, shall
own, as qualifying shares, the minimum number of shares of either this
Association or of its parent bank holding company in accordance with the
provisions of applicable law. Unless otherwise provided by the laws of the
United States, any vacancy in the Board of Directors for any reason,
including an increase in the number thereof, may be filled by action of the
Board of Directors.
FOURTH. The annual meeting of the shareholders for the election of
Directors and the transaction of whatever other business may be brought
before said meeting shall be held at the main office of this Association or
such other place as the Board of Directors may designate, on the day of each
year specified therefor in the By-Laws, but if no election is held on that
day, it may be held on any subsequent business day according to the
provisions
3
<PAGE>
of law; and all elections shall be held according to such lawful regulations
as may be prescribed by the Board of Directors.
FIFTH. The authorized amount of capital stock of this Association shall
be 2,073,750 shares of common stock of the par value of Ten Dollars ($10)
each; but said capital stock may be increased or decreased from time-to-time,
in accordance with the provisions of the laws of the United States.
No holder of shares of the capital stock of any class of the
Association shall have the preemptive or preferential right of subscription
to any share of any class of stock of this Association, whether now or
hereafter authorized or to any obligations convertible into stock of this
Association, issued or sold, nor any right of subscription to any thereof
other than such, if any, as the Board of Directors, in its discretion, may
from time-to-time determine and at such price as the Board of Directors may
from time-to-time fix.
This Association, at any time and from time-to-time, may authorize and
issue debt obligations, whether or not subordinated, without the approval of
the shareholders.
SIXTH. The Board of Directors shall appoint one of its members President
of the Association, who shall be Chairman of the Board, unless the Board
appoints another director to be the Chairman. The Board of Directors shall
have the power to appoint one or more Vice Presidents and to appoint a
Secretary and such other officers and employees as may be required to
transact the business of this Association.
The Board of Directors shall have the power to define the duties of
the officers and employees of this Association; to fix the salaries to be
paid to them; to dismiss them; to require bonds from them and to fix the
penalty thereof; to regulate the manner in which any increase of the capital
of this Association shall be made; to manage and administer the business and
affairs of this Association; to make all By-Laws that it may be lawful for
them to make; and generally to do and perform all acts that it may be legal
for a Board of Directors to do and perform.
4
<PAGE>
SEVENTH. The Board of Directors shall have the power to change the
location of the main office to any other place within the limits of the City
of Columbus, Ohio, without the approval of the shareholders but subject to
the approval of the Comptroller of the Currency; and shall have the power to
establish or change the location of any branch or branches of this
Association to any other location, without the approval of the shareholders
but subject to the approval of the Comptroller of the Currency.
EIGHTH. The corporate existence of this Association shall continue until
terminated in accordance with the laws of the United States.
NINTH. The Board of Directors of this Association, or any three or more
shareholders owning, in the aggregate, not less than 10 percent of the stock
of this Association, may call a special meeting of shareholders at any time.
Unless otherwise provided by the laws of the United States, a notice of the
time, place and purpose of every annual and special meeting of the
shareholders shall be given by first-class mail, postage prepaid, mailed at
least ten days prior to the date of such meeting to each shareholder of
record at his address as shown upon the books of this Association.
TENTH. Every person who is or was a Director, officer or employee of the
Association or of any other corporation which he served as a Director,
officer or employee at the request of the Association as part of his
regularly assigned duties may be indemnified by the Association in accordance
with the provisions of this paragraph against all liability (including,
without limitation, judgments, fines, penalties and settlements) and all
reasonable expenses (including, without limitation, attorneys' fees and
investigative expenses) that may be incurred or paid by him in connection
with any claim, action, suit or proceeding, whether civil, criminal or
administrative (all referred to hereafter in this paragraphs as "Claims") or
in connection with any appeal relating thereto in which he may become
involved as a party or otherwise or with which he may be threatened by reason
of his being or having been a Director, officer or employee of the
Association or such other corporation, or by reason of any action taken or
omitted by him in his capacity as such Director, officer or employee, whether
or not he continues to be such at the time such liability or expenses are
incurred, provided that nothing contained in this paragraph shall be
construed to permit
5
<PAGE>
indemnification of any such person who is adjudged guilty of, or liable for,
willful misconduct, gross neglect of duty or criminal acts, unless, at the
time such indemnification is sought, such indemnification in such instance is
permissible under applicable law and regulations, including published rulings
of the Comptroller of the Currency or other appropriate supervisory or
regulatory authority, and provided further that there shall be no
indemnification of directors, officers, or employees against expenses,
penalties, or other payments incurred in an administrative proceeding or
action instituted by an appropriate regulatory agency which proceeding or
action results in a final order assessing civil money penalties or requiring
affirmative action by an individual or individuals in the form of payments to
the Association. Every person who may be indemnified under the provisions of
this paragraph and who has been wholly successful on the merits with respect
to any Claim shall be entitled to indemnification as of right. Except as
provided in the preceding sentence, any indemnification under this paragraph
shall be at the sole discretion of the Board of Directors and shall be made
only if the Board of Directors or the Executive Committee acting by a quorum
consisting of Directors who are not parties to such Claim shall find or if
independent legal counsel (who may be the regular counsel of the Association)
selected by the Board of Directors or Executive Committee whether or not a
disinterested quorum exists shall render their opinion that in view of all of
the circumstances then surrounding the Claim, such indemnification is
equitable and in the best interests of the Association. Among the
circumstances to be taken into consideration in arriving at such a finding or
opinion is the existence or non-existence of a contract of insurance or
indemnity under which the Association would be wholly or partially reimbursed
for such indemnification, but the existence or non-existence of such
insurance is not the sole circumstance to be considered nor shall it be
wholly determinative of whether such indemnification shall be made. In
addition to such finding or opinion, no indemnification under this paragraph
shall be made unless the Board of Directors or the Executive Committee acting
by a quorum consisting of Directors who are not parties to such Claim shall
find or if independent legal counsel (who may be the regular counsel of the
Association) selected by the Board of Directors or Executive Committee
whether or not a disinterested quorum exists shall render their opinion that
the Director, officer or employee acted in good faith in what he reasonably
believed to be the best interests of the Association or such other
corporation and further in the case of any criminal action or
6
<PAGE>
proceeding, that the Director, officer or employee reasonably believed his
conduct to be lawful. Determination of any Claim by judgment adverse to a
Director, officer or employee by settlement with or without Court approval or
conviction upon a plea of guilty or of NOLOCONTENDERE or its equivalent shall
not create a presumption that a Director, officer or employee failed to meet
the standards of conduct set forth in this paragraph. Expenses incurred with
respect to any Claim may be advanced by the Association prior to the final
disposition thereof upon receipt of an undertaking satisfactory to the
Association by or on behalf of the recipient to repay such amount unless it
is ultimately determined that he is entitled to indemnification under this
paragraph. The rights of indemnification provided in this paragraph shall be
in addition to any rights to which any Director, officer or employee may
otherwise be entitled by contract or as a matter of law. Every person who
shall act as a Director, officer or employee of this Association shall be
conclusively presumed to be doing so in reliance upon the right of
indemnification provided for in this paragraph.
ELEVENTH. These Articles of Association may be amended at any regular or
special meeting of the shareholders by the affirmative vote of the holders of
a majority of the stock of this Association, unless the vote of the holders
of a greater amount of stock is required by law, and in that case by the vote
of the holders of such greater amount.
7
<PAGE>
EXHIBIT 4
BY-LAWS
OF
BANK ONE, COLUMBUS, NATIONAL ASSOCIATION
ARTICLE I
MEETING OF SHAREHOLDERS
SECTION 1.01. ANNUAL MEETING. The regular annual meeting of the
Shareholders of the Bank for the election of Directors and for the
transaction of such business as may properly come before the meeting shall be
held at its main banking house, or other convenient place duly authorized by
the Board of Directors, on the third Monday of January of each year, or on
the next succeeding banking day, if the day fixed falls on a legal holiday.
If from any cause, an election of directors is not made on the day fixed for
the regular meeting of shareholders or, in the event of a legal holiday, on
the next succeeding banking day, the Board of Directors shall order the
election to be held on some subsequent day, as soon thereafter as
practicable, according to the provisions of law; and notice thereof shall be
given in the manner herein provided for the annual meeting. Notice of such
annual meeting shall be given by or under the direction of the Secretary or
such other officer as may be designated by the Chief Executive Officer by
first-class mail, postage prepaid, to all shareholders of record of the Bank
at their respective addresses as shown upon the books of the Bank mailed not
less than ten days prior to the date fixed for such meeting.
SECTION 1.02. SPECIAL MEETINGS. A special meeting of the shareholders of
this Bank may be called at any time by the Board of Directors or by any three
or more shareholders owning, in the aggregate, not less than ten percent of
the stock of this Bank. The notice of any special meeting of the
shareholders called by the Board of Directors, stating the time,
8
<PAGE>
place and purpose of the meeting, shall be given by or under the direction of
the Secretary, or such other officer as is designated by the Chief Executive
Officer, by first-class mail, postage prepaid, to all shareholders of record
of the Bank at their respective addresses as shown upon the books of the
Bank, mailed not less than ten days prior to the date fixed for such meeting.
Any special meeting of shareholders shall be conducted and its proceedings
recorded in the manner prescribed in these By-Laws for annual meetings of
shareholders.
SECTION 1.03. SECRETARY OF SHAREHOLDERS' MEETING. The Board of Directors
may designate a person to be the Secretary of the meetings of shareholders.
In the absence of a presiding officer, as designated in these By-Laws, the
Board of Directors may designate a person to act as the presiding officer.
In the event the Board of Directors fails to designate a person to preside at
a meeting of shareholders and a Secretary of such meeting, the shareholders
present or represented shall elect a person to preside and a person to serve
as Secretary of the meeting.
The Secretary of the meetings of shareholders shall cause the returns made
by the judges and election and other proceedings to be recorded in the minute
book of the Bank. The presiding officer shall notify the directors-elect of
their election and to meet forthwith for the organization of the new board.
The minutes of the meeting shall be signed by the presiding officer and
the Secretary designated for the meeting.
9
<PAGE>
SECTION 1.04. JUDGES OF ELECTION. The Board of Directors may appoint as
many as three shareholders to be judges of the election, who shall hold and
conduct the same, and who shall, after the election has been held, notify, in
writing over their signatures, the secretary of the shareholders' meeting of
the result thereof and the names of the Directors elected; provided, however,
that upon failure for any reason of any judge or judges of election, so
appointed by the directors, to serve, the presiding officer of the meeting
shall appoint other shareholders or their proxies to fill the vacancies. The
judges of election at the request of the chairman of the meeting, shall act
as tellers of any other vote by ballot taken at such meeting, and shall
notify, in writing over their signatures, the secretary of the Board of
Directors of the result thereof.
SECTION 1.05. PROXIES. In all elections of Directors, each shareholder of
record, who is qualified to vote under the provisions of Federal Law, shall
have the right to vote the number of shares of record in his name for as many
persons as there are Directors to be elected, or to cumulate such shares as
provided by Federal Law. In deciding all other questions at meetings of
shareholders, each shareholder shall be entitled to one vote on each share of
stock of record in his name. Shareholders may vote by proxy duly authorized
in writing. All proxies used at the annual meeting shall be secured for that
meeting only, or any adjournment thereof, and shall be dated, and if not
dated by the shareholder, shall be dated as of the date of receipt thereof.
No officer or employee of this Bank may act as proxy.
SECTION 1.06. QUORUM. Holders of record of a majority of the shares of the
capital stock of the Bank, eligible to be voted, present either in person or
by proxy, shall constitute a
10
<PAGE>
quorum for the transaction of business at any meeting of shareholders, but
shareholders present at any meeting and constituting less than a quorum may,
without further notice, adjourn the meeting from time to time until a quorum
is obtained. A majority of the votes cast shall decide every question or
matter submitted to the shareholders at any meeting, unless otherwise
provided by law or by the Articles of Association.
ARTICLE II
DIRECTORS
SECTION 2.01. MANAGEMENT OF THE BANK. The business of the Bank shall be
managed by the Board of Directors. Each director of the Bank shall be the
beneficial owner of a substantial number of shares of BANC ONE CORPORATION
and shall be employed either in the position of Chief Executive Officer or
active leadership within his or her business, professional or community
interest which shall be located within the geographic area in which the Bank
operates, or as an executive officer of the Bank. A director shall not be
eligible for nomination and re-election as a director of the Bank if such
person's executive or leadership position within his or her business,
professional or community interests which qualifies such person as a director
of Bank terminates. The age of 70 is the mandatory retirement age as a
director of the Bank. When a person's eligibility as director of the Bank
terminates, whether because of change in share ownership, position, residency
or age, within 30 days after such termination, such person shall submit his
resignation as a director to be effective at the pleasure of the Board
provided, however, that in no event shall such person be nominated or elected
as a director. Provided, however, following a person's retirement or
resignation as a director because of the age limitations herein set forth
with
11
<PAGE>
respect to election or re-election as a director, such person may, in special
or unusual circumstances, and at the discretion of the Board, be elected by
the directors as a Director Emeritus of the Bank for a limited period of
time. A Director Emeritus shall have the right to participate in board
meetings but shall be without the power to vote and shall be subject to
re-election by the Board at its organizational meeting following the Bank's
annual meeting of shareholders.
SECTION 2.02. QUALIFICATIONS. Each director shall have the qualification
prescribed by law. No person elected a director may exercise any of the
powers of his office until he has taken the oath of such office.
SECTION 2.03. TERM OF OFFICE/VACANCIES. A director shall hold office until
the annual meeting for the year in which his term expires and until his
successor shall be elected and shall qualify, subject, however, to his prior
death, resignation, or removal from office. Whenever any vacancy shall occur
among the directors, the remaining directors shall constitute the directors
of the Bank until such vacancy is filled by the remaining directors, and any
director so appointed shall hold office for the unexpired term of his or her
successor. Notwithstanding the foregoing, each director shall hold office and
serve at the pleasure of the Board.
SECTION 2.04. ORGANIZATION MEETING. The directors elected by the
share-holders shall meet for organization of the new board at the time fixed
by the presiding officer of the annual meeting. If at the time fixed for
such meeting there is no quorum present, the
12
<PAGE>
Directors in attendance may adjourn from time to time until a quorum is
obtained. A majority of the number of Directors elected by the shareholders
shall constitute a quorum for the transaction of business.
SECTION 2.05. REGULAR MEETINGS. The regular meetings of the Board of
Directors shall be held on the third Monday of each calendar month excluding
March and July, which meeting will be held at 4:00 p.m. When any regular
meeting of the Board falls on a holiday, the meeting shall be held on such
other day as the Board may previously designate or should the Board fail to
so designate, on such day as the Chairman of the Board of President may fix.
Whenever a quorum is not present, the directors in attendance shall adjourn
the meeting to a time not later than the date fixed by the Bylaws for the
next succeeding regular meeting of the Board.
SECTION 2.06. SPECIAL MEETINGS. Special meetings of the Board of Directors
shall be held at the call of the Chairman of the Board or President, or at
the request of two or more Directors. Any special meeting may be held at
such place in Franklin County, Ohio, and at such time as may be fixed in the
call. Written or oral notice shall be given to each Director not later than
the day next preceding the day on which special meeting is to be held, which
notice may be waived in writing. The presence of a Director at any meeting of
the Board shall be deemed a waiver of notice thereof by him. Whenever a
quorum is not present the Directors in attendance shall adjourn the special
meeting from day to day until a quorum is obtained.
13
<PAGE>
SECTION 2.07. QUORUM. A majority of the Directors shall constitute a quorum
at any meeting, except when otherwise provided by law; but a lesser number
may adjourn any meeting, from time-to-time, and the meeting may be held, as
adjourned, without further notice. When, however, less than a quorum as
herein defined, but at least one-third and not less than two of the
authorized number of Directors are present at a meeting of the Directors,
business of the Bank may be transacted and matters before the Board approved
or disapproved by the unanimous vote of the Directors present.
SECTION 2.08. COMPENSATION. Each member of the Board of Directors shall
receive such fees for, and transportation expenses incident to, attendance at
Board and Board Committee Meetings and such fees for service as a Director
irrespective of meeting attendance as from time to time are fixed by
resolution of the Board; provided, however, that payment hereunder shall not
be made to a Director for meetings attended and/or Board service which are
not for the Bank's sole benefit and which are concurrent and duplicative with
meetings attended or board service for an affiliate of the Bank for which the
Director receives payment; and provided further, that payment hereunder shall
not be made in the case of any Director in the regular employment of the Bank
or of one of its affiliates.
SECTION 2.09. EXECUTIVE COMMITTEE. There shall be a standing committee of
the Board of Directors known as the Executive Committee which shall possess
and exercise, when the Board is not in session, all powers of the Board that
may lawfully be delegated. The Executive Committee shall also exercise the
powers of the Board of Directors in accordance with the Provisions of the
"Employees Retirement Plan" and the "Agreement and Declaration of Trust" as
the same now exist or may be amended hereafter. The Executive
14
<PAGE>
Committee shall consist of not fewer than four board members, including the
Chairman of the Board and President of the Bank, one of whom, as hereinafter
required by these By-laws, shall be the Chief Executive Officer. The other
members of the Committee shall be appointed by the Chairman of the Board or
by the President, with the approval of the Board and shall continue as
members of the Executive Committee until their successors are appointed,
provided, however, that any member of the Executive Committee may be removed
by the Board upon a majority vote thereof at any regular or special meeting
of the Board. The Chairman or President shall fill any vacancy in the
Committee by the appointment of another Director, subject to the approval of
the Board of Directors. The regular meetings of the Executive Committee
shall be held on a regular basis as scheduled by the Board of Directors.
Special meetings of the Executive Committee shall be held at the call of the
Chairman or President or any two members thereof at such time or times as may
be designated. In the event of the absence of any member or members of the
Committee, the presiding member may appoint a member or members of the Board
to fill the place or places of such absent member or members to serve during
such absence. Not fewer than three members of the Committee must be present
at any meeting of the Executive Committee to constitute a quorum, provided,
however that with regard to any matters on which the Executive Committee
shall vote, a majority of the Committee members present at the meeting at
which a vote is to be taken shall not be officers of the Bank and, provided
further, that if, at any meeting at which the Chairman of the Board and
President are both present, Committee members who are not officers are not in
the majority, then the Chairman of the Board or President, which ever of such
officers is not also the Chief Executive Officer, shall not be eligible to
vote at such meeting and shall not be recognized for purposes of determining
if a quorum is present at such meeting. When neither the
15
<PAGE>
Chairman of the Board nor President are present, the Committee shall appoint
a presiding officer. The Executive Committee shall keep a record of its
proceedings and report its proceedings and the action taken by it to the
Board of Directors.
SECTION 2.10 COMMUNITY REINVESTMENT ACT AND COMPLIANCE POLICY COMMITTEE.
There shall be a standing committee of the Board of Directors known as the
Community Reinvestment Act and Compliance Policy Committee the duties of
which shall be, at least once in each calendar year, to review, develop and
recommend policies and programs related to the Bank's Community Reinvestment
Act Compliance and regulatory compliance with all existing statutes, rules
and regulations affecting the Bank under state and federal law. Such
Committee shall provide and promptly make a full report of such review of
current Bank policies with regard to Community Reinvestment Act and
regulatory compliance in writing to the Board, with recommendations, if any,
which may be necessary to correct any unsatisfactory conditions. Such
Committee may, in its discretion, in fulfilling its duties, utilize the
Community Reinvestment Act officers of the Bank, Banc One Ohio Corporation
and Banc One Corporation and may engage outside Community Reinvestment Act
experts, as approved by the Board, to review, develop and recommend policies
and programs as herein required. The Community Reinvestment Act and
regulatory compliance policies and procedures established and the
recommendations made shall be consistent with, and shall supplement, the
Community Reinvestment Act and regulatory compliance programs, policies and
procedures of Banc One Corporation and Banc One Ohio Corporation. The
Community Reinvestment Act and Compliance Policy Committee shall consist of
not fewer than four board members, one of whom shall be the Chief Executive
Officer and a majority of whom are not officers of the Bank. Not fewer than
three members of the
16
<PAGE>
Committee, a majority of whom are not officers of the Bank, must be present
to constitute a quorum. The Chairman of the Board or President of the Bank,
whichever is not the Chief Executive Officer, shall be an ex officio member
of the Community Reinvestment Act and Compliance Policy Committee. The
Community Reinvestment Act and Compliance Policy Committee, whose chairman
shall be appointed by the Board, shall keep a record of its proceedings and
report its proceedings and the action taken by it to the Board of Directors.
SECTION 2.11. TRUST COMMITTEES. There shall be two standing Committees
known as the Trust Management Committee and the Trust Examination Committee
appointed as hereinafter provided.
SECTION 2.12. OTHER COMMITTEES. The Board of Directors may appoint such
special committees from time to time as are in its judgment necessary in the
interest of the Bank.
ARTICLE III
OFFICERS, MANAGEMENT STAFF AND EMPLOYEES
SECTION 3.01. OFFICERS AND MANAGEMENT STAFF.
(a) The officers of the Bank shall include a President, Secretary and
Security Officer and may include a Chairman of the Board, one or more Vice
Chairmen, one or more Vice Presidents (which may include one or more
Executive Vice Presidents and/or Senior Vice Presidents) and one or more
Assistant Secretaries, all of whom shall be elected by the Board. All other
officers may be elected by the Board or appointed in
17
<PAGE>
writing by the Chief Executive Officer. The salaries of all officers
elected by the Board shall be fixed by the Board. The Board from
time-to-time shall designate the President or Chairman of the Board to
serve as the Bank's Chief Executive Officer.
(b) The Chairman of the Board, if any, and the President shall be
elected by the Board from their own number. The President and Chairman of
the Board shall be re-elected by the Board annually at the organizational
meeting of the Board of Directors following the Annual Meeting of
Shareholders. Such officers as the Board shall elect from their own number
shall hold office from the date of their election as officers until the
organization meeting of the Board of Directors following the next Annual
Meeting of Shareholders, provided, however, that such officers may be
relieved of their duties at any time by action of the Board in which event
all the powers incident to their office shall immediately terminate.
(c) Except as provided in the case of the elected officers who are
members of the Board, all officers, whether elected or appointed, shall hold
office at the pleasure of the Board. Except as otherwise limited by law or
these By-laws, the Board assigns to Chief Executive Officer and/or his
designees the authority to appoint and dismiss any elected or appointed
officer or other member of the Bank's management staff and other employees
of the Bank, as the person in charge of and responsible for any branch
office, department, section, operation, function, assignment or duty in the
Bank.
(d) The management staff of the Bank shall include officers elected by
the Board, officers appointed by the Chief Executive Officer, and such
other persons in the
18
<PAGE>
employment of the Bank who, pursuant to written appointment and
authorization by a duly authorized officer of the Bank, perform management
functions and have management responsibilities. Any two or more offices
may be held by the same person except that no person shall hold the office
of Chairman of the Board and/or President and at the same time also hold
the office of Secretary.
(e) The Chief Executive Officer of the Bank and any other officer of
the Bank, to the extent that such officer is authorized in writing by the
Chief Executive Officer, may appoint persons other than officers who are
in the employment of the Bank to serve in management positions and in
connection therewith, the appointing officer may assign such title,
salary, responsibilities and functions as are deemed appropriate by him,
provided, however, that nothing contained herein shall be construed as
placing any limitation on the authority of the Chief Executive Officer as
provided in this and other sections of these By-Laws.
SECTION 3.02. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer of the
Bank shall have general and active management of the business of the Bank and
shall see that all orders and resolutions of the Board of Directors are
carried into effect. Except as otherwise prescribed or limited by these
By-Laws, the Chief Executive Officer shall have full right, authority and
power to control all personnel, including elected and appointed officers, of
the Bank, to employ or direct the employment of such personnel and officers
as he may deem necessary, including the fixing of salaries and the dismissal
of them at pleasure, and to define and prescribe the duties and
responsibility of all Officers of the Bank, subject to such further
limitations and directions as he may from time-to-time deem proper. The
Chief
19
<PAGE>
Executive Officer shall perform all duties incident to his office and such
other and further duties, as may, from time-to-time, be required of him by
the Board of Directors or the shareholders. The specification of authority
in these By-Laws wherever and to whomever granted shall not be construed to
limit in any manner the general powers of delegation granted to the Chief
Executive Officer in conducting the business of the Bank. The Chief Executive
Officer or, in his absence, the Chairman of the Board or President of the
Bank, as designated by the Chief Executive Officer, shall preside at all
meetings of shareholders and meetings of the Board. In the absence of the
Chief Executive Officer, such officer as is designated by the Chief Executive
Officer shall be vested with all the powers and perform all the duties of the
Chief Executive Officer as defined by these By-Laws. When designating an
officer to serve in his absence, the Chief Executive Officer shall select an
officer who is a member of the Board of Directors whenever such officer is
available.
SECTION 3.03. POWERS OF OFFICERS AND MANAGEMENT STAFF. The Chief Executive
Officer, the Chairman of the Board, the President, and those officers so
designated and authorized by the Chief Executive Officer are authorized for
an on behalf of the Bank, and to the extent permitted by law, to make loans
and discounts; to purchase or acquire drafts, notes, stock, bonds, and other
securities for investment of funds held by the Bank; to execute and purchase
acceptances; to appoint, empower and direct all necessary agents and
attorneys; to sign and give any notice required to be given; to demand
payment and/or to declare due for any default any debt or obligation due or
payable to the Bank upon demand or authorized to be declared due; to
foreclose any mortgages, to exercise any option, privilege or election to
forfeit, terminate, extend or renew any lease; to authorize and direct any
proceedings for the collection of any money or for the enforcement of any
20
<PAGE>
right or obligation; to adjust, settle and compromise all claims of every
kind and description in favor of or against the Bank, and to give receipts,
releases and discharges therefor; to borrow money and in connection therewith
to make, execute and deliver notes, bonds or other evidences of indebtedness;
to pledge or hypothecate any securities or any stocks, bonds, notes or any
property real or personal held or owned by the Bank, or to rediscount any
notes or other obligations held or owned by the Bank, to employ or direct the
employment of all personnel, including elected and appointed officers, and
the dismissal of them at pleasure, and in furtherance of and in addition to
the powers hereinabove set forth to do all such acts and to take all such
proceedings as in his judgment are necessary and incidental to the operation
of the Bank.
Other persons in the employment of the Bank, including but not limited to
officers and other members of the management staff, may be authorized by the
Chief Executive Officer, or by an officer so designated and authorized by the
chief Executive Officer, to perform the powers set forth above, subject,
how-ever, to such limitations and conditions as are set forth in the
authorization given to such persons.
SECTION 3.04. SECRETARY. The Secretary or such other officers as may be
designated by the Chief Executive Officer shall have supervision and control
of the records of the Bank and, subject to the direction of the Chief
Executive Officer, shall undertake other duties and functions usually
performed by a corporate secretary. Other officers may be designated by the
Chief Executive Officer or the Board of Directors as Assistant Secretary to
perform the duties of the Secretary.
21
<PAGE>
SECTION 3.05. EXECUTION OF DOCUMENTS. The Chief Executive Officer, Chairman
of the Board, President, any officer being a member of the Bank's management
staff who is also a person in charge of and responsible for any department
within the Bank and any other officer to the extent such officer is so
designated and authorized by the Chief Executive Officer, the Chairman of the
Board, the President, or any other officer who is a member of the Bank's
management staff who is in charge of and responsible for any department
within the Bank, are hereby authorized on behalf of the Bank to sell, assign,
lease, mortgage, transfer, deliver and convey any real or personal property
now or hereafter owned by or standing in the name of the Bank or its nominee,
or held by this Bank as collateral security, and to execute and deliver such
deeds, contracts, leases, assignments, bills of sale, transfers or other
papers or documents as may be appropriate in the circumstances; to execute
any loan agreement, security agreement, commitment letters and financing
statements and other documents on behalf of the Bank as a lender; to execute
purchase orders, documents and agreements entered into by the Bank in the
ordinary course of business, relating to purchase, sale, exchange or lease of
services, tangible personal property, materials and equipment for the use of
the Bank; to execute powers of attorney to perform specific or general
functions in the name of or on behalf of the Bank; to execute promissory
notes or other instruments evidencing debt of the Bank; to execute
instruments pledging or releasing securities for public funds, documents
submitting public fund bids on behalf of the Bank and public fund contracts;
to purchase and acquire any real or personal property including loan
portfolios and to execute and deliver such agreements, contracts or other
papers or documents as may be appropriate in the circumstances; to execute
any indemnity and fidelity bonds, proxies or other papers or documents of
like or different character necessary, desirable or incidental to the conduct
of its banking business; to
22
<PAGE>
execute and deliver settlement agreements or other papers or documents as may
be appropriate in connection with a dismissal authorized by Section 3.01(c)
of these By-laws; to execute agreements, instruments, documents, contracts or
other papers of like or difference character necessary, desirable or
incidental to the conduct of its banking business; and to execute and deliver
partial releases from and discharges or assignments of mortgages, financing
statements and assignments or surrender of insurance policies, now or
hereafter held by this Bank.
The Chief Executive Officer, Chairman of the Board, President, any officer
being a member of the Bank's management staff who is also a person in charge
of and responsible for any department within the Bank, and any other officer
of the Bank so designated and authorized by the Chief Executive Officer,
Chairman of the Board, President or any officer who is a member of the Bank's
management staff who is in charge of and responsible for any department
within the Bank are authorized for and on behalf of the Bank to sign and
issue checks, drafts, and certificates of deposit; to sign and endorse bills
of exchange, to sign and countersign foreign and domestic letters of credit,
to receive and receipt for payments of principal, interest, dividends, rents,
fees and payments of every kind and description paid to the Bank, to sign
receipts for property acquired by or entrusted to the Bank, to guarantee the
genuineness of signatures on assignments of stocks, bonds or other
securities, to sign certifications of checks, to endorse and deliver checks,
drafts, warrants, bills, notes, certificates of deposit and acceptances in
all business transactions of the Bank.
Other persons in the employment of the Bank and of its subsidiaries,
including but not limited to officers and other members of the management
staff, may be authorized by the
23
<PAGE>
Chief Executive Officer, Chairman of the Board, President or by an officer so
designated by the Chief Executive Officer, Chairman of the Board, or
President to perform the acts and to execute the documents set forth above,
subject, however, to such limitations and conditions as are contained in the
authorization given to such person.
SECTION 3.06. PERFORMANCE BOND. All officers and employees of the Bank
shall be bonded for the honest and faithful performance of their duties for
such amount as may be prescribed by the Board of Directors.
ARTICLE IV
TRUST DEPARTMENT
SECTION 4.01. TRUST DEPARTMENT. Pursuant to the fiduciary powers granted to
this Bank under the provisions of Federal Law and Regulations of the
Comptroller of the Currency, there shall be maintained a separate Trust
Department of the Bank, which shall be operated in the manner specified
herein.
SECTION 4.02. TRUST MANAGEMENT COMMITTEE. There shall be a standing
Committee known as the Trust Management Committee, consisting of at least
five members, a majority of whom shall not be officers of the Bank. The
Committee shall consist of the Chairman of the Board who shall be Chairman of
the Committee, the President, and at least three other Directors appointed by
the Board of Directors and who shall continue as members of the Committee
until their successors are appointed. Any vacancy in the Trust Management
Committee may be filled by the Board at any regular or special meeting. In
the event of the
24
<PAGE>
absence of any member or members, such Committee may, in its discretion,
appoint members of the Board to fill the place of such absent members to
serve during such absence. Three members of the Committee shall constitute a
quorum. Any member of the Committee may be removed by the Board by a
majority vote at any regular or special meeting of the Board. The Committee
shall meet at such times as it may determine or at the call of the Chairman,
or President or any two members thereof.
The Trust Management Committee, under the general direction of the Board
of Directors, shall supervise the policy of the Trust Department which shall
be formulated and executed in accordance with Law, Regulations of the
Comptroller of the Currency, and sound fiduciary principles.
SECTION 4.03. TRUST EXAMINATION COMMITTEE. There shall be a standing
Commit-tee known as the Trust Examination Committee, consisting of three
directors appointed by the Board of Directors and who shall continue as
members of the committee until their successors are appointed. Such members
shall not be active officers of the Bank. Two members of the Committee shall
constitute a quorum. Any member of the Committee may be removed by the Board
by a majority vote at any regular or special meeting of the Board. The
Committee shall meet at such times as it may determine or at the call of two
members thereof.
This Committee shall, at least once during each calendar year and within
fifteen months of the last such audit, or at such other time(s) as may be
required by Regulations of the Comptroller of the Currency, make suitable
audits of the Trust Department or cause suitable
25
<PAGE>
audits to be made by auditors responsible only to the Board of Directors, and
at such time shall ascertain whether the Department has been administered in
accordance with Law, Regulations of the Comptroller of the Currency and sound
fiduciary principles.
The Committee shall promptly make a full report of such audits in writing
to the Board of Directors of the Bank, together with a recommendation as to
what action, if any, may be necessary to correct any unsatisfactory
condition. A report of the audits together with the action taken thereon
shall be noted in the Minutes of the Board of Directors and such report shall
be a part of the records of this Bank.
SECTION 4.04. MANAGEMENT. The Trust Department shall be under the
management and supervision of an officer of the Bank or of the trust
affiliate of the Bank designated by and subject to the advice and direction
of the Chief Executive Officer. Such officer having supervisory
responsibility over the Trust Department shall do or cause to be done all
things necessary or proper in carrying on the business of the Trust
Department in accordance with provisions of law and applicable regulations.
SECTION 4.05. HOLDING OF PROPERTY. Property held by the Trust Department
may be carried in the name of the Bank in its fiduciary capacity, in the name
of Bank, or in the name of a nominee or nominees.
SECTION 4.06. TRUST INVESTMENTS. Funds held by the Bank in a fiduciary
capacity awaiting investment or distribution shall not be held uninvested or
undistributed any longer than is reasonable for the proper management of the
account and shall be invested in
26
<PAGE>
accordance with the instrument establishing a fiduciary relationship and
local law. Where such instrument does not specify the character or class of
investments to be made and does not vest in the Bank any discretion in the
matter, funds held pursuant to such instrument shall be invested in any
investment which corporate fiduciaries may invest under local law.
The investments of each account in the Trust Department shall be kept
separate from the assets of the Bank, and shall be placed in the joint
custody or control of not less than two of the officers or employees of the
Bank or of the trust affiliate of the Bank designated for the purpose by the
Trust Management Committee.
SECTION 4.07. EXECUTION OF DOCUMENTS. The Chief Executive Officer, Chairman
of the Board, President, any officer of the Trust Department, and such other
officers of the trust affiliate of the Bank as are specifically designated
and authorized by the Chief Executive Officer, the President, or the officer
in charge of the Trust Department, are hereby authorized, on behalf of this
Bank, to sell, assign, lease, mortgage, transfer, deliver and convey any real
property or personal property and to purchase and acquire any real or
personal property and to execute and deliver such agreements, contracts, or
other papers and documents as may be appropriate in the circumstances for
property now or
27
<PAGE>
hereafter owned by or standing in the name of this Bank, or its nominee, in
any fiduciary capacity, or in the name of any principal for whom this Bank
may now or hereafter be acting under a power of attorney, or as agent and to
execute and deliver partial releases from any discharges or assignments or
mortgages and assignments or surrender of insurance policies, to execute and
deliver deeds, contracts, leases, assignments, bills of sale, transfers or
such other papers or documents as may be appropriate in the circumstances for
property now or hereafter held by this Bank in any fiduciary capacity or
owned by any principal for whom this Bank may now or hereafter be acting
under a power of attorney or as agent; to execute and deliver settlement
agreements or other papers or documents as may be appropriate in connection
with a dismissal authorized by Section 3.01(c) of these By-laws; provided
that the signature of any such person shall be attested in each case by any
officer of the Trust Department or by any other person who is specifically
authorized by the Chief Executive Officer, the President or the officer in
charge of the Trust Department.
The Chief Executive Officer, Chairman of the Board, President, any officer
of the Trust Department and such other officers of the trust affiliate of the
Bank as are specifically designated and authorized by the Chief Executive
Officer, the President, or the officer in charge of the Trust Department, or
any other person or corporation as is specifically authorized by the Chief
Executive Officer, the President or the officer in charge of the Trust
Department, are hereby authorized on behalf of this Bank, to sign any and all
pleadings and papers in probate and other court proceedings, to execute any
indemnity and fidelity bonds, trust agreements, proxies or other papers or
documents of like or different character necessary, desirable or incidental
to the appointment of the Bank in any fiduciary capacity and the conduct of
its business in any fiduciary capacity; also to foreclose any mortgage, to
execute and deliver receipts for payments of principal, interest, dividends,
rents, fees and payments of every kind and description paid to the Bank; to
sign receipts for property acquired or entrusted to the Bank; also to sign
stock or bond certificates on behalf of this Bank in any fiduciary capacity
and on behalf of this Bank as transfer agent or registrar; to guarantee the
genuineness of signatures on assignments of stocks, bonds or other
securities, and to authenticate bonds, debentures, land or lease trust
certificates or other
28
<PAGE>
forms of security issued pursuant to any indenture under which this Bank now
or hereafter is acting as Trustee. Any such person, as well as such other
persons as are specifically authorized by the Chief Executive Officer or the
officer in charge of the Trust Department, may sign checks, drafts and orders
for the payment of money executed by the Trust Department in the course of
its business.
SECTION 4.08. VOTING OF STOCK. The Chairman of the Board, President, any
officer of the Trust Department, any officer of the trust affiliate of the
Bank and such other persons as may be specifically authorized by Resolution
of the Trust Management Committee or the Board of Directors, may vote shares
of stock of a corporation of record on the books of the issuing company in
the name of the Bank or in the name of the Bank as fiduciary, or may grant
proxies for the voting of such stock of the granting if same is permitted by
the instrument under which the Bank is acting in a fiduciary capacity, or by
the law applicable to such fiduciary account. In the case of shares of stock
which are held by a nominee of the Bank, such shares may be voted by such
person(s) authorized by such nominee.
ARTICLE V
STOCKS AND STOCK CERTIFICATES
SECTION 5.01. STOCK CERTIFICATES. The shares of stock of the Bank shall be
evidenced by certificates which shall bear the signature of the Chairman of
the Board, the President, or a Vice President (which signature may be
engraved, printed or impressed), and shall be signed manually by the
Secretary, or any other officer appointed by the Chief Executive Officer for
that purpose.
29
<PAGE>
In case any such officer who has signed or whose facsimile signature has
been placed upon such certificate shall have ceased to be such before such
certificate is issued, it may be issued by the Bank with the same effect as
if such officer had not ceased to be such at the time of its issue. Each
such certificate shall bear the corporate seal of the Bank, shall recite on
its fact that the stock represented thereby is transferable only upon the
books of the Bank properly endorsed and shall recite such other information
as is required by law and deemed appropriate by the Board. The corporate
seal may be facsimile engraved or printed.
SECTION 5.02. STOCK ISSUE AND TRANSFER. The shares of stock of the Bank
shall be transferable only upon the stock transfer books of the Bank and
except as hereinafter provided, no transfer shall be made or new certificates
issued except upon the surrender for cancellation of the certificate or
certificates previously issued therefor. In the case of the loss, theft, or
destruction of any certificate, a new certificate may be issued in place of
such certificate upon the furnishing of any affidavit setting forth the
circumstances of such loss, theft, or destruction and indemnity satisfactory
to the Chairman of the Board, the President, or a Vice President. The Board
of Directors, or the Chief Executive Officer, may authorize the issuance of a
new certificate therefor without the furnishing of indemnity. Stock Transfer
Books, in which all transfers of stock shall be recorded, shall be provided.
The stock transfer books may be closed for a reasonable period and under
such conditions as the Board of Directors may at any time determine for any
meeting of shareholders, the payment of dividends or any other lawful
purpose. In lieu of closing the
30
<PAGE>
transfer books, the Board may, in its discretion, fix a record date and hour
constituting a reasonable period prior to the day designated for the holding
of any meeting of the shareholders or the day appointed for the payment of
any dividend or for any other purpose at the time as of which shareholders
entitled to notice of and to vote at any such meeting or to receive such
dividend or to be treated as shareholders for such other purpose shall be
determined, and only shareholders of record at such time shall be entitled to
notice of or to vote at such meeting or to receive such dividends or to be
treated as shareholders for such other purpose.
ARTICLE VI
MISCELLANEOUS PROVISIONS
SECTION 6.01. SEAL. The impression made below is an impression of the seal
adopted by the Board of Directors of BANK ONE, COLUMBUS, NATIONAL
ASSOCIATION. The Seal may be affixed by any officer of the Bank to any
document executed by an authorized officer on behalf of the Bank, and any
officer may certify any act, proceedings, record, instrument or authority of
the Bank.
SECTION 6.02. BANKING HOURS. Subject to ratification by the Executive
Committee, the Bank and each of its Branches shall be open for business on
such days and during such hours as the Chief Executive Officer of the Bank
shall, from time to time, prescribe.
SECTION 6.03. MINUTE BOOK. The organization papers of this Bank, the
Articles of Association, the returns of the judges of elections, the By-Laws
and any amendments
31
<PAGE>
thereto, the proceedings of all regular and special meetings of the
shareholders and of the Board of Directors, and reports of the committees of
the Board of Directors shall be recorded in the minute book of the Bank. The
minutes of each such meeting shall be signed by the presiding Officer and
attested by the secretary of the meetings.
SECTION 6.04. AMENDMENT OF BY-LAWS. These By-Laws may be amended by vote of
a majority of the Directors.
32
<PAGE>
EXHIBIT 6
Securities and Exchange Commission
Washington, D.C. 20549
CONSENT
The undersigned, designated to act as Trustee under the Indenture for RAC
Financial Group, Inc. described in the attached Statement of Eligibility and
Qualification, does hereby consent that reports of examinations by Federal,
State, Territorial, or District Authorities may be furnished by such
authorities to the Commission upon the request of the Commission.
This Consent is given pursuant to the provision of Section 321(b) of the
Trust Indenture Act of 1939, as amended.
Bank One, Columbus, NA
Dated: October 11, 1996
By: /s/ Jeff Eubank
------------------------------------
Jeff Eubank
Authorized Signer
33
