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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
__X__ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1996
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
COMMISSION FILE NUMBER: 0-21075
FIRST ENTERPRISE FINANCIAL GROUP, INC.
(Exact name of Registrant as specified in its Charter)
ILLINOIS 36-3688499
(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
500 DAVIS STREET, SUITE 1005
EVANSTON, ILLINOIS 60201 (847) 866-8665
(Address of principal executive offices, (Registrant's telephone number,
including zip code) including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS TITLE OF EACH EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------------
Common Stock, $.01 par value Nasdaq National Market
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant was approximately $28,649,303 based on the closing sale price
of $13.375 per share as reported on the Nasdaq Stock Market's National Market
on February 3, 1997.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of February 3, 1997 was 5,323,329.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents of the registrant are incorporated herein
by reference:
DOCUMENT PART OF FORM 10-K
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Proxy Statement for the 1997 annual meeting of shareholders III
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PART I
ITEM 1 - BUSINESS
As used in this report, the "Company" means First Enterprise Financial
Group, Inc., an Illinois corporation ("FEFG"), and First Enterprise Acceptance
Company, an Illinois corporation ("FEAC") and wholly owned subsidiary of FEFG.
GENERAL
The Company is a specialty finance company primarily engaged in
purchasing and servicing installment contracts originated by dealers for
financing the sale of automobiles. The Company purchases installment contracts
which provide financing for non-prime consumers. The Company also offers, as
agent, ancillary products in conjunction with the installment contracts the
Company purchases. The Company commenced operations in 1990 and began
purchasing installment contracts in May 1992 through three branch offices. As
of December 31, 1996, the Company operated 35 branch offices in eight
southeastern states.
THE INDUSTRY
The automobile finance industry is the second largest consumer finance
market in the United States, estimated by the Federal Reserve Board to have
been a $354 billion market in terms of outstanding automobile installment
credit at the end of 1995. Generally, the industry classifies prime and
non-prime consumers based on the creditworthiness of the consumer. The Company
does not further categorize its consumers within the classification of
non-prime. Every non-prime consumer is evaluated by the branch manager and
branch personnel in accordance with the Company's uniform credit guidelines and
procedures which are specifically designed to support its evaluation of
non-prime consumers.
The Company believes that the non-prime portion of the automobile
finance market ranges from $30 billion to $50 billion or more and is highly
fragmented. Many large financial service entities, such as commercial banks,
savings and loans, credit unions and captive finance companies do not
consistently provide financing to the non-prime market. The Company believes
that some of the factors contributing to the limited activities of traditional
lenders in the non-prime segment of the market are (i) the higher risk of the
obligers and the installment contracts, (ii) the lack of effective experience
in servicing non-prime consumers, and (iii) the regulatory oversight and
capital requirements imposed by governmental agencies on traditional lenders
which limit their ability to extend credit to such non-prime consumers. In
many cases, those organizations electing to remain in the automobile finance
business have migrated toward higher credit quality customers in order to
reduce collection and processing costs and to maintain higher levels of credit
quality. Many of the largest providers of financing to the non-prime
automobile finance market are the publicly-traded specialty automobile finance
companies. The Company estimates that these companies collectively have less
than a 15% market share. The
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remainder is primarily comprised of privately held finance companies and
dealers who provide financing programs directly to the consumer.
The Company believes that several demographic and economic trends
favor increased growth in the nonprime segment of the automobile finance
industry. Currently, the average American family must spend a significantly
higher percentage of its income to purchase a new or used automobile than it
did several years ago. According to industry data, the average price of a new
automobile in 1994 represented approximately 51% of the U.S. median family
income for that year, an increase from approximately 44% in 1986. The Company
believes this increase, combined with increases in the average useful life of
automobiles and the number of late-model used automobiles available for sale
(including rental cars and cars that were formerly leased) will continue to
expand the used automobile market.
BUSINESS STRATEGY
The Company's strategy is to grow its Total Portfolio by increasing
its penetration of existing markets and by expanding into new market areas.
The principal components of the Company's strategy include:
- Decentralized Structure. The Company operates with a
decentralized branch office network that provides branch
managers with a significant degree of autonomy and
accountability. Within guidelines set by the Company, branch
managers are responsible for the development of dealer
relationships, underwriting of installment contract purchases,
servicing and collection of accounts and implementation of
repossession procedures. Performance goals are established
for each branch office, and the branch manager's incentive
compensation is tied to the performance results of the branch
office. Management believes that its decentralized
operational structure enhances dealer service, results in
better portfolio quality through personal knowledge of local
market conditions and improves collection rates by requiring
collection activity to be handled through direct local contact
with consumers. Decentralization enhances dealer service by
allowing branch managers to frequently meet one-on-one with
local dealers, quickly respond to contract applications and
respond to changes in competitive conditions. The
decentralized structure also enables branch managers to
interact personally with consumers during the origination and
servicing of installment contracts. Decentralization requires
more effective management information systems, internal audit
procedures and credit guidelines to maintain control over the
Company's business.
- Experienced Management Personnel. The Company's growth and
profitability have been largely the result of the services of
its management at the executive, supervisory and branch
levels. The executive officers of the Company have an average
of over 34 years of experience in the financial services
industry. The Company's regional supervisors and branch
managers have an average of 31
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years and 20 years of experience, respectively, in the
consumer and automobile finance industries. The Company
believes that hiring and retaining experienced management
personnel, particularly at the branch and supervisory levels,
is essential for the Company to accomplish its bjectives. The
Company believes it attracts and retains experienced
management personnel by providing competitive compensation,
significant autonomy in the Company's decentralized
operational structure and equity participation.
- Focus on Smaller Markets. The Company generally targets
smaller markets with populations of less than 150,000. The
Company believes that these markets tend to be less
competitive than larger markets and that dealers in such
markets are more relationship oriented than in larger markets.
Management believes the Company gains a competitive advantage
by opening branch offices headed by experienced branch
managers who typically have established relationships with
local dealers and extensive knowledge of the market. The
Company considers the availability of experienced branch
managers with knowledge of the local market to be the most
important factor in selecting additional branch office
locations. Other factors considered in the selection of
additional branch office locations include competition,
demographics and the regulatory climate. The Company had 35
branch offices in eight southeastern states as of December 31,
1996. The Company opened ten new branch offices in 1996 and
plans to open five additional branch offices by March 31,
1997, some of which may be in new states.
- Service to Dealers. The Company helps to expand its dealers'
customer bases by providing financing to consumers who
otherwise might not be able to obtain credit. The Company
further assists dealers by promptly responding to credit
applications, by providing a consistent source of financing
and by typically paying dealers within 24 hours after
receiving all required documentation. As of December 31,
1996, the Company purchased installment contracts from a total
of 1,313 dealers in eight southeastern states and had active
relationships with 573 of such dealers. The Company defines
an active relationship with a dealer as one in which the
Company purchases at least five contracts per twelve month
period from such dealer. As of December 31, 1996, no single
dealer accounted for more than 2.1% of the Total Portfolio.
- Management Information System. The Company utilizes an
on-line, real-time data processing system of a third party
vendor to process its installment contract transactions, to
assist in compliance with its credit policies and certain
applicable laws and regulations and to monitor its
decentralized branch office network. This system has been
customized to meet the Company's processing, compliance and
reporting requirements. The executive, operations and branch
offices have immediate access to data from the management
information system. Management believes that the Company's
information system will permit sustained growth in the Total
Portfolio.
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BRANCH OFFICES
While the Company generally targets smaller markets with populations
of less than 150,000, the Company has opened and may continue to open branch
offices in larger communities. As of December 31, 1996, the Company had 35
branch offices in eight southeastern states. Ten new branch offices were
opened in 1996 and the Company plans to open five additional branch offices by
March 31, 1997. The Company has never closed a branch office.
The following table summarizes certain information regarding the Company's
branch offices.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1993 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Number of New Branch Offices . . . . . . . . . . . . . 4 9 8 10
Total Number of Branch Offices . . . . . . . . . . . . 8 17 25 35
Number of Contracts Purchased . . . . . . . . . . . . . 2,685 4.935 10,021 15,810
Dollar Amount of Contracts Purchased
(in thousands) . . . . . . . . . . . . . . . . . . . . $19,248 $35,137 $70,184 $120,154
</TABLE>
The actual selection of a new branch office location is generally
based on the availability of an experienced branch manager with industry and
market knowledge in the selected community, competition, certain demographic
factors and the regulatory climate. The Company expects to attract additional
qualified managers to staff new branch offices and has recently established a
training program to provide an expanding pool of qualified branch managers.
Branch managers operate their branch offices with a significant degree
of autonomy and accountability. Operating within the guidelines set by the
Company, branch managers are responsible for the development of new dealer
relationships, underwriting of automobile installment contract purchases,
servicing and collection of accounts and implementation of repossession
procedures. Decentralization allows branch managers to frequently meet
one-on-one with local dealers, quickly respond to contract applications and
respond to changes in competitive conditions. This decentralized structure
also enables branch managers to interact personally with the consumers during
the origination and servicing of installment contracts.
After several months of orientation, a branch manager typically opens
a new branch office with two or three employees. Staff is expanded as growth
warrants. The Company's initial capital expenditure for a new branch office is
approximately $15,000, which includes computer equipment, furniture and signs.
Based on previous experience, the Company's branch offices are expected to be
profitable within nine to 12 months of commencing operations. During the
startup
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period, all costs, net of revenue, are treated as current period operating
expenses. The Company leases all of its branch offices with average monthly
rent of approximately $1,000 per branch office.
MONITORING OF BRANCH OFFICES
The Company monitors the performance of each of its branch offices
through daily and monthly review of operating and financial reports from its
management information system, quarterly site reviews of branch offices by the
Company's five regional supervisors and operational reviews of branch offices
by its internal auditor.
The Company's management information system enables the executive
officers and regional supervisors to immediately access branch and portfolio
information. Some of the more important reports received by management from its
information system include: (i) delinquency reports, (ii) charge-off reports,
(iii) inventory repossession reports, (iv) cash reports, (v) trial balances,
(vi) branch income statements and (vii) volume reports. The Company also uses
its management information system to transfer deposits from its local branch
bank accounts to its central bank utilizing the Automated Clearing House.
Branch disbursement checks are drawn on a central bank account which provides
additional controls.
DEALER RELATIONSHIPS
Generally, for each dealer, branch managers evaluate (i) the level and
quality of the dealer's inventory, (ii) the length of time the dealer has been
in business, (iii) historical financial information to determine financial
viability and (iv) the dealer's reputation in the community. Branch managers
review, on an ongoing basis through the Company's management information
system, the loss experience on the installment contracts purchased from each
dealer.
Generally, the Company enters into a non-exclusive written dealer
agreement (a "Dealer Agreement") with each dealer from which the Company
purchases installment contracts on a continuing basis. The Dealer Agreement
does not obligate the Company to purchase installment contracts from the dealer
or the dealer to offer any installment contracts for sale to the Company.
Dealer Agreements generally provide representations and warranties relating to
such matters as to whether (i) the financed automobile is free of all liens,
claims and encumbrances except the Company's lien, (ii) the down payment
specified in the installment contract has been paid in full and no part of the
down payment was loaned to the consumer by the dealer and (iii) the dealer has
complied with applicable law. Dealer Agreements generally also provide that the
dealer shall indemnify the Company against any damages or liabilities,
including reasonable attorneys' fees and including in certain instances
repurchases of the installment contract on demand, arising out of (i) any
breach of a representation or warranty of the dealer set forth in the Dealer
Agreement or (ii) any claim or defense that a consumer may have against a
dealer relating to an installment contract.
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The Company believes it has strong relationships with dealers and that
such relationships will continue. The Company is not affiliated with any
dealers, nor is there common ownership with any dealer. The Company's
relationships with dealers are not regulated at the federal or state level.
CREDIT UNDERWRITING PROCEDURES
If a non-prime consumer elects to finance the purchase of an
automobile through a dealer, the dealer may submit the consumer's credit
application to the Company for review of the consumer's creditworthiness and
the proposed transaction terms. The branch manager reviews the transaction in
accordance with the Company's credit guidelines and procedures, which generally
take into account, among other things, the individual's stability of residence,
employment history, credit history, ability to pay and ratio of debt service
payments to income, the down payment, as well as the value of the collateral.
In addition, the branch manager evaluates a credit bureau report in order to
determine if (i) the individual's credit quality is deteriorating, (ii) the
individual's credit history suggests a high probability of default or (iii) the
individual's credit experience is too limited for the Company to assess the
probability of performance. The branch personnel may also require verification
of certain applicant or dealer provided information prior to making the credit
decision. Such verification is performed solely by Company branch personnel
and typically includes (i) submission of supporting documentation, such as a
paycheck stub or other substantiation of income, (ii) evidence of residency and
(iii) proof of physical damage insurance. Within the parameters set by the
Company's credit guidelines and procedures, the branch manager is permitted to
supplement the data received with subjective judgment and knowledge of local
conditions. By using a wide variety of criteria and the knowledge and
experience of the local branch manager, the Company attempts to reduce its
default rate and thus limit its losses.
After reviewing the credit application and the terms of the sale, the
branch office notifies the dealer whether the Company would be willing to
purchase the installment contract upon sale of the automobile to the applicant.
The Company typically responds to submitted dealer applications on the date
received, and in many cases within two to three hours. For the year ended
December 31, 1996, the Company approved approximately 27% of all submitted
credit applications and approximately 61% of the installment contracts related
to approved credit applications were purchased by the Company. The difference
between the number of applications approved and the number of installment
contracts purchased is primarily due to dealers submitting credit applications
to more than one finance company. In cases where the Company is unwilling to
purchase an installment contract from a dealer under the proposed terms but
believes the applicant has the capacity to meet other repayment obligations,
the branch office will work with the dealer to restructure the terms of the
financing or suggest the sale of an alternative automobile with a price more
suited to the applicant's financial means.
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INSTALLMENT CONTRACT PURCHASE
When the branch manager approves the purchase of an installment
contract, the branch office notifies the dealer by facsimile. Such notice
confirms all pertinent information relating to the terms of the approval,
including the finance charge, the term, information about the automobile to be
sold, a list of ancillary products purchased by the consumer and the amount of
non-refundable contract acquisition discount that the Company will deduct from
the initial principal balance of the installment contract. Since inception of
the Company's automobile finance activities, the nonrefundable contract
acquisition discount charged by the Company has averaged approximately 10% of
the initial principal balance of the installment contracts. Generally, the
amount paid in cash to dealers for installment contracts ranges between 80% to
110% of the wholesale value of the automobile, with an average of approximately
100%. The consumer is typically required to make a down payment of at least 10%
of the purchase price.
After the dealer delivers all required documentation to the Company,
the Company remits funds to the dealer, generally within 24 hours. In most
cases, the consumer is contacted directly to verify the terms of the
transaction. Upon purchase of the installment contract, the Company acquires a
perfected security interest in the financed automobile. Each installment
contract requires that the automobile be properly insured against physical
damage and that the Company be named as a loss payee on the insurance policy.
Compliance with these requirements is verified prior to the remittance of funds
to the dealer.
The following table summarizes the Company's installment contract volume by
state since 1993.
<TABLE>
<CAPTION>
State Years Ended December 31,
----- ------------------------
1993 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Alabama . . . . . . . . . . . . . . . . . . . . 32.5% 30.4% 25.2% 17.9%
Florida . . . . . . . . . . . . . . . . . . . . 46.7 42.4 24.8 27.4
Georgia . . . . . . . . . . . . . . . . . . . . 13.6 6.2 3.8 3.6
Mississippi . . . . . . . . . . . . . . . . . . -- 2.9 14.0 14.1
North Carolina . . . . . . . . . . . . . . . . -- 0.9 8.5 6.1
South Carolina . . . . . . . . . . . . . . . . 7.2 6.9 8.8 14.3
Tennessee . . . . . . . . . . . . . . . . . . . -- 10.3 14.9 12.1
Virginia . . . . . . . . . . . . . . . . . . . -- -- -- 4.5
------ ------ ------ ------
Total 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
</TABLE>
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INSTALLMENT CONTRACT TERMS
The Company purchases precomputed, fixed rate, fully secured, retail
installment contracts on a nonrecourse basis. The installment contracts are
purchased from dealers for the principal balance less the nonrefundable
contract acquisition discount. The non-refundable contract acquisition discount
is determined based on, among other factors, the competitive condition of the
market, the age and value of the automobile and the creditworthiness of the
consumer.
In 1993, 1994, 1995 and 1996, the Company purchased 2,685, 4,935,
10,021 and 15,810 installment contracts, respectively, representing aggregate
principal balances of $19.2 million, $35.1 million, $70.2 million and $120.2
million, respectively. Installment contracts purchased in 1996 had an average
initial principal balance of approximately $7,600, a weighted average
contractual APR of approximately 24.9%, a weighted average non-refundable
contract acquisition discount of approximately 10.8% and a weighted average
initial contract term of approximately 41 months.
INSTALLMENT CONTRACT SERVICING
The Company's installment contract servicing activities are
specifically tailored for the higher risks associated with non-prime consumers.
Each branch office collects and posts all payments received, responds to
consumer inquiries, takes all necessary action to maintain the security
interest granted in the financed automobiles, investigates delinquencies,
communicates with the consumer to obtain timely payments and, when necessary,
contracts with third parties to recover and sell the financed automobile.
The Company has established a process through which it attempts to
educate consumers, both in writing and by telephone, upon the Company's
purchase of their installment contracts. This process is designed to ensure
that consumers clearly understand their obligations and includes a review of
the terms of the installment contract with particular emphasis on the amount
and due date of each payment obligation, the Company's expectations as to the
timely receipt of payments, maintenance of insurance coverage and the Company's
delinquency and repossession policies. The branch offices send their
respective customers a payment coupon book prior to the first payment due date.
Branch office personnel typically contact delinquent consumers within
one to two days after such consumer's due date and collection efforts continue
until payment has been received. The Company believes that early and frequent
contact with the consumer reinforces the consumer's recognition of his or her
contractual obligation and the Company's expectation of timely payment. If
early collection efforts are not successful, branch office personnel design a
collection strategy that includes a specific deadline by which each delinquent
obligation should be collected. Accounts that have not been collected by such
deadline are again reviewed and unless there are specific circumstances which
warrant further collection efforts, such accounts are assigned to an outside
recovery agency for repossession. Only branch managers can
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authorize repossession of an automobile. Repossessed automobiles are generally
resold through wholesale auctions. The elapsed time between repossession and
resale is generally 15 to 45 days, including passage of the period during which
the law of the applicable jurisdiction permits the consumer to redeem the
automobile.
The Company provides its branch managers with flexibility in working
with consumers in the collection of payments. Specifically, if a consumer is
unable to make a scheduled payment the branch manager can grant a payment
deferment. The consumer must pay a fee and must sign a deferment agreement as
acceptance of the contract modification. The scheduled payment is then
deferred for the period of time agreed upon between the branch manager and the
consumer but will not exceed 30 days. Generally, no more than two deferments
may be granted in any 12 month period. The branch manager and consumer may
also change the day of the month that each contractual payment is due. Each
contract can generally have the due date changed only once and the change
cannot be greater than 30 days from the original due date.
ANCILLARY PRODUCTS
The Company offers to consumers, as agent for unaffiliated providers,
optional credit life and accident and health insurance, extended warranty
coverage and motor club memberships solely in connection with its purchase of
consumer installment contracts. The consumers are obligated to secure physical
damage insurance from any acceptable source. If a consumer fails to maintain
physical damage insurance, under the terms of the installment contract the
Company is permitted to and does force place such insurance with the insurer
that it represents. The Company receives commissions on its sales of all such
ancillary products.
MANAGEMENT INFORMATION SYSTEMS
Management believes that operational information available on a
continuous basis at all levels of management is a key factor in managing the
growth and profitability of a decentralized company in a highly competitive
market. The Company has contracted with a third party, Florida Informanagement
Services, Inc. ("FIS"), to provide daily processing of the Company's
installment contract receivables and all other management reporting and
information needs through December 5, 1999. FIS is required to maintain the
data network, provide customized programming services and provide data backup,
recovery and disaster recovery for the Company's records. The system has been
customized by FIS to process the Company's installment contract transactions,
to assist in compliance with its credit policies and certain applicable laws
and regulations and to monitor its decentralized branch office network. The
management information system provides on-line, real-time data processing that
uses personal computers as terminals with automatic download functions and
customized report writer capability at each branch office location.
All of the Company's offices are connected to the FIS main computer
center in Orlando, Florida. The system provides all of the data processing
with respect to the Company's
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installment contract transactions, including application processing, retrieval
of credit bureau reports, purchases of installment contracts, payments to
dealers, customer payment posting, credit and collection monitoring activity
and recording and posting of all general ledger information. The system
requires each branch office to balance all daily transactions before closing
out for the day. In addition, each branch office and the Company's operations
headquarters and executive office have selective access to retrieve data from
the system.
The Company's management information system is programmed with Company
guidelines and legal parameters that limit the acceptance of installment
contracts outside such guidelines and parameters. When certain installment
contract information that does not meet these guidelines is entered into the
system, it will be rejected and only accepted after it is corrected. In
addition, all branch office entries are automatically sorted and classified
into the general ledger system. As a result, the Company is able to compile
financial statements promptly at month-end. The system produces monthly
reports related to selected operational functions and administrative activity
as well as maintains a cash management system to control cash on a daily basis.
The Company believes that the system has the capacity to support
sustained growth in the Total Portfolio.
COMPETITION
The automobile finance business is highly fragmented and competitive.
The Company believes that there are numerous competitors providing, or capable
of providing, financing through dealers to non-prime consumers of automobiles
and that many companies have entered the market for non-prime consumers during
the last several years. The Company does not believe that it currently
competes, in any significant manner, with commercial banks, savings and loans,
credit unions, financing arms of automobile manufacturers such as General
Motors Acceptance Corporation, Ford Motor Credit Corporation and Chrysler
Credit Corporation, and other consumer lenders that apply more traditional
lending criteria to the credit approval process. Traditional lenders such as
banks and credit unions generally lend to "prime" consumers. These consumers
generally borrow at lower finance rates, purchase newer model automobiles and
have a lower default rate than non-prime customers. Many of the largest
providers of financing to the non-prime automobile finance market are
publicly-traded specialty automobile finance companies. The Company estimates
that these companies collectively have less than a 15% market share. The
remainder of providers is primarily comprised of privately held finance
companies and dealers who provide financing programs directly to the consumer.
The Company believes that it competes principally on the basis of the service
provided and terms offered to participating dealers.
Most non-prime lenders require an acquisition discount for each
installment contract purchased. The Company's non-refundable acquisition
discounts are based on the value and condition of the automobile, the
relationship between the amount financed and the automobile's value and the
consumer's creditworthiness which includes length of employment, net income,
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stability of residency, indebtedness and payment history. During 1996, the
average non-refundable acquisition discount charged by the Company was 10.8%.
REGULATION
The Company's business is subject to regulation and licensing under
various federal, state and local statutes and regulations. As of December 31,
1996, the Company's business operations were conducted with dealers located in
eight states, and, accordingly, the laws and regulations of such states govern
the Company's operations. Most states where the Company operates (i) limit
finance charges, fees and other charges that may be imposed by, or prescribe
certain other terms of, the installment contracts that the Company purchases,
(ii) govern the sale and type of insurance products offered by the Company and
the insurers for which it acts as agent, (iii) define the Company's rights to
repossess and sell collateral and (iv) prohibit the practice of increasing the
cash sale price for consumers who pay for automobiles on credit rather than in
cash ("cash sale differential"). It is the Company's policy not to purchase
installment contracts from dealers who charge a cash sale differential. In
addition, the Company is required to be licensed or registered to conduct its
finance operations in certain states in which the Company purchases installment
contracts. As the Company expands its operations into other states, it will be
required to comply with the laws of such states.
Numerous federal and state consumer protection laws and regulations
impose substantive disclosure requirements upon lenders and servicers involved
in automobile financing. Some of the federal laws and regulations include the
Truth-in-Lending Act, the Equal Credit Opportunity Act, the Federal Trade
Commission Act, the Fair Credit Reporting Act, the Fair Credit Billing Act, the
Fair Debt Collection Practices Act, the Magnuson-Moss Warranty Act, the Federal
Reserve Board's Regulations B and Z and the Soldiers' and Sailors' Civil Relief
Act.
The Company is subject to state regulations governing insurance agents
in connection with its sales of credit and other insurance, which require that
insurance agents (such as the Company's personnel) be licensed, govern the
commissions that may be paid to agents in connection with the sale of credit
insurance and limit the premium amount charged for insurance.
In addition, the Federal Trade Commission ("FTC") has adopted a
holder-in-due-course rule which has the effect of subjecting persons that
finance consumer credit transactions (and certain related lenders and their
assignees) to all claims and defenses which the consumer could assert against
the seller of the goods and services. With respect to used automobiles
specifically, the FTC's Rule on Sale of Used Automobiles requires that all
sellers of used automobiles prepare, complete and display a Buyer's Guide which
explains the warranty coverage for such automobiles. The Credit Practices Rules
of the FTC impose additional restrictions on sales contract provisions and
credit practices.
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EXECUTIVE OFFICERS
As of March 1, 1997, the executive officers of the Company, their ages
and their present positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
---- --- -------------------------
<S> <C> <C>
Michael P. Harrington 60 Chairman of the Board, President and Chief Executive Officer
Thomas G. Parker 56 President and Chief Operating Officer of First Enterprise Acceptance Company
Kenneth L. Stucky 58 Vice President and Chief Administrative Officer of First Enterprise Acceptance
Company
Robert J. Harker 57 Vice President and Controller
Paul A. Stinneford 64 Director, Vice President, Secretary and General Counsel
Jan W. Erfert 61 Vice President and Treasurer
</TABLE>
Michael P. Harrington has served as Chairman of the Board, President
and Chief Executive Officer of the Company since the Company commenced
operations in 1990. Prior to the formation of the Company, Mr. Harrington
served as President and Treasurer of First Illinois Finance Company ("First
Illinois"), the predecessor company of Mercury Finance Company ("Mercury")
which is a publicly held company. He was a co-founder of First Illinois in
1983. Prior to the commencement of First Illinois, Mr. Harrington served as the
interim Chief Executive Officer of General Finance Corporation ("General
Finance") and had previously been Financial Vice President, Treasurer, and a
Director of General Finance.
Thomas G. Parker has served as President and Chief Operating Officer
of First Enterprise Acceptance Company since 1992. Prior to joining the
Company, Mr. Parker was employed by Mercury from 1984 to 1992; his last
position was as a District Director. Prior to joining Mercury, Mr. Parker was
the Senior Vice President of Operations for Atlantic Discount Company, a
company he had joined in 1974. From 1963 through 1974 Mr. Parker was employed
at General Finance at which his last capacity was as a Director of Supervision.
Kenneth L. Stucky has served as Vice President and Chief
Administrative Officer of First Enterprise Acceptance Company since 1992.
Prior to joining the Company, Mr. Stucky was a Financial Business Consultant.
From 1981 through 1986 he was the Business Manager for a law firm in
Jacksonville, FL. From 1975 through 1981 he served as Administrative Vice
President
13
<PAGE> 14
for Atlantic Discount Company, a consumer finance company doing business in
several southeastern states. Prior to joining Atlantic Discount Company, Mr.
Stucky was employed at General Finance for 13 years in a number of
administrative, planning and financial positions.
Robert J. Harker has served as a Vice President and the Controller of
the Company since the Company commenced operations in 1990. Mr. Harker was a
Director of the Company from 1994 until July 1996. Prior to the formation of
the Company, Mr. Harker was Vice President and Controller of First Illinois, of
which he vas a co-founder in 1983. Prior to the commencement of First Illinois,
Mr. Harker served for over 23 years in a number of accounting and finance
capacities with General Finance.
Paul A. Stinneford has served as a Director, Vice President, the
Secretary and the General Counsel of the Company since the Company commenced
operations in 1990. Prior to the formation of the Company, Mr. Stinneford was
Vice President, Secretary and General Counsel of Spiegel, Inc. Prior to joining
Spiegel, Inc. in 1972, Mr. Stinneford was employed as an attorney with Sears,
Roebuck and Co. which he had joined in 1958.
Jan W. Erfert has served as a Vice President and the Treasurer of the
Company since 1994. Prior to joining the Company, Mr. Erfert served as Chief
Information Officer for The American Hospital Association from 1989 to 1992 and
was Vice President, Management Services for Allied Van Lines, Inc. from 1985 to
1989. His previous experience includes ten years with the American Medical
Association as Vice President and Chief Financial Officer from 1975 to 1985. He
was General Manager, Accounting Division at the U.S. Postal Service from 1973
to 1975 and had a three year association with the Aetna Finance Company
subsidiary of ITT Corporation while serving on the ITT Headquarters
Comptroller's Staff from 1965 to 1973. Mr. Erfert is a certified public
accountant.
EMPLOYEES
As of December 31, 1996, the Company employed 226 persons, none of
whom is covered by a collective bargaining agreement. The Company provides
medical insurance and other benefits for eligible employees. The Company
generally considers its relationships with its employees to be good.
ITEM 2 - PROPERTIES
PROPERTIES
The principal executive office of the Company is located in Evanston,
Illinois in a leased office facility of approximately 2,600 square feet, and
the lease for such office expires on October 31, 2000. The operations
headquarters is located in Enterprise, Alabama in a leased office facility of
approximately 7,200 square feet, and the lease for such office expires on June
30, 1999. As of December 31, 1996, the Company leased office space for 35
branch offices
14
<PAGE> 15
ranging from approximately 1,000 square feet to 3,000 square feet, and was
obligated under leases expiring on dates ranging from May 1997 to December
2005.
ITEM 3 - LEGAL PROCEEDINGS
The Company is involved from time to time in ordinary routine
litigation incidental to its business. The litigation is generally based upon
claims that certain of the Company's business practices such as acquiring
installment contracts at an acquisition discount, force placing insurance and
offering other insurance products violate laws, including the Alabama Consumer
Credit Act, the Alabama Deceptive Practices Act and the Federal Truth in
Lending Act. Three of the suits pending against the Company as of March 1, 1997
are purported class actions. One of the purported class actions was
conditionally certified as a class action, but the other class actions have not
been so certified. The Company believes that the ultimate outcome of all
pending litigation as of March 1, 1997, will not have a material adverse effect
on the Company, its profitability and its financial position. The Company
intends to vigorously defend all such actions.
Due to the consumer-oriented nature of the Company's industry and the
application of certain laws and regulations, industry participants are
regularly named as defendants in litigation alleging violations of federal and
state laws and regulations and consumer law torts, including fraud. Many of
these actions allege violations of consumer protection laws. Therefore, there
can be no assurance that the Company will not be named as a defendant in future
suits or that such suits will not have a material adverse effect on the
Company, its profitability and its financial condition.
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended December 31, 1996.
PART II
ITEM 5 - MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS
The Company's Common Stock is listed on the Nasdaq stock market's
National Market under the symbol "FENT." The approximate number of holders of
record of the Common Stock was 45 as of February 3, 1997.
15
<PAGE> 16
<TABLE>
<CAPTION>
3rd Quarter* 4th Quarter
<S> <C> <C>
1996 price range of common stock:
High $10.375 $11.125
Low 7.00 9.00
1996 dividends per common share -- --
</TABLE>
* For the period commencing July 22, 1996, the date the public market
for the Company's Common Stock commenced, through September 30, 1996.
16
<PAGE> 17
ITEM 6 - SELECTED FINANCIAL DATA
The selected financial data set forth below as of and for the years ended
December 31, 1992 through 1996 are derived from the audited financial
statements of the Company. The selected financial and operating data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements, including
the Notes thereto, and other financial data included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Automobile portfolio finance charges (1)............................. $557 $3,002 $5,082 $9,634 $17,665
Interest from timeshare receivables (1).............................. 1,458 752 123 11 -
------ ------- ------- -------- --------
Finance charges and interest......................................... 2,015 3,754 5,205 9,645 17,665
Interest expense..................................................... 1,080 1,201 1,576 4,039 6,281
------ ------- ------- -------- --------
Net interest income ................................................. 935 2,553 3,629 5,606 11,384
Provision for credit losses.......................................... - - - - 4,000
Other income:
Servicing income................................................... - 227 1,323 3,052 4,964
Insurance commissions.............................................. 93 534 550 1,342 3,198
Fees and other income.............................................. 53 169 257 606 1,649
Gain on sale of installment contracts.............................. - - - - 524
------ ------- ------- -------- --------
Total other income............................................... 146 930 2,130 5,000 10,335
Total operating expenses............................................. 1,168 2,421 5,095 8,172 12,790
Income taxes (2)..................................................... (2) 30 3 60 1,962
Income tax effect of S Corporation termination (2)................... - - - - (267)
Extraordinary item................................................... - - - - 150
------ ------- ------- -------- --------
Net income (loss).................................................... ($85) $1,032 $661 $2,374 $3,084
====== ======= ======= ======== ========
Pro forma net income................................................. $2,285 $3,578
======== ========
Per share data:
Pro forma net income per share (3)................................. $0.42 $0.63
Pro forma weighted average shares outstanding (in thousands) (3)... 5,408 5,683
PORTFOLIO DATA:
Total Portfolio...................................................... $6,215 $19,399 $39,724 $80,261 $149,470
Average Total Portfolio.............................................. 2,001 12,204 28,553 59,374 117,132
Average Owned Portfolio.............................................. 2,001 11,560 19,997 40,153 79,375
Average indebtedness (4)............................................. 16,899 18,252 18,480 34,917 66,782
Number of installment contracts purchased............................ 800 2,685 4,935 10,021 15,810
Installment contracts purchased...................................... $7,525 $19,248 $35,137 $70,184 $120,154
OPERATING DATA:
Owned Portfolio yield (5)............................................ 27.84% 25.97% 25.41% 23.99% 22.26%
Cost of borrowed funds (4)........................................... 6.39 6.58 8.53 11.57 9.41
Net interest spread ................................................. 21.45 19.39 16.88 12.42 12.85
Net interest margin (6).............................................. 21.65 19.98 18.10 13.96 14.34
Allowance for credit losses as a
percentage of Owned Portfolio...................................... 9.59 6.86 7.59 8.42 9.57
Net charge-offs in the Owned Portfolio as a
percentage of average Owned Portfolio.............................. 1.00 4.35 6.04 7.49 8.51
Net charge-offs in the Total Portfolio as a
percentage of average Total Portfolio.............................. 1.00 4.12 5.94 6.46 7.42
Operating expenses as a percentage of
average Total Portfolio............................................ 58.37% 19.84% 17.84% 13.76% 10.92%
Number of branch offices............................................. 4 8 17 25 35
Number of dealers.................................................... 69 187 333 722 1,313
BALANCE SHEET DATA:
Net principal balance (7)............................................ $6,215 $7,612 $33,779 $59,495 $118,551
Allowance for credit losses.......................................... (596) (522) (2,563) (5,011) (11,350)
Timeshare receivables................................................ 12,955 4,326 266 - -
Total assets......................................................... 19,077 12,272 33,101 58,411 119,756
Senior debt.......................................................... 7,200 5,966 25,640 43,267 61,153
Notes payable - securitized pool..................................... - - - - 36,733
Subordinated debt.................................................... 10,777 4,000 3,850 8,355 -
Stockholders' equity................................................. 885 1,524 1,728 2,165 16,316
</TABLE>
(1) In May 1992, the Company changed its business strategy from the financing
of timeshare receivables at resort properties to purchasing installment
contracts originated by automobile dealers for financing the sale of
automobiles.
(2) For all periods presented except 1996, the Company was an S Corporation and
was not subject to income taxes. Effective January 1, 1996, the Company
terminated its Subchapter S status and is subject to federal and state
income taxes. Upon termination, and in compliance with SFAS No. 109, the
Company recognized a deferred tax benefit of $267,000 representing the
cumulative temporary differences between the financial reporting and tax
basis of its assets and liabilities.
(3) Pro forma net income per share represents pro forma net income divided by
pro forma weighted average shares outstanding. Pro forma net income
represents net income, adjusted for the pro forma provision for income
taxes as if the Company had been subject to income taxes for the year-ended
December 31, 1995, plus the after-tax interest savings resulting from the
repayment of debt resulting from the issuance of common stock in connection
with the initial public offering. Pro forma weighted shares outstanding is
based on the Company's actual weighted average shares and common share
equivalents outstanding plus 2,169,636 shares sold by the Company in
connection with the initial public offering.
(4) Average indebtedness represents the average dollar balance of borrowings
outstanding under the Credit Facility and subordinated notes throughout the
year. Cost of borrowed funds represents interest expense as a percentage
of average indebtedness. Averages were computed using the beginning and
ending balance for each month during the year.
(5) Represents automobile portfolio finance charges as a percentage of the
average Owned Portfolio.
(6) Represents net interest income as a percentage of the average Owned
Portfolio. For periods prior to 1996, interest expense was allocated to
the Owned Portfolio based on the ratio of the average Owned Portfolio to
the average total finance receivables (consisting of both the Owned
Portfolio and timeshare receivables).
(7) Represents the net principal balance of finance receivable in the Owned
Portfolio.
17
<PAGE> 18
ITEM 7 - MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
preceding "Selected Financial and Operating Data" and the Company's Financial
Statements and the Notes thereto and the other financial data included in this
report. The financial information provided below has been rounded in order to
simplify its presentation. The ratios and percentages provided below are
calculated using the detailed financial information contained in the Financial
Statements, the Notes thereto and the financial data elsewhere in this report.
GENERAL
The Company is a specialty finance company engaged primarily in
purchasing and servicing installment contracts originated by dealers in the
sale of automobiles. The Company derives most of its revenue from (i) finance
charges earned on the installment contracts, (ii) contractual servicing fees
and bonus servicing fees resulting from the sales of certain receivables and
(iii) fees and commissions derived from the sale of ancillary products. The
following table summarizes the Company's sources of revenues,
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Finance charges from installment contracts . . . . . . . . 69.3% 65.8% 63.1%
Servicing income . . . . . . . . . . . . . . . . . . . . . 18.0 20.8 17.7
Other fees and commissions . . . . . . . . . . . . . . . . 11.0 13.3 17.3
Gain on sale of installment contracts . . . . . . . . . . . -- -- 1.9
Interest income from timeshare receivables . . . . . . . . 1.7 0.1 --
----- ----- -----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
From its inception in 1990 through May 1992, the Company engaged in
the financing of timeshare receivables at resort properties. In May 1992 the
Company changed its operating strategy to focus on the financing of automobile
installment contracts. As of December 31, 1996, the Company had sold or
collected all remaining timeshare receivables. The Company's automobile
installment contract portfolio has grown significantly since 1992. The Total
Portfolio increased from $6.2 million at December 31, 1992 to $149.5 million at
December 31, 1996.
Installment contracts are generally purchased from dealers at a
discount from the principal amount financed by consumers which is
non-refundable to dealers ("non-refundable contract acquisition discount").
The amount of the non-refundable contract acquisition discount is negotiated
between the dealers and the branch managers based on several factors, including
the creditworthiness of the consumers, the value and condition of the
automobiles and the relationship between the amount to be financed and the
automobile's value. Installment contracts purchased during the year ended
December 31, 1996 had a weighted average non-refundable contract acquisition
discount of approximately 10.8%. The portfolio of owned and sold installment
contracts is grouped into pools on a chronological basis (quarterly beginning
in 1995) for purposes of evaluating the non-refundable contract acquisition
discounts. The non-refundable contract acquisition discount represents both a
credit allowance and a yield enhancement, with the portion necessary to absorb
credit losses allocated to the allowance for credit losses. The remaining
portion of the non-refundable contract acquisition discount, if any, is
allocated to the unamortized contract acquisition discount and is accreted into
finance charge income over the estimated life of the installment contracts
using the sum-of-the-months'-digits method which approximates the interest
method. Since August 1995, all of the Company's non-refundable contract
acquisition discount has been allocated to the allowance for credit losses.
See "---Credit Loss Experience."
The Company records an installment contract on its books as the total
of contractually scheduled payments under such contract, reduced by: (i)
unearned finance charges, which are recognized as income using the interest
method; (ii) unearned insurance commissions, which are recognized as income
over the average terms of the related policies using the
sum-of-the-months'-digits method; (iii) the unamortized contract acquisition
discount, which
18
<PAGE> 19
represents the portion of the non-refundable contract acquisition discount not
allocated to the allowance for credit losses and (iv) that portion of the
contract acquisition discount allocated to the allowance for credit losses. If
an installment contract becomes 90 or more days contractually delinquent and no
full contractual payment is received in the month the account reaches such
delinquency status, the accrual of income is suspended until one or more full
contractual monthly payments are received. Late charges, deferment fees and
extensions fees are recognized as income when collected.
As part of its overall funding strategy, the Company has sold finance
receivables under various asset purchase agreements. During the years ended
December 31, 1993, 1995 and 1996, the Company sold $12.1 million, $27.5
million, and $35.2, respectively, under such agreements. The sales were
without recourse and no gain or loss was recognized for those sales in 1993 and
1995 as they were not material to the financial statements. Gains were
recognized for the sales in the year ended December 31, 1996 in the amount of
$524,000 primarily due to a decrease in the fixed rate to the purchaser
compared to previous sales. The gains on the sales of finance receivables were
determined by the difference between sales proceeds and the cost of the finance
receivables and adjusted for the present value of the difference between the
estimated future servicing revenues (net of a fixed rate to the purchaser) and
the normal servicing costs ("excess servicing rights"). The excess servicing
rights were capitalized and are being amortized over the expected life of the
finance receivables. In conjunction with the sale of these receivables, the
Company and the purchasers have entered into servicing agreements whereby the
Company retained servicing rights on the installment contracts sold and
receives contractual servicing fees equal to 3% per annum of the remaining
principal balance of the installment contracts sold. Under the terms of the
existing agreements, the Company is also eligible to receive additional
servicing fees, based upon portfolio performance, on the installment contracts
("bonus servicing fees"). The bonus servicing fees represent the difference
between the yield received by the Company and the sum of (i) the Company's 3%
contractual servicing fee, (ii) the yield due to the purchaser and (iii) the
addition or reduction necessary to maintain the purchaser's reserve at the
required level. At December 31, 1996, the outstanding balance of installment
contracts sold and serviced by the Company was $30.9 million. All servicing
fees earned by the Company are recognized in the Company's financial statements
as servicing income.
This report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
GROWTH, PROFITABILITY AND RECENT TRENDS AND DEVELOPMENTS
The Company has experienced significant growth since it changed its
operating strategy to focus on the financing of automobile installment
contracts. From December 31, 1992 to December 31, 1996, the Total Portfolio
increased from $6.2 million to $149.5 million. The Company's strategy is to
grow the Total Portfolio by increasing its penetration of existing markets and
by expanding into new market areas. The Company has grown from four branch
offices at December 31, 1992 to 35 branch offices at December 31, 1996.
The principal determinant of the Company's net interest income is the
difference between the finance charge income earned on the Owned Portfolio and
the interest paid on borrowed funds. The laws of most states establish the
maximum finance charge rates and prescribe the types and maximum amounts of
fees, insurance premiums and other amounts that consumers may be charged. As
is common in the non-prime consumer market, the Company's installment contracts
generally bear the maximum allowable interest rates and other charges permitted
under applicable state laws.
The Company's liabilities are generally more interest-rate sensitive
than are its earning assets. As a result, significant increases in the
Company's cost of funds could have a material adverse effect on its
profitability and financial condition. To a degree, the Company can mitigate
the adverse effect of an increase in interest rates by (i) selling or
financing portions of its Total Portfolio with fixed liabilities, (ii)
focusing on purchasing only installment contracts which bear the maximum
finance charge rates permitted by law or which are originated in states where
finance charge rate ceilings have not been established, (iii) expanding into
states that permit higher finance charge rates on consumer installment
contracts, (iv) reducing the amount it pays for an installment contract (e.g.,
19
<PAGE> 20
increasing the non-refundable contract acquisition discount) and (v) entering
into interest rate protection agreements. Additionally, management believes
that the improved capitalization resulting from its Initial Public Offering
done in July 1996, will allow the Company to take advantage of financing
structures which may reduce the Company's cost of funds or mitigate interest
rate exposures.
The following table sets forth information with regard to the
Company's net interest spread, which represents the difference between the
yield on installment contracts and the Company's cost of borrowed funds.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Owned Portfolio yield (1) . . . . . . . . . . . . . . . . . . . . . . 25.41% 23.99% 22.26%
Cost of borrowed funds . . . . . . . . . . . . . . . . . . . . . . . 8.53 11.57 9.41
----- ----- -----
Net interest spread . . . . . . . . . . . . . . . . . . . . 16.88% 12.42% 12.85%
Net interest margin (2) . . . . . . . . . . . . . . . . . . . . . . . 18.10% 13.96% 14.34%
</TABLE>
- -------------------
(1) Represents automobile portfolio finance charges as a percentage of the
average Owned Portfolio.
(2) Represents net interest income as a percentage of the average Owned
Portfolio. For 1994 and 1995, interest expense was allocated to the
Owned Portfolio based on the ratio of the average Owned Portfolio to
the average total finance receivables (consisting of both the Owned
Portfolio and timeshare receivables).
As reflected in the preceding table, the Company's yield has decreased
during the period from 1994 through December 31, 1996. This is due primarily
to increased penetration into states which have laws which limit the maximum
amount of finance charges, fees, premiums and other charges that can be
charged. Additionally, the decrease is due to (i) force placed collateral
protection insurance ("CPI") for which the Company does not charge interest,
accounting for a larger percentage of the Owned Portfolio, and (ii) the
reduction of accretion income stemming from the unamortized contract
acquisition discount. The Company's cost of borrowed funds increased from 1994
to 1995, but decreased in 1996. The increase in 1995 was due primarily to the
replacement of subordinated debt, the issuance of new subordinated debt and a
higher average cost of borrowed funds under the Credit Facility in 1995. In
December 1994, the Company replaced $4 million in subordinated debt bearing
interest at 6%, with a $4 million subordinated note bearing interest at 13.5%.
Additionally, in September 1995, the Company issued a new subordinated note for
$4.5 million bearing interest at 13%, the proceeds of which were used to pay
down borrowings under the Credit Facility. The average cost of borrowed funds
on the Credit Facility increased from 9.1% in 1994 to 10.5% in 1995. The
average cost of borrowed funds decreased from 1995 to 1996 due primarily to the
retirement of all subordinated debt, a lower average cost of funds on the
Credit Facility, and the securitization of certain finance receivables. In
July 1996, the Company completed its initial public offering of 1,886,640
shares of common stock at a price of $7 per share and in August 1996, the
Underwriters exercised their 30-day overallotment option to purchase an
additional 282,996 shares, also at $7 per share. The proceeds to the Company
were used to retire all subordinated debt and reduce the balance on the Credit
Facility by approximately $3 million. Further, effective October 1, 1996, the
Company renegotiated its Credit Facility, increasing the commitment to $85
million from $62 million and reducing the interest rate to prime plus 25 basis
points with an option of 250 basis points over LIBOR. The average cost of
borrowed funds on the Credit Facility decreased from 10.5% in 1995 to 9.5% in
1996. Finally, in June 1996, the Company completed a $45.1 million debt
financing transaction consisting of 6.84% fixed rate securitization notes. The
proceeds received by the Company were used to repay indebtedness under the
Credit Facility.
The Company's profitability is also dependent on its credit loss
experience. See "--Credit Loss Experience."
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31,1995
Net Interest Income
Finance charges and interest increased $8.1 million, or 83.2%, from
$9.6 million in 1995 to $17.7 million in 1996. The growth in finance charges
and interest resulted from an increase in the Owned Portfolio due to an
20
<PAGE> 21
increase in the number of installment contracts purchased. Installment
contracts purchased increased $50.0 million, or 71.2%, from $70.2 million in
1995 to $120.2 million in 1996. The Company opened 10 branch offices in 1996,
increasing to 35 the number of its branch offices.
The average Owned Portfolio yield decreased from 24.0% in 1995 to
22.3% in 1996. This decrease was primarily attributable to increased
penetration into states which have laws which limit the maximum amount of
finance charges, fees and premiums and other charges that can be charged. The
decrease was also attributable to (i) an increase in CPI insurance, for which
the Company does not charge interest, as a percentage of the Owned Portfolio in
1996 as compared to 1995, and (ii) accretion of the unamortized contract
acquisition discount of approximately $128,000 in 1995 compared to no accretion
income for 1996. Receivables relating to CPI insurance premiums as a
percentage of the Owned Portfolio increased from 5.2% at December 31, 1995 to
6.4% at December 31, 1996.
Interest expense increased $2.3 million from $4.0 million in 1995 to
$6.3 million in 1996. The increase in interest expense resulted from an
increase in borrowings under the Credit Facility and the securitization of
finance receivables. Average total indebtedness increased $31.9 million, or
91.3%, from $34.9 million for 1995 to $66.8 million for 1996. The average cost
of borrowed funds decreased from 11.6% for 1995 to 9.4% for 1996. The decrease
in the average cost of borrowed funds was due to the following factors, (i)
the extinguishment of $8.5 million of subordinated debt bearing interest at a
weighted average rate of 13.3% in July 1996 from the proceeds of the Initial
Public Offering, (ii) a reduction of the interest rate on the Credit Facility
from an average rate of 10.5% for 1995 to 9.5% for 1996, and (iii) the
securitization in June 1996, of installment contracts as a fixed rate debt
transaction bearing interest at a rate of 6.8%, the proceeds of which were used
to pay down borrowings under the Credit Facility. In addition to the weighted
average interest rates on the subordinated debt, the Company amortized both the
fees associated with the debt and the discount related to the detachable
warrants attached to the debt. Further, in addition to the stated rate of 6.8%
on the fixed rate securitized notes, the Company is amortizing fees associated
with the securitization, which totaled approximately $966,000.
Net interest income increased $5.8 million, or 103.1%, from $5.6
million in 1995 to $11.4 million in 1996. The net interest margin on the Owned
Portfolio increased from 14.0% in 1995 to 14.3% in 1996, due to the lower cost
of funds, offset by the reduction in the average portfolio yield as discussed
above.
Provision for Credit Losses
For 1996, the Company made provisions for credit losses of $4 million.
There were no provisions for credit losses in 1995. The provisions for credit
losses were necessary to increase the allowance for credit losses to the level
required from management's static pool loss analyses performed on the
portfolio. As a result, the allowance for credit losses as a percentage of the
Owned Portfolio increased from 8.4% at December 31, 1995 to 9.6% at December
31, 1996. See "--Credit Loss Experience."
Other Income
Other income increased $5.3 million, or 106.7%, from $5.0 million in
1995 to $10.3 million in 1996. The increase in other income was due primarily
to the increase in servicing income, the sale of ancillary products, the
collection of certain fees, and the recognition of a gain on the sale of
installment contracts.
Servicing income increased $1.9 million, or 62.7%, from $3.1 million
in 1995 to $5.0 million in 1996. The increase in servicing income was due to
the sale of $35.2 million in installment contracts during 1996 as compared to
the sale of $27.5 million in 1995. Further, the average balance of sold
contracts increased $18.5 million, or 96.4%, from $19.2 million in 1995 to
$37.7 million in 1996.
Income from insurance commissions increased $1.9 million, or 138.3%,
from $1.3 million in 1995 to $3.2 million in 1996. The increase was
attributable to the increased sales of insurance products in connection with
the
21
<PAGE> 22
increase in the volume of installment contracts purchased and the introduction
of certain new insurance products in late 1995.
Fee and other income increased $1.0 million from $606,000 in 1995 to
$1.6 million in 1996. The increase was attributable to increased fees
collected in connection with the growth of the Total Portfolio due to an
increase in the number of installment contracts purchased.
In 1996, the Company recognized a gain on the sale of $35.2 million of
installment contracts in the amount of $524,000. The gain on the sale of
installment contracts was determined by the difference between sales proceeds
and the cost of the installment contracts adjusted for the present value of the
excess servicing rights. The excess servicing rights were capitalized and are
being amortized over the expected life of the installment contracts in direct
proportion to the reduction in the related pool of installment contracts sold.
Operating Expenses
Operating expenses increased $4.6 million, or 56.5%, from $8.2 million
in 1995 to $12.8 million in 1996. The increase in operating expenses was due
to increases in salaries and employee benefits, rent and other expenses
relating to the opening of new branch offices as well as the addition of
administrative personnel at the Evanston, Illinois and Enterprise, Alabama
offices. Salaries and employee benefits increased $2.7 million, or 52.5%, from
$5.1 million in 1995 to $7.8 million in 1996. Although total operating
expenses increased in 1996 as compared to 1995, the Total Portfolio increased
at a faster rate than the rate of increase in operating expenses. As a result,
operating expenses as a percentage of the average Total Portfolio decreased
from 13.8% in 1995 to 10.9% in 1996.
Income Taxes
Income taxes increased $1.9 million from $60,000 in 1995 to $2.0
million in 1996. The increase is due to the Company terminating its status as
an S Corporation effective on January 1, 1996. As a result, the Company is now
subject to federal and certain state and local income taxes.
Upon termination of its S Corporation status, and in compliance with
SFAS No. 109, the Company recognized a deferred tax benefit of $267,000 for
1996 representing the cumulative temporary differences between the financial
reporting and tax basis in its assets and liabilities.
Extraordinary Item
In 1996, the Company incurred an extraordinary charge against earnings
of $150,000, net of taxes of $96,000, related to the early extinguishment of
$8.5 million in subordinated debt. The subordinated debt was extinguished in
July 1996, from the proceeds of the Initial Public Offering of the Company's
common stock. The extraordinary charge was comprised of previously unamortized
fees associated with the debt and unamortized discounts related to the
detachable warrants attached to the subordinated debt.
Net Income
Net income increased $710,000, or 29.9%, from $2.4 million in 1995 to
$3.1 million in 1996. The increase in net income was primarily attributable to
the growth in the Total Portfolio and related factors as discussed above, as
well as the income tax benefit resulting from the termination of the S
Corporation status.
22
<PAGE> 23
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31,1994
Net Interest Income
Finance charges and interest increased $4.4 million, or 85.3%, from
$5.2 million in 1994 to $9.6 million in 1995. The growth in finance charges
and interest resulted from an increase in the Owned Portfolio due to an
increase in the number of installment contracts purchased in 1995.
The Company opened eight branch offices in 1995, increasing to 25 the
number of its branch offices. In 1995, the Company purchased 10,021
installment contracts representing $70.2 million, an increase of 103.1% and
99.7%, respectively, from the 4,935 installment contracts representing $35.1
million purchased in 1994.
The average Owned Portfolio increased $20.2 million, or 100.8%, from
$20.0 million in 1994 to $40.2 million in 1995. The average portfolio yield
decreased from 25.4% in 1994 to 24.0% in 1995. This decrease was primarily
attributable to increased penetration in 1995 in states which have laws which
limit the maximum amount of finance charges, fees, premiums and other charges
that can be charged.
Interest expense increased $2.4 million from $1.6 million in 1994 to
$4.0 million in 1995. The increase in interest expense resulted from an
increase in borrowings under the Credit Facility and an increase in the average
interest rate paid on borrowed funds. Average indebtedness in 1995 increased
$16.4 million, or 88.9%, from $18.5 million in 1994 to $34.9 million in 1995.
The average cost of borrowed funds was 8.5% and 11.6% in 1994 and 1995,
respectively. The increase in the average cost of borrowed funds was due
primarily to the replacement of subordinated debt at a higher interest rate and
the issuance of new subordinated debt. In December 1994, the Company replaced
$4 million in subordinated debt bearing interest at 6% with a $4 million
subordinated note bearing interest at 13.5%. Additionally, in September 1995,
the Company issued a new subordinated note for $4.5 million bearing interest at
13%, the proceeds of which were used to pay down borrowings under the Credit
Facility. See"---Liquidity and Capital Resources." In addition to the
increase in the interest rate on the subordinated debt, the Company is
amortizing both the fees associated with the debt and the discount related to
the detachable warrants attached to the debt. Net interest income increased
$2.0 million, or 54.5%, from $3.6 million in 1994 to $5.6 million in 1995.
The net interest margin on the Owned Portfolio decreased from 18.1% in
1994 to 14.0% in 1995, primarily due to the higher cost of borrowed funds and
lower average portfolio yield as discussed above.
Other Income
Other income increased $2.9 million, or 134.8%, from $2.1 million in
1994 to $5.0 million in 1995. The increase in other income was primarily due
to increases in servicing income and income from the sale of ancillary
products.
Servicing income increased $1.8 million, or 130.8%, from $1.3 million
in 1994 to $3.1 million in 1995. The increase in servicing income was due to
the sale of $27.5 million in installment contracts in 1995.
Income from insurance commissions increased $792,000, or 144.2%, from
$550,000 in 1994 to $3.1 million in 1995. The increase was attributable to the
increased sales of insurance products in connection with the increase in the
volume of installment contracts purchased.
Operating Expenses
Operating expenses increased $3.1 million, or 60.4%, from $5.1 million
in 1994 to $8.2 million in 1995. The increase in operating expenses was due to
increases in salaries and employee benefits, rent and other expenses relating
to the opening of new branch offices in 1995, as well as the addition of
administrative personnel at the Evanston, Illinois and Enterprise, Alabama
offices. Salaries and employee benefits increased $1.9 million, or 59.5%, from
$3.2 million in 1994 to $5.1 million in 1995. Although operating expenses
increased in 1995, as
23
<PAGE> 24
compared to 1994, the Total Portfolio grew at a faster rate than the rate of
increase in operating expenses. As a result, operating expense as a percentage
of the average Total Portfolio decreased from 17.8% in 1994 to 13.8% in 1995.
Net Income
Net income increased $1.7 million, or 259.1%, from $661,000 in 1994 to
$2.4 million in 1995. The increase in net income was primarily attributable to
the growth in the Total Portfolio and related factors as discussed above.
CREDIT LOSS EXPERIENCE
The Company maintains an allowance for credit losses at a level
management believes adequate to absorb potential losses in the Owned Portfolio.
The adequacy of the allowance for credit losses is evaluated by management on
an ongoing basis through historical credit loss experience, delinquencies, the
value of the underlying collateral, the level of the finance contract portfolio
and general economic conditions and trends. An account is charged off against
the allowance for credit losses at the earliest of the time the account's
collateral is repossessed, the account is 150 days or more past due or the
account is otherwise deemed to be uncollectible.
The Total Portfolio is grouped into pools on a chronological basis
(quarterly beginning in 1995) for purposes of evaluating trends and loss
experience on a more detailed basis ("static pools"). If management determines
that the allowance for credit losses is not adequate to provide for potential
losses of an individual pool, amounts will be transferred, to the extent
available, from the unamortized contract acquisition discounts for that pool to
the allowance for credit losses. Any remaining shortfall in the allowance for
credit losses for an individual pool would be provided through a charge against
income. If management determines that the allowance for credit losses is in
excess of amounts required to provide for losses of an individual pool, the
allowance for credit losses charged to income, if any, will be reduced or the
contract acquisition discounts will be amortized over the remaining life of the
contracts in the pool.
Based upon historical analysis and expected future trends, management
changed the allocation of the non-refundable contract acquisition discount to
the allowance for credit losses, such that all non-refundable contract
acquisition discount was allocated entirely to the allowance for credit losses
after 1994. Additionally, after reviewing the adequacy of the allowance for
credit losses, the remaining balance of the unamortized contract acquisition
discount was transferred to the allowance for credit losses on August 1, 1995.
For the year ended December 31, 1996, the Company increased its allowance for
credit losses by $4.0 million through a charge against income based upon
continued historical analysis, particularly evaluation of the earliest static
pools. Management will continue to monitor this allocation and may, if
appropriate, in the future allocate portions of the non-refundable acquisition
discount to unamortized contract acquisition discount.
The following table sets forth the cumulative net charge offs as a
percentage of the original pool balance based on the quarter of origination and
segmented by the number of months elapsing since origination.
POOL'S CUMULATIVE NET LOSSES AS A PERCENTAGE OF ORIGINAL POOL BALANCE
<TABLE>
<CAPTION>
% of
Original
Principal
Number of Months Since Origination Balance
Pool 3 6 9 12 15 18 21 24 Remaining
---- - - - -- -- -- -- -- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995:
1st Qtr 0.10% 0.67% 2.06% 3.55% 5.79% 6.96% 7.68% 8.53% 32.6%
2nd Qtr 0.01% 0.63% 1.81% 3.39% 4.71% 5.69% 6.83% 38.7%
3rd Qtr 0.06% 0.57% 2.26% 4.17% 5.92% 7.31% 47.8%
4th Qtr 0.01% 0.41% 2.07% 3.73% 5.80% 60.4%
</TABLE>
24
<PAGE> 25
POOL'S CUMULATIVE NET LOSSES AS A PERCENTAGE OF ORIGINAL POOL BALANCE
<TABLE>
<CAPTION>
% of
Original
Principal
Number of Months Since Origination Balance
Pool 3 6 9 12 15 18 21 24 Remaining
---- - - - -- -- -- -- -- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996:
1st Qtr 0.01% 0.25% 1.53% 3.73% 77.2%
2nd Qtr 0.00% 0.32% 1.58% 81.3%
3rd Qtr 0.00% 0.38% 92.3%
4th Qtr 0.00% 91.9%
</TABLE>
The following table summarizes certain information relating to the
Company's allocation of the non-refundable contract acquisition discount and
its allowance for credit losses and unamortized contract acquisition discount.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ALLOWANCE FOR CREDIT LOSSES:
Allowance for credit losses, beginning of period . . . . $ 522 $ 2,563 $ 5,011
Non-refundable contract acquisition discount obtained
on contracts purchased and allocated to allowance
for credit losses . . . . . . . . . . . . . . . . . . 3,249 7,553 12,037
Discount allocated to installment contracts sold . . . . --- (2,197) (2,947)
Installment contracts charged off, net of recoveries . . (1,208) (3,009) (6,751)
Provision for credit losses . . . . . . . . . . . . . . . . --- --- 4,000
Transferred from unamortized contract
acquisition discount . . . . . . . . . . . . . . . . . . --- 101 ---
------- ------- -------
Allowance for credit losses, end of period . . . . . . . $ 2,563 $ 5,011 $11,350
======= ======= =======
UNAMORTIZED CONTRACT ACQUISITION DISCOUNT:
Unamortized contract acquisition discount,
beginning of period . . . . . . . . . . . . . . . . . $ 117 $ 229 $ ---
Non-refundable contract acquisition discount obtained
on contracts purchased, to be accreted into finance
charge income . . . . . . . . . . . . . . . . . . . . 332 --- ---
Accreted into finance charge income . . . . . . . . . . (210) (128) ---
Transferred to allowance for credit losses . . . . . . . . --- (101) ---
------- ------- -------
Unamortized contract acquisition discount,
end of period . . . . . . . . . . . . . . . . . . . . $ 229 $ --- $ ---
======= ======= =======
</TABLE>
Under the Company's credit policy, the Company suspends the accrual of
finance charge income with respect to an installment contract that is 90 days
past due. An account is charged off against the allowance for credit losses at
the earliest of the time (i) the account's collateral is repossessed, (ii)
the account is 150 days or more past due or (iii) the account is otherwise
deemed to be uncollectible.
25
<PAGE> 26
The following table summarizes data relating to the Company's
charge-off experience and allowance for credit losses.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CHARGE OFF EXPERIENCE:
TOTAL PORTFOLIO:
Average Total Portfolio . . . . . . . . . . . . . . . . . $28,553 $59,374 $117,132
Net charge-offs (1) . . . . . . . . . . . . . . . . . . . 1,697 3,834 8,693
Net charge-offs as a percentage of average Total
Portfolio . . . . . . . . . . . . . . . . . . . . . . 5.9% 6.5% 7.4%
OWNED PORTFOLIO:
Average Owned Portfolio . . . . . . . . . . . . . . . . $19,997 $40,153 $ 79,375
Net charge-offs (1) . . . . . . . . . . . . . . . . . . . 1,208 3,009 6,751
Net charge-offs as a percentage of average Owned
Portfolio . . . . . . . . . . . . . . . . . . . . . . 6.0% 7.5% 8.5%
ALLOWANCE FOR CREDIT LOSSES:
Owned Portfolio . . . . . . . . . . . . . . . . . . . . . $33,779 $59,495 $118,551
Allowance for credit losses . . . . . . . . . . . . . . 2,563 5,011 11,350
Allowance for credit losses as a percentage of
Owned Portfolio . . . . . . . . . . . . . . . . . . . 7.6% 8.4% 9.6%
</TABLE>
- --------------------
(1) The Company's experience to date is that only nominal amounts are
collected on charged-off accounts.
DELINQUENCY EXPERIENCE
A payment is considered past due if the customer fails to make any
full payment on or before the due date as specified by the terms of the
installment contract. The Company typically contacts delinquent customers
within one to two days after the due date.
The following table summarizes the Company's delinquency experience
for accounts with payments 60 days or more past due on a dollar basis for the
Total Portfolio and Owned Portfolio. The delinquency experience data exclude
automobiles which have been repossessed.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
TOTAL PORTFOLIO:
Installment contracts, gross . . . . . . . . . . . . . . $52,262 $105,881 $197,485
Past due contracts, gross:
60 to 89 days . . . . . . . . . . . . . . . . . . . . 159 726 1,755
90 days or more . . . . . . . . . . . . . . . . . . . 57 454 1,338
Total 60 days or more . . . . . . . . . . . . . . . . $ 216 $ 1,180 $ 3,093
======= ======== ========
Contracts with payments 60 days or more past due
as a percentage of total installment contracts,
gross . . . . . . . . . . . . . . . . . . . . . . . . 0.41% 1.11% 1.57%
======= ======== ========
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OWNED PORTFOLIO:
Installment contracts, gross . . . . . . . . . . . . . . $45,206 $79,422 $159,898
Past due contracts, gross:
60 to 89 days . . . . . . . . . . . . . . . . . . . 105 509 1,365
90 days or more . . . . . . . . . . . . . . . . . . . 57 317 796
Total 60 days or more . . . . . . . . . . . . . . . . $ 162 $ 826 $ 2,161
======= ======= ========
Contracts with payments 60 days or more past due
as a percentage of total installment contracts,
gross . . . . . . . . . . . . . . . . . . . . . . . . 0.36% 1.04% 1.35%
======= ======= ========
</TABLE>
REPOSSESSED COLLATERAL
The Company commences repossession procedures against the underlying
collateral when it determines that collection efforts are likely to be
unsuccessful. Repossession generally occurs after a customer has missed two
consecutive monthly payments. In such cases, the net amount due under the
installment contract is reduced to the estimated fair value of the collateral,
less estimated costs of disposition, through a charge to the allowance for
credit losses. Repossessed collateral is valued at the lower of cost or
market, which on average was approximately 60% of the net balance of the
contract at the time of repossession for repossessions made through December
31, 1996. Repossessed inventory was valued at $543,000 and $930,000 at
December 31, 1995 and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations, branch office openings and the
growth of the Total Portfolio through six principal sources of funds: (i)
payments received under installment contracts, (ii) borrowings under the
Credit Facility, (iii) proceeds from the issuance of subordinated notes, (iv)
proceeds from the sale of installment contracts, (v) proceeds from the
issuance of common stock in connection with the initial public offering, (vi)
proceeds from an asset securitization transaction and (vii) proceeds from the
liquidation of timeshares receivables.
Net cash flows provided by operating activities were $1.1 million,
$3.9 million and $1.1 million in 1994, 1995 and 1996, respectively.
The Company's cash flows used in investing activities since inception
have been used primarily for the purchase of installment contracts. Cash used
for the purchase of installment contracts was $35.1 million, $70.2 million and
$120.2 million for 1994, 1995 and 1996, respectively. Capital expenditures
were $543,000, $521,000 and $739,000 for 1994, 1995 and 1996, respectively.
Cash used in investing activities was offset by (i) the collection of principal
on installment contracts of $11.4 million, $22.0 million and $31.6 million in
1994, 1995 and 1996, respectively; (ii) net proceeds of $24.8 million and
$31.7 million from the sales of installment contracts in 1995 and 1996,
respectively; and (iii) proceeds from the liquidation of timeshare receivables
of $4.1 million and $266,000 in 1994 and 1995, respectively.
Cash was provided by financing activities, primarily from net
borrowings under the Credit Facility, the securitization of installment
contracts, an initial public offering of the Company's common stock and the
issuance of subordinated debt. Net borrowings under the Credit Facility were
$19.7 million, $17.6 million and $17.9 million in 1994, 1995 and 1996,
respectively. In addition, cash was provided through the securitization of
installment contracts in the amount of $45.1 million in 1996, the proceeds of
which were used to reduce the borrowings under the Credit Facility. Further,
$11.2 million in cash was raised in 1996 through the initial public offering of
the Company's common stock, the net proceeds of which were used to repay $8.5
million of subordinated debt, with the balance reducing amounts outstanding on
the Credit Facility. In addition, cash was provided in 1995 through borrowings
on a subordinated basis in the amount of $4.5 million. Offsetting cash
provided from financing activities were dividends paid of $474,000, $1.5
million and $2.1 million in 1994, 1995 and 1996, respectively.
27
<PAGE> 28
As of the date hereof, the Company has a $85 million Credit Facility
with a group of seven banks, for which LaSalle National Bank acts as agent, and
which expires June 1, 1998. The Credit Facility is collateralized by a lien on
all the Company assets not subjected to the securitized pool. Interest is
payable at the agent bank's reference rate plus .25% (8.50% at December 31,
1996) and the Company has a option of 2.50% over the LIBOR rate. Borrowings
outstanding under the Credit Facility were $61.2 million at December 31, 1996.
The Credit Facility requires the Company to maintain minimum capital funds (as
defined) of $11.5 million. The Credit Facility also requires that total loss
reserves be maintained at not less than 8% of net installment contracts
receivable and no more than 3% of net installment contracts receivable may be
more than 60 days past due. The Credit Facility also requires that earnings
before interest and taxes to cash interest expense may not be less than 125%
and the ratio of unsubordinated debt to tangible net worth plus subordinated
debt cannot exceed 5 to 1. At December 31, 1996, the Company was in compliance
with all of these covenants.
The Company issued a senior and a junior subordinated note in 1990.
Each note had a face value of $5.0 million, carried an interest rate of 6% and
was unsecured. The Company granted warrants to the junior subordinated note
holder allowing for the purchase of 51% of the Common Stock of the Company. The
senior subordinated note was paid off in 1993. In December 1994, the junior
subordinated note was paid off and the remaining warrants were surrendered to
the Company.
In December 1994, in order to refinance the junior subordinated note,
the Company issued a subordinated note in the amount of $4.0 million to Michael
P. Harrington, its Chairman, President and Chief Executive Officer. Under the
terms of such note, interest was payable at the end of each quarter at a fixed
rate of 13.5% and was due on September 30, 1996. The proceeds were used to
retire the remaining principal balance on the junior subordinated note.
Simultaneously, Mr. Harrington issued a $4.0 million note to LaSalle secured by
capital stock in the Company owned by Mr. Harrington. Under the terms of the
note issued to LaSalle, interest was payable at the end of each quarter at a
fixed rate of 13.5% and was due on September 30, 1996. In connection with this
note issuance, the Company issued to LaSalle a detachable warrant to purchase
193,320 shares of Common Stock. The warrant was exercised by LaSalle at a
price of $1.13 per share in connection with the initial public offering of the
Company's common stock in July 1996.
On September 21, 1995, the Company issued a subordinated note in the
amount of $4.5 million to Banc One Capital Partners V, Ltd. ("Banc One").
Under the terms of the agreement, interest was payable monthly at a fixed rate
of 13%. The note was due on August 31, 1998. In connection with the issuance of
the Banc One note, a detachable warrant to purchase 193,320 shares of Common
Stock was issued to Banc One. The warrant was exercised at a price of $1.56 per
share in connection with the initial public offering of the Company's common
stock in July 1996.
The company sold a total of $74.8 million of installment contracts -
$12.1 million in 1993, $27.5 million in 1995 and $35.2 million under various
asset purchase agreements and servicing agreements. Pursuant to these
servicing agreements, the Company retains the servicing rights on the
installment contracts sold and receives servicing fees. At December 31, 1996
the outstanding balance of installment contracts sold and serviced by the
Company was $30.9 million, and such installment contracts were sold to yield
the purchasers, including GECC, a range of 8.9% to 11.0% per annum. See Notes
to Financial Statements.
In order to meet its 1997 funding needs, the Company will require
additional financing to supplement its expected cash flows from operations and,
the anticipated borrowings under its Credit Facility. The Company has entered
into a securitization facility with a placement agent for the issuance of up to
$200 million of securitized notes through one or more wholly-owned special
purpose subsidiaries. Initially, on June 18, 1996, a wholly-owned subsidiary
of the Company sold approximately $45.1 million of 6.84% fixed rate Securitized
Notes in an asset securitization transaction (the "Securitization"). The
Securitized Notes were secured by installment contracts and the payments under
the Securitized Notes are guaranteed pursuant to a financial guaranty insurance
policy issued by Financial Security Assurance Inc. The net proceeds of the
Securitization to the Company were used to reduce the outstanding balance
under the Credit Facility. The debt incurred in the Securitization is
reflected on the balance sheet of the Company and did not result in a gain on
sale. The Company has not entered into any agreements with
28
<PAGE> 29
the purchasers of the Securitized Notes in excess of the $45.1 million of the
Securitized Notes sold and there can be no assurance that any such additional
sales will occur. The Company presently intends to finance additional 1997
funding needs through borrowings under the Credit Facility and securitization
transactions.
IMPACT OF INFLATION
Although the Company does not believe that inflation directly has a
material adverse effect on its financial condition or results of operations,
increases in the inflation rate generally are associated with increased
interest rates. Because the Company borrows funds on a floating rate basis and
purchases installment contracts bearing fixed rates, increased costs of
borrowed funds could have a material adverse impact on the Company's
profitability. Inflation also can affect the Company's operating expenses.
IMPACT OF NEW ACCOUNTING STANDARDS
The Company believes that the provisions of certain Statements of
Financial Accounting Standards ("SFAS") which have not been implemented by the
Company either do not apply to the Company or would not affect the Company's
financial position, results of operations, or disclosures relating thereto.
These statements include SFAS No. 106 "Employer's Accounting for Postretirement
Benefits Other than Pensions" and SFAS No. 121 "Accounting for the Impairment
of Long-Lived Assets to be Disposed of."
The Company intends to continue to apply the provisions of Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" in
accounting for stock-based compensation. The Company will provide pro forma
net income and net income per share disclosures as if the fair value based
accounting method in Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" had been used to account for
stock-based compensation.
The Company will adopt Statement of Financial Accounting Standards No.
125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" effective January 1, 1997. As a result, for all
securitization transactions completed after this date and meeting the specific
criteria of SFAS 125, the company will remove the securitized assets and
related liabilities from its balance sheet and recognize applicable servicing
assets.
29
<PAGE> 30
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
First Enterprise Financial Group, Inc.
We have audited the accompanying consolidated balance sheets of First
Enterprise Financial Group, Inc. and subsidiary (the "Company") as of December
31, 1996 and 1995, and the related consolidated statements of income, changes
in stockholders' equity, and cash flows for each of the years in the three year
period ended December 31, 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Enterprise
Financial Group, Inc. and subsidiary as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in note A, effective January 1, 1996, the Company changed its tax
status by terminating its S Corporation election. Concurrent with this change,
the Company adopted the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes."
GRANT THORNTON LLP
Chicago, Illinois
February 8, 1997 (except for note K, as
to which the date is March 7, 1997)
30
<PAGE> 31
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIRST ENTERPRISE FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
ASSETS 1996 1995
------------ -----------
<S> <C> <C>
Cash ........................................................ $ 1,323,149 $ 1,703,320
Restricted cash ............................................. 4,586,780 -
Automobile finance receivables .............................. 118,537,808 59,305,631
Allowance for credit losses ................................. (11,349,783) (5,010,919)
------------ ------------
Finance receivables, net .................................. 107,188,025 54,294,712
Property and equipment, net ................................. 1,255,777 881,713
Repossessed assets .......................................... 929,560 542,841
Deferred tax asset .......................................... 2,241,000 -
Other assets ................................................ 2,231,660 988,194
------------ ------------
TOTAL ASSETS ............................................... $119,755,951 $ 58,410,780
============ ============
<CAPTION>
December 31,
-------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
------------ -----------
<S> <C> <C>
Senior debt ................................................. $ 61,153,000 $43,267,000
Notes payable - securitized pool ............................ 36,732,987 -
Subordinated debt ........................................... - 8,354,541
Accounts payable - dealers .................................. 2,704,455 1,937,710
Other accounts payable and accrued expenses ................. 2,524,003 1,577,189
Other liabilities ........................................... 325,208 460,271
------------ -----------
Total liabilities ......................................... 103,439,653 55,596,711
Commitments and contingencies ............................... - -
Common stock warrants ....................................... - 649,300
Stockholders' equity:
Common stock, $.01 par value; 20,000,000 shares authorized;
5,285,955 and 2,062,080 shares issued and outstanding
at December 31, 1996 and 1995, respectively ............ 52,860 20,621
Class B common stock, $.01 par value, non-voting;
2,262,080 shares authorized; 917,625 issued
and outstanding at December 31, 1995 ................... - 9,176
Additional paid-in capital ................................ 13,921,286 1,201,718
Retained earnings ......................................... 2,342,152 1,328,405
Guaranteed loans of stockholders .......................... - (395,151)
------------ -----------
Total stockholders' equity ................................ 16,316,298 2,164,769
------------ -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY .................................. $119,755,951 $58,410,780
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
31
<PAGE> 32
FIRST ENTERPRISE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Finance charges and interest .......................... $17,665,105 $9,644,486 $5,205,150
Interest expense ...................................... 6,281,428 4,038,900 1,575,923
----------- ---------- ----------
Net interest income ............................ 11,383,677 5,605,586 3,629,227
Provision for credit losses ........................... 4,000,000 - -
----------- ---------- ----------
Net interest income after
provision for credit losses .................. 7,383,677 5,605,586 3,629,227
Other income:
Servicing income .................................... 4,964,039 3,051,952 1,322,604
Insurance commissions ............................... 3,198,225 1,342,099 549,682
Fees and other income ............................... 1,648,878 606,202 257,257
Gain on sale of finance receivables ................. 524,000 - -
----------- ---------- ----------
Total other income ............................. 10,335,142 5,000,253 2,129,543
----------- ---------- ----------
Income before operating expenses ............... 17,718,819 10,605,839 5,758,770
Operating expenses:
Salaries and employee benefits ...................... 7,768,586 5,095,792 3,194,775
Rent expense ........................................ 530,088 355,420 212,310
Depreciation and amortization ....................... 364,563 267,962 137,365
Professional services ............................... 647,914 472,480 229,176
Data processing ..................................... 950,481 610,205 267,708
Other expenses ...................................... 2,528,839 1,370,228 1,053,912
----------- ---------- ----------
Total operating expenses ....................... 12,790,471 8,172,087 5,095,246
----------- ---------- ----------
Income before income taxes and
extraordinary item .......................... 4,928,348 2,433,752 663,524
Income taxes .......................................... 1,962,000 60,000 2,500
Deferred income tax effect of S Corporation
termination ......................................... (267,000) - -
----------- ---------- ----------
Income before extraordinary item ............... 3,233,348 2,373,752 661,024
Extraordinary charge from early extinguishment of debt,
net of income taxes .................................. (149,789) - -
----------- ---------- ----------
Net income ..................................... $ 3,083,559 $2,373,752 $ 661,024
=========== ========== ==========
Per share data:
Pro forma net income before extraordinary item ....... $ .66 $ .42
Extraordinary charge ................................. (.03) -
----------- ----------
Pro forma net income per share ........................ $ .63 $ .42
=========== ==========
Pro forma weighted average number of common
and common equivalent shares outstanding ............. 5,683,341 5,407,709
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
32
<PAGE> 33
FIRST ENTERPRISE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Class B Additional Guaranteed
Common Common Paid-in Retained Loans of
Stock Stock Capital Earnings Stockholders Total
------- -------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1993 ........... $20,621 $ - $ 779,379 $ 724,018 $ - $ 1,524,018
Net income .......................... - - - 661,024 - 661,024
Dividends paid ...................... - - - (474,027) - (474,027)
Exercise of options to acquire
547,740 shares of Class B
common stock ..................... - 5,477 252,098 - (240,606) 16,969
------- -------- ----------- ----------- ------------ -----------
Balance December 31, 1994 ........... 20,621 5,477 1,031,477 911,015 (240,606) 1,727,984
Net income .......................... - - - 2,373,752 - 2,373,752
Dividends paid ...................... - - - (1,549,125) - (1,549,125)
Appreciation of common stock
warrants ......................... - - - (407,237) - (407,237)
Exercise of options to acquire
384,062 shares of Class B
common stock ..................... - 3,841 176,765 - (154,545) 26,061
Repurchase of 14,177 shares of
Class B common stock ............. - (142) (6,524) - - (6,666)
------- -------- ----------- ----------- ------------ -----------
Balance at December 31, 1995 ........ 20,621 9,176 1,201,718 1,328,405 (395,151) 2,164,769
Net income .......................... - - - 3,083,559 - 3,083,559
Dividends paid - Final
S Corporation distribution
payment .......................... - - - (2,069,812) - (2,069,812)
Exercise of common stock
warrants to purchase 386,640
shares of common stock ........... 3,867 - 1,165,465 - - 1,169,332
Tax benefits relating to the exercise
of common stock warrants ......... - - 750,000 - - 750,000
Exercise of options to acquire
136,609 shares of common
stock ............................ 386 980 156,766 - - 158,132
Conversion of Class B stock to
common stock ..................... 10,156 (10,156) - - - -
Issuance of 1,782,996 shares of
common stock in connection
with the initial public offering,
net of offering costs ............ 17,830 - 10,647,337 - - 10,665,167
Release of guarantee on loans of
stockholders ..................... - - - - 395,151 395,151
------- -------- ----------- ----------- ------------ -----------
Balance at December 31, 1996 ........ $52,860 $ - $13,921,286 $ 2,342,152 $ - $16,316,298
======= ======== =========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of this statement.
33
<PAGE> 34
FIRST ENTERPRISE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ......................................... $ 3,083,559 $ 2,373,752 $ 661,024
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization .................. 364,563 267,962 137,365
Amortization of discount on subordinated debt .. 145,459 96,604 -
Provision for credit losses .................... 4,000,000 - -
Deferred income taxes .......................... (1,974,000) - -
Deferred income tax effect of
S Corporation termination .................... (267,000) - -
Gain on sale of finance receivables ............ (524,000) - -
Loss on disposal of property and
equipment .................................... - - 47,458
Accretion of contract acquisition
discounts .................................... - (127,797) (209,940)
Changes in assets and liabilities:
Restricted cash .............................. (4,586,780) - -
Repossessed assets ........................... (386,719) (320,554) (176,971)
Other assets ................................. (700,466) (888,653) (47,115)
Accounts payable and accrued
expenses ................................... 207,702 479,123 486,272
Income taxes payable ......................... 1,489,112 - -
Other liabilities ............................ 1,007,833 2,047,075 223,250
------------- ------------ ------------
Total adjustments ....................... (1,224,296) 1,553,760 460,319
------------- ------------ ------------
Net cash provided by
operating activities .................. 1,859,263 3,927,512 1,121,343
Cash flows from investing activities:
Automobile installment contracts
purchased ........................................ (120,154,468) (70,184,351) (35,136,768)
Proceeds from sale of automobile
installment contracts ............................ 31,665,399 24,777,933 -
Principal collections on automobile
installment contracts ............................ 31,595,756 21,970,934 11,444,010
Principal collections on timeshare
receivables ...................................... - 266,323 4,059,978
Capital expenditures ............................... (738,627) (521,291) (542,644)
------------- ------------ ------------
Net cash (used in)
investing activities .................. (57,631,940) (23,690,452) (20,175,424)
</TABLE>
34
<PAGE> 35
FIRST ENTERPRISE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Borrowings under senior debt ....................... $107,845,000 $50,385,000 $25,278,000
Payments on senior debt ............................ (89,959,000) (32,758,000 (5,604,000)
Borrowings under notes payable - securitized pool .. 45,087,652 - -
Payments on notes payable - securitized pool ....... (8,354,665) - -
Proceeds from issuance of subordinated
debt ............................................. - 4,500,000 4,000,000
Payments on subordinated debt ...................... (8,500,000) - (4,000,000)
Proceeds from issuance of common stock ............. 11,343,331 180,606 257,575
Payments on repurchase of common stock ............. - (6,666) -
Dividends paid ..................................... (2,069,812) (1,549,125) (474,027)
------------ ----------- -----------
Net cash provided by
financing activities ................. 55,392,506 20,751,815 19,457,548
------------ ----------- -----------
(DECREASE) INCREASE
IN CASH .............................. (380,171) 988,875 403,467
Cash at beginning of period .......................... 1,703,320 714,445 310,978
------------ ----------- -----------
Cash at end of period ................................ $ 1,323,149 $ 1,703,320 $ 714,445
============ =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ......................................... $ 6,405,798 $ 3,767,277 $ 1,459,751
Income taxes ..................................... 2,423,119 34,213 43,149
Supplemental schedule of non-cash financing
activities:
Issuance of common stock warrants in
connection with subordinated debt .............. $ - $ 92,063 $ 150,000
Guaranteed loans of stockholders for the
purchase of common stock ....................... - 154,545 240,606
Increase in additional paid-in capital resulting
from tax benefit in conjunction with the
exercise of common stock warrants .............. 750,000 - -
</TABLE>
The accompanying notes are an integral part of these statements.
35
<PAGE> 36
FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE BUSINESS
First Enterprise Financial Group, Inc., which operates under the name First
Enterprise Acceptance Company, including its wholly-owned special purpose
subsidiary, First Enterprise Securitization Corp. (collectively, the
"Company"), is a specialty finance company engaged primarily in purchasing and
servicing installment sales contracts originated by automobile dealers for
financing the sale of used automobiles, vans and light trucks.
The accounting policies of the Company conform to generally accepted accounting
principles and to the general practice within the automobile finance company
industry. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONSOLIDATION
The consolidated financial statements include accounts of First Enterprise
Financial Group, Inc. and its wholly-owned special purpose subsidiary, First
Enterprise Securitization Corp. All significant intercompany accounts have
been eliminated in consolidation.
ACCOUNTING CHANGES
In connection with the initial public offering ("IPO") of common stock, the
Company performed a comprehensive evaluation of its accounting policies. As a
result of this review and in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 20, "Accounting Changes," the Company has
retroactively adopted an accounting change which the Company believes is more
consistent with prevailing industry practices regarding non-refundable contract
acquisition discounts. Non-refundable contract acquisition discounts arise
from the purchase of installment contracts from dealers at amounts less than
the principal amounts of such contracts. These discounts are allocated to the
allowance for credit losses in an amount necessary to absorb estimated credit
losses with the remaining amount, if any, allocated to unamortized contract
acquisition discounts and accreted into finance charge income over the
estimated average life of the installment contracts.
36
<PAGE> 37
FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
CONCENTRATION OF CREDIT RISK
The Company's installment contract receivables are primarily with individuals
located in the southeastern United States. As of December 31, 1996,
approximately 26.8% and 21.2% of automobile finance receivables were purchased
from dealers located in Florida and Alabama, respectively.
REVENUE RECOGNITION
Finance charges on automobile installment contracts are credited to unearned
finance charges at the time the contracts are acquired. The finance charges
are recognized over the life of the installment contracts using the interest
(actuarial) method to produce constant rates of interest (yields).
If an installment contract becomes 90 or more days contractually delinquent and
no full contractual payment is received in the month the account reaches such
delinquency status, the accrual of income is suspended until one or more full
contractual monthly payments are received. Late charges, deferment fees and
extension fees are recognized as income when collected.
The Company, as agent for unaffiliated insurers, offers credit life and
accident and health insurance to borrowers under financing contracts purchased
from automobile dealers. Commissions earned on these insurance products are
recognized as income over the average terms of the related policies using the
sum-of-the-months'-digits method, which approximates the results under the
interest method.
SERVICING INCOME
Contractual servicing income on sold receivables is recognized over the life of
the related receivables as a percentage of receivables outstanding. Bonus
servicing fees are recognized when earned and are based on the difference
between the yield received by the Company and the sum of the Company's 3%
contractual servicing fee, the yield due to the purchaser and the addition or
reduction necessary to maintain the purchaser's reserve at the required level.
Gain or loss on sale of finance receivables is determined by the difference
between sales proceeds and the cost of the finance receivables and adjusted for
the present value of the difference, if any, between the estimated future
servicing revenues (net of a fixed rate to the purchaser) and normal servicing
costs ("excess servicing rights"). The excess servicing rights, if any, are
capitalized and amortized over the expected repayment life of the sold finance
receivables. All servicing fees earned by the Company are recognized in the
Company's financial statements as servicing income.
37
<PAGE> 38
FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
NON-REFUNDABLE CONTRACT ACQUISITION DISCOUNTS
Installment contracts are generally purchased from dealers at a discount from
the principal amounts financed by the consumer and are non-refundable to the
dealers ("non-refundable contract acquisition discount"). This discount, which
represents both a credit allowance and a yield enhancement, is negotiated by
the Company and the dealers. The portfolio of owned and sold installment
contracts is grouped into pools on a chronological basis (quarterly beginning
in 1995) for purposes of evaluating the non-refundable contract acquisition
discount. The portion of the non-refundable contract acquisition discount
necessary to absorb estimated credit losses for each pool is allocated to the
allowance for credit losses. The remaining portion of the contract acquisition
discount ("unamortized contract acquisition discount") for each pool, if any,
is reflected as a reduction of the net principal balance and accreted into
finance charge income over the estimated average life of the installment
contracts using the sum-of-the-months'-digits method, which approximates the
results under the interest method. Beginning in 1995, the full discount has
been allocated to the allowance for credit losses and the discount is no longer
being amortized to interest income.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is established through an allocation of the
non-refundable contract acquisition discount based upon amounts necessary to
absorb credit losses in the installment contract portfolio, as previously
discussed. The adequacy of the allowance for credit losses is evaluated by
management on an ongoing basis through historical credit loss experience,
delinquencies, the value of the underlying collateral, the level of the
installment contract portfolio and general economic conditions and trends. The
Company has found that borrowers under its installment contract receivables are
payment sensitive rather than interest rate sensitive. Consequently, the
Company does not consider interest rates a predominant risk characteristic for
purposes of evaluating credit losses. The portfolio of owned and sold loans is
grouped into pools on a chronological basis (quarterly beginning in 1995) for
purposes of evaluating trends and loss experience. If management determines
that the allowance for credit losses is not adequate to provide for potential
losses of an individual pool, amounts will be transferred, to the extent
available, from the unamortized contract acquisition discounts for that pool to
the allowance for credit losses. Any remaining shortfall in the allowance for
credit losses would be provided through a charge against income. If management
determines that the allowance for credit losses is in excess of amounts
required to provide for losses of an individual pool, the allowance for credit
losses charged to income, if any, will be reduced or the contract acquisition
discounts will be amortized over the remaining life of the installment
contracts in the pool.
An account is charged off against the allowance for credit losses at the
earliest of the time the account's collateral is repossessed, the account is
150 days or more past due or the account is otherwise deemed to be
uncollectible.
38
<PAGE> 39
FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
RESTRICTED CASH
The Company is required to establish and maintain cash reserves and collection
accounts with a trustee with respect to the securitized pool of funding
receivables. These balances are reported as restricted cash on the Company's
Consolidated Balance Sheet.
REPOSSESSED ASSETS
Repossessed collateral is valued at the lower of cost or market value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated lives, generally ranging
from five to seven years. Leasehold improvements are amortized over the lives
of the respective leases or the service lives of the improvements, whichever is
shorter. The straight-line method of depreciation and amortization is followed
for all assets for financial reporting purposes, and accelerated methods are
used for income tax purposes.
INCOME TAXES
Since its inception, the Company was an S Corporation under the Internal
Revenue Code of 1986, as amended. As a result, the income of the Company has
been taxed, for federal and certain state and local income tax purposes,
directly to the Company's stockholders, rather than the Company. The Company
terminated its status as an S Corporation effective January 1, 1996 and, as
result, the Company is subject to federal and state corporate income taxation.
Effective January 1, 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes."
The Company recognizes deferred tax assets and liabilities based on differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in the period in which the enactment in effective.
39
<PAGE> 40
FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, finance receivables and debt.
The estimated fair value of finance receivables approximates their carrying
value due to the duration of the receivables as well as the interest rates
negotiated. Estimated fair value of finance receivables is based upon the
average contractual lives of the receivables less expected prepayments and
estimated interest rates on similar receivables. The estimated fair value of
the senior debt with floating interest rates approximates its carrying value.
The fair value of the subordinated debt and the notes payable - securitized
pools obligations approximates their carrying value based upon current quoted
market prices.
NET INCOME PER SHARE
Net income per share amounts are calculated based on pro forma net income
divided by the pro forma weighted average number of shares of common stock
outstanding during the period after consideration of the dilutive effect of
common stock equivalents.
INITIAL PUBLIC OFFERING AND REORGANIZATION
On July 22, 1996, the Company completed a public offering of 1,500,000 shares
of its common stock at a price of $7.00 per share pursuant to a Form S-1
Registration Statement under the Securities Act of 1933, as originally filed on
February 1, 1996 and subsequently amended. The underwriters exercised their
over-allotment option and purchased an additional 282,996 shares of common
stock at a price of $7.00 per share on August 20, 1996. The Company received
$10,665,167 from the Common Stock Offering, after deducting the underwriting
discount and offering expenses. The proceeds were used to fund purchases of
finance contracts and, prior to such use, the proceeds were used to reduce
borrowings under the Senior Secured Credit Facility.
In connection with its IPO, the Company increased its authorized capital stock
to 20,000,000 shares of common stock, par value $.01 per share through a
reincorporation. Existing Class A common stock and Class B common stock were
exchanged for 1,288.8 shares of common stock and Class B common stock,
respectively, and all options and warrants were converted at the same exchange
rate. The Company's stock, Class B common stock was also exchanged for common
stock on a share for share basis. The outstanding warrants were exercised and
sold in the IPO. The Company sold 1,500,000 shares of the common stock and the
underwriters exercised a 30-day option to purchase an additional 282,996 shares
to cover over-allotments.
40
<PAGE> 41
FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
IMPACT OF NEW ACCOUNTING STANDARDS
Effective January 1, 1997, the Company will adopt SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities."
As a result, for all securitization transactions completed after this date and
meeting the specific criteria of SFAS No. 125, the Company will remove the
securitized assets and related liabilities from its balance sheet and recognize
applicable servicing assets.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the 1996 presentation. These reclassifications did
not affect the results of operations.
NOTE B - FINANCE RECEIVABLES
<TABLE>
<CAPTION>
Finance receivables are summarized as follows:
December 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Contractual payments ......................... $160,224,969 $79,422,000
Unearned finance charges ..................... (41,673,797) (19,926,632)
------------ ------------
Net principal balance ........................ 118,551,172 59,495,368
Unearned insurance commissions ............... (13,364) (189,737)
------------ ------------
Automobile finance receivables ............... 118,537,808 59,305,631
Allowance for credit losses .................. (11,349,783) (5,010,919)
------------ ------------
Finance receivables, net ............. $107,188,025 $ 54,294,712
============ ============
</TABLE>
Automobile finance receivables are accounted for on a discount basis and
generally have terms of 24 to 36 months, with a maximum term of 54 months.
Contractual maturities on the finance receivables by year are not readily
available as of December 31, 1996, but the Company's experience has shown that
such information is not significant in that receivables may be paid in full
prior to contractual maturity. Principal collections on finance receivables
were $31,595,756 and $21,970,934 for the years ended December 31, 1996 and
1995, respectively. The principal cash collections as a percentage of the
average receivable balance, net of unearned finance charges, were 39.8% and
54.7% for the years ended December 31, 1996 and 1995, respectively.
41
<PAGE> 42
FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE B - FINANCE RECEIVABLES - CONTINUED
A summary of the activity in the unamortized contract acquisition discounts is
as follows for the years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995 1994
---- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year ................ $ - $ 228,617 $ 117,274
Additions from new business ................. - - 321,283
Accreted into finance charge income ......... - (127,797) (209,940)
Transferred to allowance for credit losses .. - (100,820) -
---- --------- ---------
Balance at end of year ...................... $ - $ - $ 228,617
==== ========= =========
</TABLE>
A summary of the activity in allowance for credit losses is as follows for the
years ended December 31, 1996, 1995, and 1994.
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year ........... $ 5,010,919 $ 2,562,723 $ 522,368
Additions from new business ............ 12,036,835 7,553,059 3,248,531
Reduction related to finance receivables
sold ................................. (2,946,826) (2,196,577) -
Finance receivables charged off, net of
recoveries ........................... (6,751,145) (3,009,106) (1,208,176)
Transferred from unamortized contract
acquisition discounts ................ - 100,820 -
Provision for credit losses ............ 4,000,000 - -
----------- ----------- -----------
Balance at end of year ................. $11,349,783 $ 5,010,919 $ 2,562,723
=========== =========== ===========
</TABLE>
The Company utilized Asset Purchase Agreements and Servicing Agreements to sell
automobile finance receivables between 1993 and 1996. All sales under the
agreements have been without recourse to the Company and are accounted for as
sale of receivables.
42
<PAGE> 43
FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE B - FINANCE RECEIVABLES - CONTINUED
The Company sold $12.1 million, $10.8 million, $2.6 million, $9.1 million,
$15.7 million and $9.7 million of automobile finance receivables under a $40
million Asset Purchase Agreement and Servicing Agreement on December 10, 1993,
February 24, 1995, June 7, 1995, June 29, 1995, January 30, 1996, and March 8,
1996, respectively. The purchaser is entitled to earn a fixed rate (9.5%,
11.0%, 9.8%, 9.8%, 8.9% and 9.0%, respectively). In addition, on May 22, 1995
and April 22, 1996, the Company sold $5 million and $9.8 million of receivables
under another Asset Purchase Agreement and Servicing Agreement, entitling the
purchaser to earn a fixed rate of 10.3% and 9.8%, respectively. Ten percent of
the purchase price of each sale is being retained by the purchaser as a reserve
for potential losses. Gains of $524,000 were recorded on the sales
transactions occurring in 1996. The gains were determined by the difference
between the sales proceeds and the cost of the finance receivables and adjusted
for the present value of the difference between the estimated future servicing
revenues (net of a fixed rate to the purchaser) and normal servicing costs
("excess servicing rights"). The excess servicing rights have been capitalized
and are being amortized over the expected repayment
life of the sold finance receivables. The unamortized balance of excess
servicing rights at December 31, 1996 was $323,276.
Under the terms of all the above agreements, the Company retains the servicing
rights for the sold receivables and receives a contractual annualized servicing
fee equal to 3% of the net outstanding receivables from the purchaser. The
outstanding balance of all receivables sold and serviced by the Company totaled
$30,918,651 and $20,765,687 at December 31, 1996 and 1995, respectively.
Contractual servicing income amounted to $956,026, $573,812 and $269,998 for
the years ended December 31, 1996, 1995 and 1994, respectively. The Company is
eligible to receive additional bonus servicing fees based upon portfolio
performance. The bonus servicing fees represent the difference between the
yield received by the Company and the sum of the Company's 3% contractual
servicing fee, the yield retained by the purchaser and the addition or
reduction necessary to maintain the purchaser's reserve at the required level.
Bonus servicing fees amounted to approximately $4,008,000, $2,478,000 and
$1,053,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
43
<PAGE> 44
FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE C - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consist of the following at:
December 31,
---------------------
1996 1995
---------- ---------
<S> <C> <C>
Furniture and fixtures ............................ $ 425,899 $ 267,773
Equipment ......................................... 1,298,432 861,417
Leasehold improvements ............................ 358,441 218,538
---------- ---------
2,082,772 1,347,728
Less accumulated depreciation and amortization .... 826,995 466,015
---------- ---------
Total ............................................. $1,255,777 $ 881,713
========== =========
</TABLE>
NOTE D - SENIOR DEBT AND SUBORDINATED DEBT
Senior debt and subordinated debt consist of the following at:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Senior Debt:
$85,000,000, Senior Secured Credit Facility (the "Credit Facility"),
due June 1, 1998, with interest at the reference rate as
defined in the agreement, plus .25%, which was 8.50% at
December 31, 1996, and included a placement option of
250 basis points over the LIBOR rate. ........................................... $61,153,000 $43,267,000
=========== ===========
Subordinated Debt :
$4,000,000, subordinated note, unsecured, due September 30,
1996, with interest at 13.5% (net of unamortized allocation
of $62,046 to common stock warrants) ............................................ $ - $ 3,937,954
$4,500,000, subordinated note, unsecured, due August 31,
1998, with interest at 13.0% (net of unamortized allocation
of $83,413 to common stock warrants) ............................................ - 4,416,587
----------- -----------
Total ............................................................................... $ - $ 8,354,541
=========== ===========
</TABLE>
44
<PAGE> 45
FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE D - SENIOR DEBT AND SUBORDINATED DEBT - CONTINUED
SENIOR DEBT
The Company has established a Credit Facility. This facility is renewable
annually and expires June 1, 1998. To fund this facility, the Company has
entered into an agreement that permits the Company to borrow up to $85,000,000.
The agreement requires the Company to execute a collateral and security
agreement to secure payment in full of the principal and interest on all
indebtedness owed to the participants.
Borrowings under the Credit Facility are collateralized by all finance
receivables not subject to the securitized pool and certain other assets. The
agreement requires the maintenance of certain financial covenants which
include, among others, ratio of debt to net worth and ratio of reserves to the
finance receivable portfolio. The Company was in compliance with all financial
covenants at December 31, 1996 and 1995.
SUBORDINATED DEBT
In December 1994, the Company issued a subordinated note in the amount of
$4,000,000 to its principal shareholder. Under the terms of the agreement,
interest was payable at the end of each quarter at a fixed rate of 13.5%. The
note was unsecured and was due on September 30, 1996. The proceeds were used
to retire a junior subordinated note. Simultaneously, the Company's principal
shareholder issued a $4,000,000 secured note to a financial institution. Under
the terms of the agreement, interest was payable at the end of each quarter at
a fixed rate of 13.5% and was due on September 30, 1996. The Company issued to
the financial institution a detachable warrant to purchase 193,320 shares of
non-voting Class B common stock. The warrant was exercisable in whole or in
part at a price of $1.13 per share and expires on September 1, 1999, or earlier
as defined in the warrant. The warrant contained a put option such that after
the payment of the secured note but before the occurrence of other events
defined in the warrant, the financial institution may require the Company to
purchase the warrant from the financial institution at fair value. The put
option was terminated, under the terms of the warrant, upon the issuance of the
Company's stock in the IPO. Additionally, the warrant contained a call option
such that the Company, after September 30, 1997 but before the expiration date
or the occurrence of other events as defined in the warrant, may require the
financial institution to sell the warrant to the Company. Upon issuance, the
$150,000 fair value of the warrant was recorded as a discount against the
Company's subordinated note, which was amortized as interest expense. The
warrant was adjusted on a quarterly basis to the estimated repurchase value
through an adjustment to retained earnings.
45
<PAGE> 46
FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE D - SENIOR DEBT AND SUBORDINATED DEBT - CONTINUED
On September 21, 1995, the Company issued a subordinated note in the amount of
$4,500,000 to an investment partnership. Under the terms of the agreement,
interest was payable monthly at a fixed rate of 13%. The note was unsecured
and was due on August 31, 1998. The note contained a detachable warrant to
purchase 193,320 shares of non-voting Class B common stock. The warrant was
exercisable in whole or in part at a price of $1.56 per share and the warrant
expires on September 1, 2000, or earlier as defined in the warrant. The
warrant contained a put option such that after the earlier of August 31, 1998
or the payment of the subordinated debt, but before the occurrence of other
events defined in the warrant, the investment partnership may require the
Company to purchase the warrant from the investment partnership at fair value.
The put option was terminated, under the terms of the warrant, upon the
issuance of the Company's stock in the IPO. Additionally, the warrant
contained a call option such that the Company, after September 1, 1998 but
before the expiration date or the occurrence of other as defined in the
warrant, may require the investment partnership to sell the warrant to the
Company. Upon issuance, the $92,063 fair value of the warrant was recorded as
a discount against the subordinated note, which was amortized as interest
expense as an adjustment to yield over the term of the note. The warrant was
adjusted on a quarterly basis to the estimated repurchase value through an
adjustment to retained earnings.
On July 22, 1996, the Company completed its initial public offering of common
stock. The proceeds from the offering were used to retire the subordinated
notes. As a result of the early retirement of the subordinated notes, the
Company recognized an extraordinary charge against earnings of $149,789 arising
from the accelerated recognition of certain fees and the recognition of the
remaining unamortized discount on the notes.
NOTE E - NOTES PAYABLE - SECURITIZED POOL
The Company has entered into a securitized facility with a placement agent for
the issuance of up to $200 million of securitized notes through a wholly-owned
special purpose subsidiary. On June 18, 1996, the Company completed a
$45,087,652 million debt financing consisting of 6.84% fixed rate, unregistered,
automobile securitized notes issued by the Company's wholly-owned special
purpose subsidiary. The proceeds received by the Company were used to repay
indebtedness under the Credit Facility. Principal and interest on the notes are
payable monthly from collections and recoveries on the pool of finance
receivables. Financial Security Assurance Inc. ("FSA") issued a financial
guaranty insurance policy for the benefit of the noteholders. Interest expense,
including the amortization of debt issuance costs, was $1,702,380 for 1996.
46
<PAGE> 47
FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE E - NOTES PAYABLE - SECURITIZED POOL - CONTINUED
The Company is required to establish and maintain cash reserve and collection
accounts with a trustee with respect to the securitized pool of finance
receivables ("restricted cash"). The amounts set aside would be used to
supplement certain shortfalls in payments, if any, to investors. These
balances are subject to an increase up to a maximum amount as specified in the
securitization indenture and are invested in certain instruments as permitted
by the trust agreement. To the extent balances on deposit exceed specified
levels, distributions are made to the Company and, at the termination of the
transaction, any remaining amounts on deposit are distributed to the Company.
The indenture requires the Company to maintain specified delinquency and credit
loss ratios. The Company was in compliance with these covenants at December
31, 1996.
NOTE F- INCOME TAXES
The Company terminated its status as an S Corporation effective January 1, 1996
and is subject to federal and state income taxes at the approximate tax rates.
As of the date of the termination, the Company has recognized, under the
provisions of SFAS No. 109, a deferred tax asset of $267,000 representing the
cumulative temporary differences between the financial reporting and tax basis
of its assets and liabilities.
The components of the income tax provisions for the year ended December 31,
1996 was as follows:
<TABLE>
<S> <C>
Current:
Federal ........................ $ 3,263,000
State .......................... 673,000
-----------
Total current .................. 3,936,000
Deferred:
Federal ........................ (1,666,000)
State .......................... (308,000)
-----------
Total deferred ................. (1,974,000)
-----------
Total income tax provision .. $ 1,962,000
===========
</TABLE>
47
<PAGE> 48
FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE F - INCOME TAXES - CONTINUED
The provision for income taxes for the years ended 1994 and 1995 reflect the
Company's state tax expense as an S Corporation. There is no federal tax
expense for 1994 and 1995 when the Company filed as an S Corporation for
federal tax purposes.
Deferred tax assets and liabilities consist of the following at December 31,
1996:
<TABLE>
<S> <C>
Deferred tax assets:
Income accreted for tax not book .. $4,837,000
Provision for credit losses ....... 1,540,000
----------
Total deferred tax assets ......... 6,377,000
Deferred tax liabilities:
Charge-offs for tax not book ...... 4,004,000
Excess servicing rights ........... 124,000
Other, net ........................ 8,000
----------
Total deferred tax liabilities .... 4,136,000
----------
Net deferred tax assets ........ $2,241,000
==========
</TABLE>
There was no valuation allowance for deferred taxes as of December 31, 1996 due
to the Company's ability to recover previously paid taxes through carrybacks
and future taxable income.
The income taxes provided differed from the federal statutory income tax rate
(34%) for the year ended December 31, 1996 as follows:
<TABLE>
<S> <C> <C>
Statutory federal income tax .................... $1,675,600 34.0%
State income taxes, net of federal tax benefit .. 256,400 5.2
Non-deductible expenses ......................... 30,000 .6
---------- -----
Total ...................................... $1,962,000 39.8%
========== =====
</TABLE>
In connection with certain subordinated debt financing arrangements, the
Company granted lenders warrants to acquire stock of the Company at certain
prices. These warrants were exercised by the lenders in 1996. The exercise of
these warrants results in a current tax benefit for the Company, equivalent to
the applicable tax rate multiplied by the difference between the market price
at the date of exercise and the warrant price. The current tax benefit was not
recognized as a reduction of income tax expense, but was credited directly to
additional paid-in capital. Tax benefits of $750,000 associated with the
exercise of the warrants were credited to additional paid-in capital in 1996.
48
<PAGE> 49
FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE F - INCOME TAXES - CONTINUED
In connection with the termination of its S Corporation status, the Company
distributed $2,069,812 to the S Corporation shareholders ("S Shareholders").
The distribution represents the
S Corporation earnings that have been included in the taxable income of the S
Shareholders. The Company and the S Shareholders have entered into an
indemnification agreement, relating to federal and certain state and local
income tax liabilities of the Company and the S Shareholders, for the tax years
during which the Company had elected to be treated as an S Corporation. This
agreement generally provides that the Company will indemnify the S
Shareholders, and the S Shareholders will indemnify the Company, against any
increase in the indemnified party's income tax benefits or liabilities
(including interest and penalties and all expenses, attorneys' fees and
accountants' fees incurred in connection therewith) as a result of any
adjustment associated with a return filed with respect to a period during which
the Company was an S Corporation. Payments under the agreement in favor of the
S Shareholders must be approved by a majority of the Company's independent
Directors as being consistent with the terms of the agreement.
NOTE G - COMMITMENTS AND CONTINGENCIES
OFFICE LEASES
The Company leases various office facilities under operating leases with
initial terms ranging from three to five years. These leases generally require
the Company to reimburse the landlord for certain common area expenses, such as
real estate taxes and maintenance; such expenses are included in rent expense.
Total minimum rentals under non-cancelable operating leases as of December 31,
1996 are as follows:
<TABLE>
<S> <C>
Years ending December 31,
1997 .................... $645,388
1998 .................... 513,864
1999 .................... 302,180
2000 .................... 126,095
2001 .................... 86,074
Thereafter .............. 64,800
</TABLE>
In the normal course of business, it is expected that office leases will expire
and be renewed or replaced with leases for other locations. Rent expense for
the years ended December 31, 1996, 1995 and 1994 was $530,088, $355,420 and
$212,310, respectively.
49
<PAGE> 50
FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE G - COMMITMENTS AND CONTINGENCIES - CONTINUED
DATA PROCESSING AGREEMENT
The Company entered into a five year contract for data processing services in
December 1994. The contract, which expires December 1999, is payable monthly.
The fees are based upon servicing volume.
EMPLOYMENT AGREEMENTS
The Company has entered into employment contracts with six of its officers.
Two of the agreements expire on August 31, 1997, and three of the agreements
expire December 31, 1999. The agreements are automatically renewable for
successive one year periods and are subject to termination by the Company or
the officers.
The agreements provide for minimum annual salaries and annual incentive
compensation awards. The agreements allow the Company to apply for, and take
out, in its own name and as beneficiary, and at its own expense, life, health,
accident or other insurance or annuity contracts on the officers. In the event
of illness or incapacity of an officer, they are entitled to continue to
receive their regular compensation for a period of 180 days. The Company has
obtained long-term disability insurance which compensates them for the period
of such illness or incapacity in excess of 180 days.
GUARANTEED LOANS TO STOCKHOLDERS
The Company guaranteed loans made by a financial institution to certain
stockholders, the proceeds of which were used to exercise stock options. Upon
completion of the Company's initial public offering on July 22, 1996, the
Company was released from the guarantee and accordingly the loans are not
reflected on the Company's balance sheet at December 31, 1996. The guaranteed
loans are included in Other Liabilities and are treated as a reduction of
Stockholders' Equity on the balance sheet at December 31, 1995.
NOTE H - STOCK OPTION PLANS
The Company has established an Incentive Stock Option Plan and a Non-Qualified
Stock Option Plan. As amended, these plans reserve 2,062,080 shares of common
stock for issuance to key employees. Options may be granted at a price no less
than the fair market value of such shares on the date on which such options are
granted, and expire ten years from the date of grant. The options generally
vest over a three year period.
50
<PAGE> 51
FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE H - STOCK OPTION PLANS - CONTINUED
The Company has also established a Non-Qualified Director Stock Option Plan
(the "Director Plan") which grants options to purchase shares of common stock
to non-employee directors of the Company. The Director Plan allows for the
grant of options to acquire up to 100,000 shares of common stock. Under this
plan, 6,000 options are granted upon the date of their first election to the
Board of Directors and 2,000 options are granted annually thereafter, upon each
re-election, at a price per share equal to the fair market value of such stock.
Generally, the options expire ten years from the date granted; however, under
certain circumstances, the options may expire earlier. The options vest
ratably over a three year period.
The Company has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." It applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plans and does not recognize compensation expense for its
stock-based compensation plans. If the Company had elected to recognize
compensation expense based upon the fair value at the grant date for awards
issued after January 1, 1995, under this plan consistent with the methodology
prescribed by SFAS No. 123, the Company's net income and net income per share
would be reduced to the amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Net income (in thousands)
As reported .................................... $3,083,559 $2,373,752
Fair value method under SFAS No. 123 ........... 3,047,147 2,366,778
Net income per common and common equivalent share
As reported .................................... $ .63 $ .42
Fair value method under SFAS No. 123 ........... .62 .42
</TABLE>
The fair value amounts may not be representative of future disclosures because
they do not take into effect fair value compensation expense related to grants
made before 1995. The fair value of options granted in 1996 and 1995 was
estimated at the date of grant using an option-pricing model at $3.85 and $.75
per option, respectively, with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Dividend rate ............ - % - %
Expected volatility ...... 100.0% 100.0%
Risk-free interest rate .. 6.3% 6.4%
Expected life ............ 2 years 2 years
</TABLE>
51
<PAGE> 52
FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE H - STOCK OPTION PLANS - CONTINUED
The following table summarizes the Company's stock option plans for the three
years ended December 31, 1996.
<TABLE>
<CAPTION>
Weighted
Shares Average
Under Option Price
Options Per Share
--------- ------------
<S> <C> <C>
Options outstanding at January 1, 1994 ............................... 938,246 $ .47
Option changes - 1994
Granted ............................................................. 527,120 1.13
Exercised ........................................................... (547,740) .47
---------
Options outstanding at December 31, 1994 (none exercisable) .......... 917,626 .85
Option changes - 1995
Granted ............................................................. 83,771 1.36
Exercised ........................................................... (384,062) .47
Canceled ............................................................ (6,444) .47
---------
Options outstanding at December 31, 1995 (203,630 options
exercisable at $1.13 weighted average option price per share) ........ 610,891 1.16
Option changes - 1996
Granted ............................................................. 33,000 7.00
Exercised ........................................................... (136,609) 1.16
Canceled ............................................................ (19,332) 1.21
---------
Options outstanding at December 31, 1996 (252,611 options
exercisable at $1.14 weighted average exercise price per share) ...... 487,950 $1.56
=========
</TABLE>
Information about stock options outstanding at December 31, 1996 is summarized
as follows:
<TABLE>
<CAPTION>
Range of Exercise Prices
------------------------
$1.13 - $1.36 $7.00 Total
------------- ----- -----
<S> <C> <C> <C>
Options outstanding
Number outstanding .................... 454,950 33,000 487,950
=======
Weighted average remaining
contractual life (years) ........... 8.10 9.59
Weighted average exercise price ....... $1.16 $7.00
Options exercisable
Exercisable ........................... 252,611 - 252,611
Weighted average exercise price ....... $1.14 $ -
=======
</TABLE>
52
<PAGE> 53
FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE I - EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan covering substantially all employees who have
worked over 90 calendar days during which they were credited with 250 hours of
service. Employees may elect to make a salary reduction contribution in any
percentage permitted by the plan administrator up to a maximum of 15% of their
compensation or up to the maximum amount permitted by tax law per calendar
year. The Company makes matching contributions in an amount equal to 50% of
employee pretax contributions but subject to a maximum of 6% of eligible
compensation contributed to the plan.
Participants are 100% vested in employee contributions. Participants are
partially vested in their employer contributions until their sixth year of
employment when they become 100% vested. Total contributions to the plan for
the years ended December 31, 1996 and 1995 were $164,917 and $47,062,
respectively.
The Company has also established an Employee Stock Purchase Plan (the "Stock
Purchase Plan") which gives eligible employees the opportunity to purchase
common stock at 85% of the fair market value at the beginning of the option
period. (The option period began July 22, 1996 and ends on December 31, 1997
and each calendar year thereafter.) This plan is intended to qualify as an
"Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code
of 1986, as amended. A maximum of 100,000 shares of common stock are reserved
for sale under the Stock Purchase Plan. Eligible employees may elect to
contribute on an after-tax payroll deduction basis up to 10% of their base
salary. These contributions are used to purchase the common stock at the end
of the option period. Eligible employees may purchase a maximum of 500 shares
for each calendar year in which the option to purchase such shares is
outstanding.
NOTE J - LITIGATION
The Company is involved from time to time in ordinary routine litigation
incidental to its business. The litigation is generally based upon claims that
certain of the Company's business practices such as acquiring installment
contracts at a discount, force placing insurance and offering other insurance
products violate laws, including the Alabama Consumer Credit Act, the Alabama
Deceptive Practices Act and the Federal Truth in Lending Act. Management
believes that the ultimate outcome of all pending litigation will not have a
material adverse effect on the Company's financial condition or results of
operations. The Company intends to vigorously defend any such actions.
53
<PAGE> 54
FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE K - SUBSEQUENT EVENTS
On March 7, 1997, the Company completed a $44,104,106 debt financing
transaction consisting of 6.45% fixed rate, unregistered, automobile
securitized notes. The notes were issued by First Enterprise Securitization
Co. II, a wholly-owned special purpose subsidiary of First Enterprise Financial
Group, Inc., formed in February, 1997. The proceeds received by the Company
were used to repay indebtedness under the Credit Facility. Principal and
interest on the notes are payable monthly from collections and recoveries on
the pool of financed receivables. Financial Security Assurances Inc. ("FSA")
issued a financial guaranty insurance policy for the benefit of the
noteholders.
NOTE L - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth certain unaudited operating results for each of
the twelve quarters ended December 31, 1996. This information has been
prepared on the same basis as the audited financial statements and includes all
adjustments (which consist solely of normal recurring adjustments) necessary to
present fairly the financial information for such periods.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------------ ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1996
Net interest income .. $1,898,373 $2,227,110 $3,213,258 $4,044,936 $11,383,677
Other income ......... 2,543,586 2,632,297 2,856,024 2,303,235 10,335,142
Net income ........... 929,322 882,599 1,002,710 268,928 3,083,559
YEAR ENDED DECEMBER 31,
1995
Net interest income .. 1,290,419 1,125,495 1,422,941 1,766,731 5,605,586
Other income ......... 849,639 1,391,371 1,565,573 1,193,670 5,000,253
Net income ........... 489,918 614,007 774,375 495,452 2,373,752
YEAR ENDED DECEMBER 31,
1994
Net interest income .. 515,497 804,393 1,097,113 1,212,224 3,629,227
Other income ......... 761,079 625,869 507,440 235,155 2,129,543
Net income (loss) .... 346,683 301,751 278,332 (265,742) 661,024
</TABLE>
54
<PAGE> 55
FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE M - PRO FORMA DATA (UNAUDITED)
The pro forma net income per share computations reflect the issuance of
1,886,640 shares of common stock on July 22, 1996 in connection with the
Company's IPO (1,500,000 shares issued at a price of $7 per share and 386,640
shares issued for $520,000 in connection with the warrant exercised). The pro
forma computations also reflect the issuance of 282,996 shares of common stock
on August 20, 1996, at a price of $7 per share in connection with the exercise
of the over-allotment option by the underwriters.
<TABLE>
<CAPTION>
Weighted Pro Forma
Average Net Income
Shares Net Income Per Share
--------- ---------- ----------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Before pro forma effect of the offering ........ 3,513,705 $3,083,559
Adjustments for reduction in interest expense
and effect of shares required to repay
offering costs and debt of $11,527,000 .... 2,169,636 494,000
--------- ----------
Pro forma ...................................... 5,683,341 $3,577,559 $ 0.63
========= ========== ==========
YEAR ENDED DECEMBER 31, 1995
Income before income taxes ..................... $2,433,752
Pro forma provision for income taxes at 39% .... 948,000
----------
Before pro forma effect of the offering ........ 3,238,073 1,485,752
Adjustments for reduction in interest expense
and shares required to repay offering costs
and debt of $11,527,000 ................... 2,169,636 799,000
--------- ----------
Pro forma ...................................... 5,407,709 $2,284,752 $ 0.42
========= ========== ==========
</TABLE>
55
<PAGE> 56
ITEM 9 - CHANGES IN ACCOUNTANTS
Not applicable.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Company is incorporated
herein by reference to the information under the captions entitled "Board of
Directors--Members and Nominees for Election" on pages 5, 6 and 7 and the
information under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" on page 13 of the Company's proxy statement for the 1997 Annual
Meeting of Shareholders (SEC File No. 0-21075).
Information with respect to executive officers of the Company is
included in Item 1, Part I hereof under the caption "Executive Officers."
ITEM 11 - EXECUTIVE COMPENSATION
Information with respect to executive compensation is incorporated
herein by reference to the information under the captions "Executive
Compensation," on pages 8, 9, and 10, "Board of Directors--Compensation of
Directors" on page 7 and "Stock Price Performance Graph" on page 11 of
the Company's proxy statement for the 1997 Annual Meeting of Shareholders (SEC
File No. 0-21075).
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial
owners and management of the Company is incorporated herein by reference to the
information under the caption "Principal Shareholders" on pages 3 and 4 of the
Company's proxy statement for the 1997 Annual Meeting of Shareholders. (SEC
File No. 0-21075).
56
<PAGE> 57
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and transactions is
incorporated herein by reference to the information under the caption "Certain
Transactions" on pages 12 and 13 of the Company's proxy statement for the 1997
Annual Meeting of the Shareholders (SEC File No. 0-21075).
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) and (2) The response to this section of Item 14 is submitted as a
separate section of this report.
(a)(3) The exhibits, as listed in the Exhibit Index set forth on pages E-1
through E-3, are submitted as a separate section of this report.
(b) No current reports on Form 8-K were filed during the quarter ended
December 31, 1996.
(c) See Item 14(a)(3) above.
(d) The response to this portion of Item 14 is submitted as a separate
section of this report.
57
<PAGE> 58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: March 28, 1997 FIRST ENTERPRISE FINANCIAL
GROUP, INC.
By: /s/ Michael P. Harrington Michael
-----------------------------------
P. Harrington Chairman of the
Board and President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
Michael P. Harrington* Chairman of the March 28, 1997
Board of Directors
and President (Principal
Executive Officer)
Louis J. Glunz* Director March 28, 1997
M. William Isbell* Director March 28, 1997
Thomas G. Parker* Director and President March 28, 1997
First Enterprise Acceptance
Company
Joseph H. Stegmayer* Director March 28, 1997
Paul A. Stinneford* Director, Vice President March 28, 1997
and Secretary
Kenneth L. Stucky* Director and Vice March 28, 1997
President First Enterprise
Acceptance Company
Jan W. Erfert* Vice President (Principal March 28, 1997
Financial Officer)
Robert J. Harker* Vice President (Principal March 28, 1997
Accounting Officer)
*By: /s/ Michael P. Harrington Individually and as March 28, 1997
-------------------------- Attorney-in-Fact
Michael P. Harrington
</TABLE>
<PAGE> 59
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Document Description
- -------- --------------------
<S> <C>
3.1 Articles of Incorporation of First Enterprise Financial Group, Inc. [Incorporated by reference to Exhibit 3.1 to
Quarterly Report on Form 10-Q for quarter ended September 30, 1996 File No. 0-21075]
3.2 Bylaws of First Enterprise Financial Group, Inc. [Incorporated by reference to Exhibit 3.2 to Quarterly Report on
Form 10-Q for quarter ended September 30, 1996 File No. 0-21075]
4 Specimen Common Stock Certificate of First Enterprise Financial Group, Inc. [Incorporated by reference to Exhibit 4
to Registration Statement No. 33-80217]
10.1 Form of Director Indemnification Agreement [Incorporated by reference to Exhibit 10.1 to Registration Statement No.
33-80217]
10.2 1992 Stock Option Plan, as Amended and Restated [Incorporated by reference to Exhibit 10.2 to Registration
Statement No. 33-80217]
10.3 1995 Nonqualified Director Stock Option Plan [Incorporated by reference to Exhibit 10.3 to Registration Statement
No. 33-80217]
10.4 1995 Employee Stock Purchase Plan [Incorporated by reference to Exhibit 10.4 to Registration Statement No.
33-80217]
10.5.1 Employment Agreement by and between First Enterprise Financial Group, Inc. and Michael P. Harrington [Incorporated
by reference to Exhibit 10.5.1 to Registration Statement No. 33-80217]
10.5.2 Amendment No. 1 to Employment Agreement by and between First Enterprise Financial Group, Inc. and Michael P.
Harrington [Incorporated by reference to Exhibit 10.5.2 to Registration Statement No. 33-80217]
10.5.3 Employment Agreement by and between First Enterprise Financial Group, Inc. and Thomas G. Parker [Incorporated by
reference to Exhibit 10.5.3 to Registration Statement No. 33-80217]
10.5.4 Amendment No. 1 to Employment Agreement by and between First Enterprise Financial Group, Inc. and Thomas G. Parker
[Incorporated by reference to Exhibit 10.5.4 to Registration Statement No. 33-80217]
</TABLE>
E-1
<PAGE> 60
<TABLE>
<CAPTION>
Exhibit
Number Document Description
- -------- --------------------
<S> <C>
10.5.5 Employment Agreement by and between First Enterprise Financial Group, Inc. and Kenneth L. Stucky [Incorporated by
reference to Exhibit 10.5.5 to Registration Statement No. 33-80217]
10.5.6 Amendment No. 1 to Employment Agreement by and between First Enterprise Financial Group, Inc. and Kenneth L.
Stucky [Incorporated by reference to Exhibit 10.5.6 to Registration Statement No. 33-80217]
10.5.7 Employment Agreement by and between First Enterprise Financial Group, Inc. and Paul A. Stinneford [Incorporated by
reference to Exhibit 10.5.7 to Registration Statement No. 33-80217]
10.5.8 Employment Agreement by and between First Enterprise Financial Group, Inc. and Robert J. Harker [Incorporated by
reference to Exhibit 10.5.8 to Registration Statement No. 33-80217]
10.5.9 Employment Agreement by and between First Enterprise Financial Group, Inc. and Jan W. Erfert [Incorporated by
reference to Exhibit 10.5.9 to Registration Statement No. 33-80217]
10.6.1 Fourth Amended and Restated Revolving Credit Agreement
10.6.2 First Amendment to the Fourth Amended and Restated Revolving Credit Agreement
10.7 Amended and Restated Asset Purchase Agreement by and between General Electric Capital Corporation and First
Enterprise Financial Group, Inc. [Incorporated by reference to Exhibit 10.8 to Registration Statement No. 33-80217]
10.7.1 Amendment #1 to Amended and Restated Asset Purchase Agreement by and between General Electric Capital Corporation
and First Enterprise Financial Group, Inc. [Incorporated by reference to Exhibit 10.8.1 to Registration Statement
No. 33-80217]
10.8 Amended and Restated Servicing Agreement by and between General Electric Capital Corporation and First Enterprise
Financial Group, Inc. [Incorporated by reference to Exhibit 10.9 to Registration Statement No. 33-80217]
</TABLE>
E-2
<PAGE> 61
<TABLE>
<CAPTION>
Exhibit
Number Document Description
- -------- --------------------
<S> <C>
10.8.1 Amendment #1 to Servicing Agreement by and between General Electric Capital Corporation and First Enterprise
Financial Group, Inc. [Incorporated by reference to Exhibit 10.9.1 to Registration Statement No. 33-80217]
10.9 Asset Purchase Agreement by and between Liberty Bank and First Enterprise Financial Group, Inc. [Incorporated by
reference to Exhibit 10.10 to Registration Statement No. 33-80217]
10.10 Servicing Agreement by and between Liberty Bank and First Enterprise Financial Group, Inc. [Incorporated by
reference to Exhibit 10.11 to Registration Statement No. 33-80217]
10.11 Information Processing Agreement by and between Florida Informanagement Services, Inc. and First Enterprise
Financial Group, Inc. [Incorporated by reference to Exhibit 10.12 to Registration Statement No. 33-80217]
10.12 Asset Purchase Agreement by and between Liberty Bank and First Enterprise Financial Group, Inc. [Incorporated by
reference to Exhibit 10.15 to Registration Statement No. 33-80217]
10.13 Servicing Agreement by and between Liberty Bank and First Enterprise Financial Group, Inc. [Incorporated by
reference to Exhibit 10.16 to Registration Statement No. 33-80217]
10.14 Sale and Servicing Agreement by and between First Enterprise Financial Group, Inc., First Enterprise Securitization
Corp. and LaSalle National Bank [Incorporated by reference to Exhibit 10.17 to Registration Statement No. 33-80217]
10.15 Form of Tax Indemnification Agreement [Incorporated by reference to Exhibit 10.18 to Registration Statement No.
33-80217]
11 Statement Regarding Computation of Per Share Earnings
21 Subsidiaries of First Enterprise Financial Group, Inc.
23 Consent of Grant Thornton LLP
24 Power of Attorney
27 Financial Data Schedule
</TABLE>
E-3
<PAGE> 1
EXHIBIT 10.6.1
FOURTH AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
THIS FOURTH AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT (this
"Agreement"), dated as of October 15, 1996, is entered into by and among FIRST
ENTERPRISE FINANCIAL GROUP, INC., formerly known as Centre Capital Funding
Corp., an Illinois corporation, as successor to First Enterprise Financial
Group, Inc., a Delaware corporation ("FEFG"), FIRST ENTERPRISE ACCEPTANCE
COMPANY, an Illinois corporation ("FEAC") (each, individually, a "Borrower" and
collectively, the "Borrowers"), the banks listed on the signature pages hereof
(each a "Bank" and collectively the "Banks") and LASALLE NATIONAL BANK, a
national banking association, as Agent for the Banks ("Agent").
PRELIMINARY STATEMENTS
WHEREAS, FEFG, LaSalle National Bank, individually and as
agent ("LaSalle"), and certain other lenders entered into a certain Amended and
Restated Revolving Credit Agreement dated as of December 11, 1991, as amended
(the "First Amendment and Restatement"), which First Amendment and Restatement
was amended and restated pursuant to the terms of that certain Second Amended
and Restated Revolving Credit Agreement dated as of July 1, 1994, as amended,
among FEFG, LaSalle and certain other lenders listed on the signature pages
thereof (the "Second Amendment and Restatement"), and which Second Amendment
and Restatement was amended and restated pursuant to the terms of that certain
Third Amended and Restated Revolving Credit Agreement dated as of September 1,
1995, as amended, among Borrowers, LaSalle, and certain other lenders listed on
the signature pages thereof (the "Third Amendment and Restatement"), pursuant
to which the Banks made revolving loans and advances to FEFG;
WHEREAS, the Borrowers, the Banks and Agent wish to amend and
restate the Third Amendment and Restatement in its entirety to, among other
things, extend the maturity of Borrowers' revolving credit facility, make
additional funds available to Borrowers, modify the pricing and fees, and admit
CoreStates Bank, N.A. as a New Bank thereunder;
WHEREAS, the Borrowers have agreed to secure their
indebtedness to the Banks hereunder by granting to the Banks a first security
interest in and to all of their assets including, without limitation, all
Automobile Finance Agreements and Automobile Finance Receivables (in each case
as herein defined) and all of their other tangible and intangible property; and
WHEREAS, the Banks are willing to make such credit extensions
on the terms and conditions set forth herein.
<PAGE> 2
WHEREAS, this Agreement shall replace and supersede the Third
Amendment and Restatement in its entirety;
NOW, THEREFORE, for and in consideration of the mutual
agreements herein contained and the other terms, conditions, representations,
warranties, covenants and other agreements contained herein, the parties hereto
agree that the Third Amendment and Restatement is amended and restated in its
entirety as follows:
1. DEFINITIONS AND FINANCIAL TERMS.
1.1 Definitions. In addition to the terms defined
elsewhere in this Agreement, the following terms shall have the meanings
indicated for purposes of this Agreement (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"Affiliate" means any corporation or any other Person that
directly or indirectly, through one or more intermediaries, controls or is
controlled by or is under common control with, either Borrower or any officer,
shareholder, director, trustee, employee or partner of either Borrower.
"Agent" means LaSalle National Bank, a national banking
association in its capacity as Agent for the Banks hereunder and each
successor, as provided in Section 11.8, who shall act as Agent.
"Agreement" means this Fourth Amended And Restated Revolving
Credit Agreement, together with all exhibits, attachments and amendments hereto
or thereto, and all modifications, renewals, extensions, restatements and
substitutions thereof or therefor.
"Applicable UCC" means the version of the Uniform Commercial
Code in effect from time to time in any Eligible State in which a particular
Automobile Finance Receivable is generated.
"Assignment of Life Insurance Policy" means the assignment of
the life insurance policy for Michael P. Harrington, an Illinois resident, in
the form attached as EXHIBIT A hereto.
"Automobile Finance Agreement" means the standard form(s) of
automobile finance agreement as the Borrowers may from time to time use or
acquire from Eligible Dealers in Eligible States all of which forms shall
comply with all applicable Laws, copies of which shall be provided to Agent
with respect to all existing forms of Automobile Finance Agreements
-2-
<PAGE> 3
and from time to time with respect to any new forms of Automobile Finance
Agreements.
"Automobile Finance Receivable" means a receivable which
results from an Automobile Finance Transaction entered into by either Borrower
which shall be equal to the sum of all payments due by the applicable Eligible
Auto Consumer under the applicable Automobile Finance Agreement.
"Automobile Finance Receivable Reports" means those reports
prepared by the Borrowers containing (i) a summary of the Borrowers' Automobile
Finance Receivables balance as of the end of each calendar month (including
separate information with respect to Automobile Finance Receivables in the
Securitized Portfolio and with respect to the Sold Receivables), which balances
the Borrowers shall represent and warrant as being calculated in accordance
with GAAP and accurately reflecting the delinquency status of the Automobile
Finance Receivables (including a reasonable provision for uncollectibility) and
which shall be presented in a format acceptable to the Banks, (ii) a
reconciliation of the loan loss reserves and other similar reserves acceptable
to the Banks (including separate information with respect to Automobile Finance
Receivables in the Securitized Portfolio and with respect to the Sold
Receivables), and (iii) summaries of repossessions and recoveries, allowable
delinquencies and deferred Automobile Finance Receivables (each including
separate information with respect to Automobile Finance Receivables in the
Securitized Portfolio and with respect to the Sold Receivables).
"Automobile Finance Transaction" means a transaction entered
into by and between either (i) a Borrower and an Auto Consumer (in the case of
a transaction in which such Borrower provides purchase money financing directly
to the applicable Auto Consumer for the purchase of an automobile) (hereinafter
a "Direct Financing"), or (ii) a Borrower and an Eligible Dealer (in the case
of a transaction in which the Eligible Dealer provides purchase money financing
and such Borrower purchases existing Automobile Finance Receivables and the
related Automobile Finance Agreements from an Eligible Dealer) (hereinafter an
"Indirect Financing") all of which transactions shall be evidenced by an
Automobile Finance Agreement.
"Banking Day" means any day on which banks are open for
business in Chicago, Illinois.
"Bank's Collateral Identification Stamp" means the
identification stamp which the Borrowers will stamp or otherwise affix to each
Automobile Finance Agreement and contains the language set forth in EXHIBIT B
hereto, and which is sufficient to give any purported purchaser of any
Automobile Finance Receivable evidenced by such Automobile Finance Agreement
and
-3-
<PAGE> 4
the Automobile Finance Agreement notice (as such term is defined in Section
9-308 of the Applicable UCC) of the Banks' first perfected security interest in
the applicable Automobile Finance Receivable and Automobile Finance Agreement
and all proceeds thereto.
"Borrowers' Voting Stock" shall have the meaning provided in
Section 6.17(b) of this Agreement.
"Borrowing Base Certificate" means the Borrowing Base
Certificate in the form attached hereto as EXHIBIT C.
"Capital Funds" means the sum of (i) Tangible Net Worth and
(ii) Subordinated Debt.
"Cash Interest Expense" means, with respect to any Financial
Statement, the interest expense shown on the statement of cash flows contained
in such Financial Statements.
"Collateral Agreement" shall mean that Third Amended and
Restated Collateral and Security Agreement dated the date hereof in the form
attached as EXHIBIT D hereto.
"Computer Equipment" means all hardware, software or other
computer, computer-related or peripheral equipment, including, without
limitation, all of the Borrowers' proprietary software, if any, which is used
in monitoring and analyzing their loan portfolio.
"Credit" means the aggregate commitment of the Banks to make
Revolving Loans under the terms of this Agreement.
"Current Securitization Transaction" means (a) FEFG's sale,
assignment, pledge or contribution of the Eligible Automobile Receivables
listed and described in Schedule A of the Sale and Servicing Agreement and all
rights related thereto to FESC as part of the securitization of such Eligible
Automobile Receivables pursuant to the terms of the Sale and Servicing
Agreement and the Trust Indenture, and the related transactions contemplated by
the Securitization Transaction Documents and (b) the payment to the Agent of
the Payoff Amount associated with such Eligible Automobile Receivables.
"Due Date" means the date on which any payment is due to be
made from an Eligible Auto Consumer to either Borrower under the terms of any
Automobile Finance Agreement.
"EBIT" means, with respect to any income statement contained
in any of the Borrowers' Financial Statements, the Borrowers' consolidated
income computed before applicable deduction for taxes and gross interest
expenses.
-4-
<PAGE> 5
"Eligible Auto Consumer" means a natural person (and not a
corporation, partnership, trust or other legal entity) who purchases an
Eligible Automobile and finances such purchase in an Automobile Finance
Transaction.
"Eligible Automobile" means a new or used motor vehicle that
(i) to the best of Borrowers' knowledge, is acquired by an Eligible Automobile
Consumer for personal use only, (ii) is financed by FEFG in connection with an
Automobile Finance Transaction, and (iii) in which FEFG has a first perfected
security interest under the Applicable UCC, the applicable Title Statute or
other similar Laws of an Eligible State.
"Eligible Automobile Finance Receivables" means those
Automobile Finance Receivables (in each case net of Unearned Finance Charges
and/or Unearned Interest) of FEFG arising in the ordinary course of its
business which (a) are included in the Borrowers' Financial Statements, (b) are
subject to the Banks' first perfected security interest and no other Lien,
claim, security interest or other encumbrances whatsoever other than the
Permitted Liens, and (c) are evidenced by an Automobile Finance Agreement. In
addition, no Automobile Finance Receivable shall be an Eligible Automobile
Finance Receivable if:
(i) it arises out of an Automobile Finance Transaction entered
into by and between FEFG and any Affiliate of FEFG other than
a wholly-owned Subsidiary of FEFG; or
(ii) it arises out of an Automobile Finance Transaction
entered into by and between FEFG (or an Eligible Dealer) and
any Person other than an Eligible Auto Consumer; or
(iii) any installment payment in respect of such Automobile
Finance Receivable is due or unpaid more than 90 days after
the applicable Due Date therefor, or in respect of which the
Eligible Automobile financed thereby has been transferred to
repossession inventory, or more than three (3) installment
payments in respect of such Automobile Finance Receivable is
past due; or
(iv) the original Principal Purchase Price of such Automobile
Finance Receivable exceeds 120% of the Wholesale Value of the
Eligible Automobile financed thereby; or
(v) FEFG does not have a first perfected security interest in
the Eligible Automobile which was
-5-
<PAGE> 6
financed by such Automobile Finance Receivable or otherwise
has failed to take all actions necessary to comply with the
provisions of the applicable Title Statute; or
(vi) any covenant, representation or warranty contained in
this Agreement or any of the other Loan Documents or the
applicable Automobile Finance Agreement in each case with
respect to such Automobile Finance Receivable has been
breached; or
(vii) the subject Eligible Auto Consumer has commenced a
voluntary case under the federal bankruptcy laws, as now
constituted or hereafter amended, or has made an assignment
for the benefit of creditors, or a decree or order for relief
has been entered by a court having jurisdiction in the
premises in respect of such Eligible Auto Consumer in an
involuntary case under the federal bankruptcy laws, as now
constituted or hereafter amended, or any other petition or
other application for relief under the federal bankruptcy laws
has been filed against such Eligible Auto Consumer, or if such
Eligible Auto Consumer has failed, suspended business, ceased
to be solvent, or consented to or suffered a receiver,
trustee, liquidator or custodian to be appointed for it or for
any portion of its assets or affairs, unless such Eligible
Auto Consumer has reaffirmed its obligation under the
Automobile Finance Agreement evidencing such Automobile
Finance Receivable, which reaffirmation has been approved by
court order and then only the portion of such Eligible
Automobile Finance Receivable which has been approved by such
court order shall be deemed to be eligible hereunder; or
(viii) the Automobile Finance Receivable involves an Eligible
Auto Consumer with respect to whom either Borrower has
knowledge that such Eligible Auto Consumer is not a U.S.
Citizen or has a principal residence outside of the United
States, except for U.S. military personnel on assignment
outside of the United States; or
(ix) the Automobile Finance Receivable is subject to any
actual offset, deduction, defense, dispute, or counterclaim,
or is contingent in any respect or for any reason; or
(x) FEFG has made any agreement with the subject Eligible Auto
Consumer for any deduction from the Automobile Finance
Receivable (or from any other
-6-
<PAGE> 7
Automobile Finance Receivable from such Eligible Auto
Consumer); or
(xi) the Banks believe that collection of such Automobile
Finance Receivable is insecure or that such Automobile Finance
Receivable may not be paid by reason of the applicable
Eligible Auto Consumer's financial inability to pay; or
(xii) the Banks' Collateral Identification Stamp has not been
stamped on or otherwise affixed to the Automobile Finance
Agreement evidencing the Automobile Finance Receivable; or
(xiii) the Automobile Finance Receivable arises out of a
Automobile Finance Transaction which does not comply, in all
material respects, with any applicable Laws; or
(xiv) the Eligible Automobile which was financed by such
Automobile Finance Receivable has been repossessed; or
(xv) more than two (2) payments shall have been deferred under
the applicable Automobile Finance Agreement in the immediately
preceding twelve months or more than five (5) payments shall
have been deferred over the life of the Automobile Finance
Agreement.
"Eligible Dealer" means any automobile dealer which the Agent
has not in its reasonable discretion disapproved in writing.
"Eligible States" means, with respect to any Eligible Vehicle,
the state in which the motor vehicle is titled and registered by the Eligible
Auto Consumer at the time of purchase, but only to the extent that, if such
state does not have a Title Statute, the Agent shall have received a
certificate in form and substance acceptable to the Banks in their sole and
complete discretion executed by the President and Chief Executive Officer of
the Borrowers which certificate shall constitute the representation and
warranty of the Borrowers that no Title Statute exists in such state and that
the form of Automobile Finance Agreement to be used in such state complies with
all applicable Laws in such state.
"Environmental Laws" means all federal, state and local Laws
(including, without limitation, the common law), statutes, ordinances, rules,
regulations and other requirements (including, without limitation,
administrative orders, consent agreements and conditions contained in
applicable permits),
-7-
<PAGE> 8
relating to health, safety, and the protection of the environment, including,
but not limited to, the Comprehensive Environmental Response, Compensation and
Liability Act and Recover Act ("RCRA"), 42 U.S.C. Section 7401 et seq., all as
amended or hereafter amended.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"Event of Default" means any of the events described in
Section 10.1.
"FEAC" means First Enterprise Acceptance Company, an Illinois
corporation.
"FEAC's Voting Stock" shall have the meaning provided in
Section 6.17(a) of this Agreement.
"FEFG" means First Enterprise Financial Group, Inc., an
Illinois corporation.
"FESC" means First Enterprise Securitization Corp., a Delaware
corporation.
"FEFG's Voting Stock" shall have the meaning provided in
Section 6.17(a) of this Agreement.
"Floating Rate" has the meaning set forth in Section 3.1.
"GAAP" means generally accepted accounting principles in
effect in the United States of America.
"Illinois UCC" means the Uniform Commercial Code in effect in
the State of Illinois as the same may be amended from time to time.
"Indebtedness" means, without duplication, all items which, in
accordance with GAAP, would be included as liabilities and shall include,
without limitation, capitalized leases, letters of credit, secured and
unsecured debt and contingent but accrued liabilities.
"IPO" means the firm initial public offering by FEFG of up to
1,782,996 shares of its common stock.
"Laws" means all ordinances, statutes, rules, regulations,
codes, orders, injunctions, writs or decrees of any government, whether
federal, state, municipal or local, of any political subdivision or agency
thereof, or of any court, board or similar entity established by any of the
foregoing having
-8-
<PAGE> 9
jurisdiction over any Property, assets, business or operations of either
Borrower.
"LIBOR-Based Rate" means that rate of interest per year equal
to the LIBOR Rate plus 2.5%
"LIBOR Rate" means during any LIBOR Rate Borrowing Period for
each Revolving Loan bearing interest at the LIBOR-Based Rate, that rate of
interest per year equal to the quotient obtained by dividing (x) the rate of
interest determined by the Agent to be the average (rounded upward to the
nearest whole multiple of one-eighth percent (1/8%) per annum, if such average
is not such a multiple) of the rate per annum at which deposits in U.S. dollars
are generally offered in the London Interbank Market at 11:00 A.M. London time,
one (1) Banking Day before the first day of such LIBOR Rate Borrowing Period,
for a period equal to such LIBOR Rate Borrowing Period, in the amount of the
applicable Revolving Loan, by (y) the difference between one hundred percent
(100%) and any applicable reserve requirements (rounded upward to the nearest
whole multiple of one hundredth (1/100) of one percent (1%) per annum),
including without limitation, any statutory maximum requirement for the Banks
to hold reserves for "Eurocurrency Liabilities" under Regulation D of the Board
of Governors of the Federal Reserve System (or any similar reserves under any
successor regulation or regulations).
"LIBOR Rate Borrowing Period" has the meaning set forth in
Section 3.3.
"Lien" means any interest in Property securing an obligation
owed to, or a claim by, a Person other than the owner of the Property, whether
such interest is based on the common law, statute or contract, and including
but not limited to the security interest or lien arising from a mortgage,
encumbrance, pledge, conditional sale or trust receipt or a lease, consignment
or bailment for security purposes. The term "Lien" shall include, without
limitation, reservations, exceptions, encroachments, easements, rights-of-way,
covenants, conditions, restrictments, leases and other title exceptions and
encumbrances affecting Property. For the purposes of this Agreement, the
Borrowers shall be deemed to be the owner of any Property which they have
acquired or hold subject to a conditional sale agreement or other arrangement
pursuant to which title to the Property has been retained by or vested in some
other person for security purposes.
"Loan Documents" means this Agreement, the Revolving Notes,
the Collateral Agreement, the Assignment of Life Insurance Policy, and all
related documents as the same may be amended or restated from time to time.
-9-
<PAGE> 10
"Loans" means the Revolving Loans made pursuant to Section
2.1.
"Majority Banks" means those Banks whose shares in the
aggregate Revolving Loans outstanding constitute (or, if no Revolving Loans are
outstanding, those whose Percentage Interests in the Credit constitute) at
least sixty-seven (67%).
"Maturity Date" means June 1, 1998.
"Obligations" means all obligations (monetary or otherwise) of
the Borrowers arising under or in connection with this Agreement, the Revolving
Notes and each of the other Loan Documents.
"Payoff Amount" means with respect to any Eligible Automobile
Receivable, an amount not less than the aggregate sum advanced by Banks against
such Eligible Automobile Finance Receivable under this Agreement.
"PBGC" means the Pension Benefit Guaranty Corporation and any
entity succeeding to any or all of its functions under ERISA.
"Percentage Interest" means the percentage interest of each
Bank in the Revolving Loan Commitment (as defined in Section 2.1 hereof) as set
forth opposite each Bank's name on the signature pages hereof, and as the same
may be modified from time to time.
"Permitted Securitization Transaction" means the Current
Securitization Transaction and any Securitization Transaction hereafter entered
into by FEFG with the written consent of Agent and Banks.
"Permitted Liens" has the meaning set forth in Section 7.15
hereof.
"Person" means any individual, sole proprietorship, joint
venture, partnership, limited partnership, association, unincorporated
organization, joint-stock company or association, trust, corporation, entity,
institution or government body.
"Plan" shall have the meaning given to such term in Section
3(3) of ERISA and which is established or maintained by either Borrower, any of
its Subsidiaries or any Affiliate and includes any Plan as to which such
Borrower, any of its Subsidiaries or any Affiliate may have any liability.
"Prime Rate" means, at any time, the rate of interest per
annum then most recently announced by LaSalle at Chicago, Illinois as its Prime
Rate. Each change in the interest rate
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on any Revolving Note shall take effect on the effective date of the change in
the Prime Rate. The use of the term Prime Rate is not intended nor does it
imply that such rate of interest is a preferred rate of interest or one of
which is offered by LaSalle to its most credit worthy customers.
"Principal Purchase Price" means, in respect of any Automobile
Finance Transaction the aggregate amount of cash either (i) paid by FEFG to an
Eligible Dealer (in the case of an Indirect Financing) or (ii) loaned to an
Eligible Auto Consumer (in the case of a Direct Financing).
"Property" means any interest in any kind of property or
asset, whether real, personal or mixed, or tangible or intangible.
"Revolving Loan Borrowing Base" means, as of any subject date,
80% of Eligible Automobile Receivables.
"Revolving Note(s)" means the Borrowers' Revolving Notes,
substantially in the form set forth as EXHIBIT E, with appropriate insertions.
"Sale and Servicing Agreement" means the Sale and Servicing
Agreement dated as of June 1, 1996, among FEFG, FESC and LaSalle National Bank,
as backup servicer.
"Securitization Transaction" means collectively, (a) FEFG's
sale, assignment, pledge or contribution of some or all of the Automobile
Finance Receivables and related rights to an SPE as part of a securitization of
all or some of the Automobile Finance Receivables and (b) the payment to Banks
of any Payoff Amount associated therewith.
"Securitization Transaction Documents" means all agreements,
instruments and documents executed and delivered in connection with a Permitted
Securitization Transaction.
"Securitized Portfolio" means all Eligible Automobile
Receivables sold or contributed to a SPE in connection with a Permitted
Securitization Transaction.
"Security Insurer" means Financial Surety Assurance, Inc., a
financial guaranty insurance company incorporated under the laws of the State
of New York.
"Sold Receivables" means those Automobile Finance Receivables
sold to General Electric Capital Corporation or to Liberty Bank or in any
similar transaction to which the Banks have consented.
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"SPE" means a special purpose entity, including, without
limitation, a wholly-owned subsidiary of FEFG or FEAC or trust, established in
connection with a Permitted Securitization Transaction.
"Stock Option Plan" shall have the meaning provided in Section
6.17(c) of this Agreement.
"Subordinated Debt" means that portion of any liabilities,
obligations or Indebtedness of either Borrower which contains terms
satisfactory to the Banks and is subordinated in a manner satisfactory to the
Banks, as to right and time of payment of principal and interest thereon, to
any and all of the Obligations, having a term extending at least six (6) months
beyond the Maturity Date, and is evidenced by a subordination agreement
substantially in the form of the Subordination Agreement attached hereto as
EXHIBIT F which agreement shall be acceptable to the Banks in their sole
discretion.
"Subordination Agreement" shall mean any agreement
substantially in the form of EXHIBIT F among Agent, Banks, the Borrowers and
the holder of any permitted Subordinated Debt.
"Subsidiary" means any corporation, voluntary association,
joint stock company, voting trust or similar organization of which either
Borrower and its other Subsidiaries own directly or indirectly more than 50% of
the shares of stock having general voting power under ordinary circumstances to
elect a majority of the board of directors, managers, trustees or others
performing similar functions.
"Tangible Net Worth" means net worth, determined in accordance
with GAAP, less the sum of Borrowers' (i) intangible assets, classified as such
in accordance with GAAP, (ii) prepaid expenses, classified as such in
accordance with GAAP, (iii) advances to Affiliates classified as such in
accordance with GAAP (exclusive of advances by FEFG to FEAC) and (iv) deferred
items classified as assets on the Borrower's Financial Statements, including,
without limitation, any deferred income taxes.
"Title Statutes" means the applicable certificate of title
statues in effect from time to time in any Eligible State.
"Unearned Finance Charge" means, with respect to any
Automobile Finance Receivable, that portion of the aggregate finance charge
(irrespective of whether such finance charge is characterized as finance
charges, points, unearned discounts or any other similar type of additional
charge) which either Borrower has charged the applicable Eligible Auto Consumer
in connection with such transaction and which has not been earned
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as of any particular date and that component of the outstanding balance of any
Automobile Finance Receivable which is comprised of interest. For purposes of
this Agreement, Unearned Finance Charges shall be calculated in accordance with
all applicable Laws and otherwise in accordance with the applicable Automobile
Finance Agreement.
"Unmatured Event of Default" means any event or condition
which with the lapse of time or giving of notice, or both, would constitute an
Event of Default.
"Unsubordinated Debt" means, as of any date, the total of the
Borrowers' Indebtedness to any and all Persons less: (i) the total principal
balances of the Subordinated Debt as of such date; (ii) any liabilities that
have a direct offsetting receivable due from the same Person; and (iii)
guaranteed shareholder loans to the extent such loans were used to purchase
common stock of FEFG and do not exceed $400,000 in the aggregate at any one
time; and (iv) 50% of any cash shown on the balance sheet of the Borrowers. To
the extent that Borrowers have a negative cash balance, liabilities will be
increased accordingly.
Wholesale Market Value means, with respect to the motor
vehicle securing an Automobile Finance Receivable, the most recent wholesale
value thereof (based upon the factory-to-dealer invoice, in the case of a new
vehicle, or any one of the Kelly Blue Book value, the Black Book value, the
NADA Guide value, the AIDA Guidebook value or any similar valuation guidebook
commonly used in the automobile finance industry and acceptable to the Agent in
its sole discretion, in the case of a used vehicle) as of the date of
origination of the related Automobile Finance Receivable.
1.2 Financial And Other Terms. Unless otherwise
defined or the context otherwise requires, all financial and accounting terms
shall be defined in accordance with GAAP. All other terms used but not
otherwise defined herein shall have the meanings provided by the Illinois UCC.
2. COMMITMENT OF THE BANKS. Subject to the terms and conditions
of this Agreement, each Bank, severally but not jointly, agrees as follows:
2.1 Revolving Loans. Subject to the terms of this
Agreement, to make loans to the Borrowers (collectively called the "Revolving
Loans" and individually each a "Revolving Loan") on any Banking Day, which
Revolving Loans the Borrowers may repay and re-borrow during the period from
the date hereof, to, but not including, the Maturity Date, in such amounts as
FEFG may from time to time request, subject to the limitations set forth in
Section 2.2 hereof; provided, however, that the
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aggregate principal amount of all Revolving Loans made under this Section 2.1
shall not exceed, at any one time, the lowest of (i) the Revolving Loan
Borrowing Base, (ii) $85,000,000 or (iii) such fixed dollar amount as is (in
the aggregate) committed by the Banks executing this Agreement from time to
time if such amount is less than $85,000,000 (such lowest sum being the
"Revolving Loan Commitment"); notwithstanding the forgoing, if no Event of
Default shall have occurred and be continuing on each anniversary of the date
hereof, the Banks shall be under no commitment to extend such Maturity Date,
but each Bank agrees to inform the Borrowers on such anniversary date whether
it intends to extend the Maturity Date for an additional one-year period. If,
at any time the outstanding Revolving Loans exceed the Revolving Loan
Commitment, the Borrowers will immediately notify the Agent of such excess and
pay the Banks the amount thereof. Notwithstanding anything to the contrary
contained herein, no Bank shall be obligated to advance any funds under this
Section 2.1 which funds exceed the amount determined by multiplying such Bank's
Percentage Interest by the Revolving Loan Commitment.
2.2 Borrowing Procedure. FEFG shall give telephonic
notice (promptly confirmed in writing) to the Agent of each proposed borrowing;
provided, however, the borrowing procedure set forth in this Section 2.2 may be
modified by any other method as reasonably agreed on by Agent and Borrowers.
Such notice shall designate the amount of the requested Revolving Loan to be
made by the Banks, the date on which the Revolving Loan is to be made available
to the Borrowers, whether the requested Revolving Loan shall bear interest at
the Floating Rate or the LIBOR-Based Rate, and if the Revolving Loan is to bear
interest at the LIBOR-Based Rate, the applicable LIBOR Rate Borrowing Period
for such Revolving Loan; provided, however, that such notice is received by the
Agent not later than 12:30 p.m., Chicago time on the Banking Day on which the
Borrower is requesting the Revolving Loan be made available by the Bank in the
case of a Revolving Loan to bear interest at the Floating Rate and not later
than two (2) Banking Days prior to the Banking Day on which the Borrower is
requesting the Revolving Loan be made available by the Bank in the case of a
Revolving Loan to bear interest at the LIBOR-Based Rate. Agent shall promptly
advise Banks of such proposed borrowing, and Banks shall provide the Agent at
its principal office in Chicago with immediately available funds covering the
amount of the requested Loans. Agent shall pay over such immediately available
funds to the Borrowers upon the Agent's receipt of the certificate required
under Section 8.3 hereof. Each Revolving Loan or payment of principal prior to
the Maturity Date shall be in an aggregate amount of at least $10,000 or an
integral multiple thereof (except for Revolving Loans bearing interest at the
LIBOR-Based Rate, each of which shall be in a minimum amount of $1,000,000 and
integral multiples of $500,000 thereafter).
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2.3 Revolving Notes. The Revolving Loans shall be
evidenced by the Revolving Notes, each of which shall be dated the date of the
initial Revolving Loan, made payable to the order of the Bank making the
Revolving Loans and each of which shall mature on the Maturity Date. All
Revolving Loans made by the Banks to the Borrowers pursuant to this Agreement
and all payments of principal shall be evidenced by each Bank in its records,
or, at such Bank's option, on the schedule attached to its respective Revolving
Note, which records or schedule shall be rebuttable presumptive evidence of the
subject matter thereof.
2.4 Procedure For Admission of Additional Banks -
Increase In Percentage Interests. In the event that any bank or other financial
institution shall desire to become a Bank under this Agreement (each a "New
Bank") or any existing Bank shall desire to increase its Percentage Interest
hereunder (each an "Increasing Bank") such New Bank or Increasing Bank, as
applicable, shall submit to the Agent on behalf of the Banks such information
as the Banks shall request in respect of such New Bank's or Increasing Bank's
commitment to the Credit. Upon the approval of the Majority Banks, such New
Bank or Increasing Bank, as applicable, shall be admitted as a Bank and shall
execute a counterpart signature page to this Agreement and all other
appropriate Loan Documents. After such execution such Bank shall be entitled
to all of the rights and shall undertake all of the obligations of a Bank
hereunder.
3. INTEREST AND FEES.
3.1 The Revolving Loans; Rate. Each Revolving Loan
shall bear interest at the Borrowers' option at either of the following rates:
(i) the Prime Rate plus one-quarter of one percent (1/4%), computed on the
basis of actual days elapsed over a 360-day year (the "Floating Rate"); or (ii)
a fixed interest rate per annum (computed for the actual number of days elapsed
on the basis of a 360-day year) which shall be equal to the LIBOR-Based Rate in
effect on the date the Agent quotes such rate to the Borrower (the "LIBOR-Based
Rate"). The Borrowers' acceptance of any LIBOR-Based Rate shall be final and
conclusive as to all matters with respect to the determination thereof.
Interest on Loans bearing interest at the Floating Rate shall be payable
monthly in arrears beginning on October 31, 1996, and continuing on the last
day of each calendar month thereafter. The Floating Rate shall fluctuate
concurrently with and in an amount equal to any increase or decrease in the
Prime Rate. Interest on Loans bearing interest at the LIBOR-Based Rate shall be
payable in arrears on the last day of the applicable LIBOR Rate Borrowing
Period.
3.2 Interest Rate Election. Borrowers shall make an
election in writing pursuant to Section 2.2 as to whether
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such Revolving Loan shall bear interest at the Floating Rate or the LIBOR-Based
Rate. If Borrowers elect to have a Revolving Loan bear interest at the
LIBOR-Based Rate, Borrowers shall also specify the applicable LIBOR Rate
Borrowing Period for such Revolving Loan; provided, however, no more than five
(5) Revolving Loans may bear interest at the LIBOR-Based Rate at any time and
each Revolving Loan bearing interest at the LIBOR-Based Rate shall be in a
minimum amount of $1,000,000.
3.3 Borrowing Periods. At any time when the Borrowers
shall select or renew the LIBOR-Based Rate to apply to any Revolving Loan, they
shall fix a period for each such Revolving Loan during which such LIBOR-Based
Rate shall apply, such periods to be for periods (the "LIBOR Rate Borrowing
Periods") of 30, 60 or 90 days; provided that (i) in no event shall any LIBOR
Rate Borrowing Period so selected expire later than the Maturity Date; and (ii)
if any LIBOR Rate Borrowing Period expires on a day which is not a Banking Day,
such LIBOR Rate Borrowing Period shall expire on the next Banking Day.
3.4 Conversion to LIBOR-Based Rate. Upon two (2)
Banking Days prior written or telephonic notice to Agent, Borrowers may elect
to convert any Revolving Loan bearing interest at the Floating Rate into a
Revolving Loan bearing interest at the LIBOR-Based Rate in effect on the date
of the election. Borrower shall, in such notice, specify the LIBOR Borrowing
Rate Period for such Revolving Loan. Upon such election, Agent shall make a
notation on its books and records evidencing such conversion.
3.5 Renewal of Interest Rate Option. Upon the
expiration of any LIBOR Rate Borrowing Period, the Borrowers may renew the
LIBOR-Based Rate for one or more additional LIBOR Rate Borrowing Periods;
provided that Borrowers shall give to the Banks notice of the renewal date in
accordance with the provisions of Section 3.2 hereof. In the absence of the
receipt of a notice from the Borrowers of renewal in accordance with this
Section 3.5 or of conversion in accordance with Section 3.4, the interest rate
with respect to any such Revolving Loan as to which such notice is not properly
received shall automatically be converted to the Floating Rate on the last day
of the expiring LIBOR Rate Borrowing Period.
3.6 LIBOR Rate Unascertainable; Impracticability. The
Agent shall promptly notify the Borrower in the event that:
(i) on any date on which a LIBOR-Based Rate selected
by the Borrowers by notice to the Agent would
otherwise be set (including any conversion to or
renewal thereof), the Agent shall have determined
in good faith (which determination shall be final
and conclusive)
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<PAGE> 17
that adequate and reasonable means do not exist
for determining the LIBOR Rate; or
(ii) at any time the Agent shall have determined in
good faith (which determination shall be final and
conclusive) that the selection of a LIBOR-Based
Rate or the continuation of or the conversion or
renewal of a LIBOR-Based Rate has been made
impossible or impracticable or unlawful by
compliance by any Bank with any applicable law or
governmental regulation, guideline or order or
interpretation thereof by any governmental
authority charged with the interpretation or
administration thereof or with any request or
directive of any such governmental authority
(whether or not having the force of law).
3.7 Effect of Unascertainability or Impractibility.
Once the Agent has given notice of its determination under (i) or (ii) above,
the obligation of the Banks to allow conversion to or selection or renewal of
the LIBOR-Based Rate by the Borrowers with respect to any Revolving Loan shall
be suspended until the Agent gives further notice to the Borrowers that the
circumstances specified in such original notice no longer apply. If the Banks
have determined in accordance with (ii) above that they may no longer continue
any LIBOR Rate Revolving Loans, then upon the date specified in any notice of
determination under (ii) above (which shall not be earlier than the date such
notice is given), (x) the LIBOR-Based Rate shall cease to apply and any
Revolving Loans bearing interest at the LIBOR-Based Rate shall automatically be
converted to the Floating Rate and (y) the Borrowers shall pay to Agent for the
account of the Banks, the accrued and unpaid interest on any Revolving Loans
bearing interest at the LIBOR-Based Rate to (but not including) such specified
date. If, at the time notice of a determination is given pursuant to this
Section 3.7, the Borrowers have previously been offered the LIBOR-Based Rate by
the Banks and have previously notified the Agent that they wish to convert to
or select or renew the LIBOR-Based Rate, but such rate has not yet been set,
such notification shall be of no force and effect, and the Borrowers shall,
with respect to any Revolving Loan subject to such notice, either (i) convert
such Revolving Loan to the Floating Rate or (ii) if such Revolving Loan is
bearing interest at the Floating Rate, retain the Floating Rate as to such
Revolving Loan.
3.8 Indemnity. Without prejudice to any other provision of this
Agreement, the Borrowers shall compensate the Banks upon written request by the
Agent for all losses (including, but not limited to, lost profits) and expenses
in respect of any interest paid by the Banks to lenders of funds borrowed by
the
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Banks or deposited with the Banks to make or maintain any of the Revolving
Loans which accrue interest at the LIBOR-Based Rate, which the Banks may
sustain (i) if for any reason a borrowing to which the LIBOR-Based Rate is to
apply does not occur on a date specified therefor hereof; (ii) if any
prepayment or repayment of any of the Revolving Loans occurs on a date which is
not the last date of the relevant LIBOR Rate Borrowing Period; (iii) as a
consequence of any Event of Default by the Borrowers under this Loan Agreement
or any acceleration or mandatory prepayment or principal reduction. Without
limiting the generality of the foregoing, the Borrowers shall indemnify the
Banks against any loss or expense which the Banks may sustain or incur as a
consequence of the default by the Borrowers in payment of principal of or
interest on any Revolving Loan bearing interest at the LIBOR-Based Rate,
including, but not limited to, any premium or penalty incurred by the Banks in
respect of funds borrowed by it or deposited with it for the purpose of making
or maintaining any of the Revolving Loans, as determined by the Banks in the
exercise of their sole discretion. A certificate submitted by the Agent on
behalf of the Banks to the Borrowers shall, in the absence of manifest error,
be conclusive and binding as to the amount thereof.
3.9 Unused Line Fee. The Borrowers agree to pay to
the Banks, ratably in accordance with their Percentage Interest, an unused line
fee (the "Unused Line Fee") of one-quarter of one percent (.25%) per annum on
the daily average of the unused amount of the Credit (which daily average shall
be calculated by the Agent in accordance with the formula set forth on SCHEDULE
3.9 hereof) during the period commencing on the date of this Agreement and
ending on the Maturity Date or, if earlier, the termination of the Credit. The
Unused Line Fee shall be payable quarterly in arrears on the last Banking Day
of each calendar quarter commencing on December 31, 1996 with a final payment
of such Unused Line Fee on the Maturity Date.
3.10 Fees and Expenses. (a) The Borrowers shall pay
and/or reimburse the Agent, on request, for all its expenses incurred in
connection with the preparation, negotiation, documentation, or enforcement of
this Agreement, the Revolving Notes, or any other Loan Documents, including,
without limitation, all reasonable attorney, paralegal and other professional
fees and expenses. All such reimbursements shall be made by the Borrowers
within five (5) days after the Agent's or applicable Bank's written demand
therefor.
(b) The Borrowers shall pay and/or reimburse Agent, on
request, for all its expenses incurred in connection with the amendment or
modification of this Agreement, the Revolving Notes, or any other Loan
Documents. Notwithstanding the foregoing, the Borrowers shall have no
obligation to reimburse
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and/or pay the Agent for any expenses incurred for the first three amendments
or modifications of this Agreement, the Revolving Notes, or any other Loan
Documents in any year, except in connection with the amendment prepared in
connection with the annual renewal of this Agreement. The expenses in
connection with each amendment or modification for which Borrowers are
responsible shall not exceed $1,500 for each such amendment for each Bank.
However, at no time shall Borrowers be responsible for the fees of the Agent if
the purpose of any amendment or modification is to: (a) permit the incurrence
by Borrowers of any Subordinated Debt, as long as the terms of such
Subordinated Debt comply with the requirements set forth herein; (b) provide
the consent of the Banks to a Permitted Securitization; (c) add a New Bank; or
(d) increase or decrease the Percentage Interest of any Bank.
3.11 Method of Calculating Interest and Fees. Interest
and any fee shall be computed on the basis of a year consisting of 360 days and
paid for actual days elapsed.
4. PAYMENTS, PREPAYMENTS, OFFSETS AND REDUCTION OR TERMINATION OF
THE CREDIT.
4.1 Place of Payment. All payments hereunder
(including payments with respect to the Revolving Notes) shall be made without
set-off or counterclaim and shall be made in immediately available funds by the
Borrowers to the Agent for the account of the Banks, ratably in accordance with
each Bank's Percentage Interest. All such payments shall be made to the Agent,
prior to 12:30 p.m., Chicago time, at its offices at 135 South LaSalle Street,
Chicago, Illinois 60603, or at such other place as may be designated by the
Agent to the Borrowers in writing. Any payment received after 12:30 p.m.,
Chicago time, shall be deemed received on the next Banking Day. Whenever any
payment to be made hereunder or under any Revolving Note shall be stated to be
due on a date other than a Banking Day, such payment may be made on the next
succeeding Banking Day, and such extension of time shall be included in the
computation of payment of interest or any fees.
4.2 Reduction of Credit. The Borrowers may from time
to time, upon at least 2 Banking Days' prior notice to the Agent (which shall
promptly advise each Bank thereof) permanently reduce the amount of the Credit
(such reduction to be made among the Banks according to their respective pro
rata share of the Credit) but only upon payment of the principal of the
Revolving Notes in excess of the then reduced amount of the Credit. Any such
reduction shall be in an amount of $100,000 or an integral multiple thereof and
shall include accrued interest to the date of reduction on the principal amount
being repaid. The Borrowers may at any time on like notice terminate
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the Credit upon payment in full of the Revolving Notes and other liabilities of
the Borrowers hereunder.
4.3 Offset. In addition to and not in limitation of
all rights of offset that any Bank or other holder of any Revolving Note may
have under applicable law, each Bank or other holder of any Revolving Note
shall, upon the occurrence of any Event of Default described in Section 10.1 or
any Unmatured Event of Default described in Section 10.1(c), have the right to
appropriate and apply to the payment of each Revolving Note any and all
balances, credits, deposits, accounts or moneys of the Borrowers then or
thereafter with such Bank or other holder.
4.4 Proration of Payments. If any Bank or other
holder of a Revolving Note shall obtain any payment or other recovery (whether
voluntary, involuntary, by application of offset or otherwise) on account of
principal of or interest on any Revolving Note in excess of its Percentage
Interest of payments and other recoveries obtained by all Banks or other
holders on account of principal of and interest in Revolving Notes then held by
them, such Bank or other holder shall purchase from the other Banks or holders
such participation in the Revolving Notes held by them as shall be necessary to
cause such purchasing Bank or other holder to share the excess payment or other
recovery ratably with each of them; provided, however, that if all or any
portion of the excess payment or other recovery is thereafter recovered from
such purchasing holder, the purchase shall be rescinded and the purchase price
restored to the extent of such recovery, but without interest. The Borrowers
agree that the Bank so purchasing a participation from the other Banks under
this Section 4.4 may exercise all its rights of payment, including the right of
set-off, with respect to such participation as fully as if such Bank were the
direct creditor of the Borrowers in the amount of such participation.
4.5 Borrower's Loan Account. The Agent will maintain
on its books one or more loan accounts on behalf of the Banks (each a "Loan
Account") in which shall be recorded (i) all Revolving Loans made by the Banks
to the Borrowers pursuant to this Agreement, (ii) all payments made by the
Borrowers on all such Revolving Loans, and (iii) all other appropriate debits
and credits as provided in this Agreement or the other Loan Documents,
including, without limitation, all fees, charges, expenses and interest
provided for hereunder or thereunder. Each of the Banks may also maintain loan
accounts in the ordinary course of business. The Agent may send the Borrowers
statements of all accounts due hereunder as reflected in any Loan Account,
which statements shall be deemed accurate in the absence of manifest error.
4.6 Prepayment. The principal, accrued interest and
all other amounts of the Obligations bearing interest at the
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Floating Rate may be prepaid by the Borrowers in whole or in part without
premium or penalty; provided, however, that all such prepayments shall be in
the minimum amount of $50,000 (or less if less is due). The Borrowers may from
time to time prepay Revolving Loans bearing interest at the LIBOR-Based Rate;
however, the Borrowers shall pay to the Agent on behalf of the Banks an amount
equal to the amount of interest which the Banks would have earned for the
balance of such LIBOR Rate Borrowing Period in respect of the Revolving Loan so
prepaid if such Revolving Loan had not been prepaid prior to the end of such
LIBOR Rate Borrowing Period, plus any reasonable expense or penalty incurred by
any Bank on so relending or reinvesting such Revolving Loan, reduced, if any
Bank is able to relend or reinvest the principal amount of the Revolving Loan
so prepaid for the balance of such LIBOR Rate Borrowing Period, by the amount
of interest to such Bank on so relending or reinvesting the Revolving Loan.
Such additional payment shall not exceed the difference between the amount of
interest the Banks would have earned for the balance of such LIBOR Rate
Borrowing Period in respect of the Revolving Loan so prepaid if such Revolving
Loan had originally been made at the Floating Rate in effect as of the date of
the prepayment, plus any reasonable expenses incurred by Banks on so relending
or reinvesting such Revolving Loan.
4.7 Application of Payments and Prepayments. Any
payment or prepayment made by the Borrowers under this Agreement, or any of the
other Loan Documents shall be applied to Obligations owing as of the date of
payment in the following order: (i) to any amounts owing to the Banks pursuant
to Sections 3.9 and 3.10 of this Agreement; (ii) to interest accrued and owing
pursuant to the terms of the Revolving Notes (allocated pro rata among each of
the Banks in accordance with their respective Percentage Interests); and (iii)
to the principal balance of the Revolving Notes (allocated pro rata among each
of the Banks in accordance with their respective Percentage Interests).
4.8 Settlement. Agent shall provide to each Bank on
any date on which FEFG requests a Revolving Loan or makes a payment on the
Obligations (the "Settlement Date") a Request and Settlement Statement in the
form of EXHIBIT G hereto showing the change in the outstanding principal
balance of the Revolving Loans since the prior Settlement Date as well as each
Bank's share in the outstanding Revolving Loans. If any Bank's share in the
outstanding Revolving Loans on such Settlement Date exceeds such Bank's share
in the outstanding Revolving Loans on the prior Settlement Date, such Bank
shall, by wire transfer, remit to Agent on each Settlement Date its
contribution to the extent of such Bank's Percentage Interest in the
outstanding Revolving Loans on such Settlement Date. Similarly, if any Bank's
share in the Revolving Loans on the prior Settlement Date
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exceeded its share in the Revolving Loans on any Settlement Date, Agent shall,
by wire transfer, remit to such Bank on the Settlement Date the amount of such
excess. At any time, Agent may request an interim settlement on a date other
than a Settlement Date by providing to each Bank a Request and Settlement
Statement, and each Bank shall be required to remit its contribution to Agent
as provided in this Section 4.8. Each Bank's obligation to make any
contribution on a Settlement Date shall not be affected by the occurrence of a
default or Event of Default under this Agreement between any Settlement Date
and the next succeeding Settlement Date.
4.9 Default Interest. After maturity,
whether by acceleration or otherwise, the unpaid principal of each Revolving
Note shall bear interest until paid at the Prime Rate in effect from time to
time plus 3% per annum, but never less than 3% above the Prime Rate in effect
at maturity. Interest after maturity shall be payable on demand.
5. SECURITY. The Obligations shall be secured by a first
security interest in all of the Borrowers' assets, including, without
limitation, all of the Automobile Finance Receivables and Automobile Finance
Agreements as set forth in more detail in the Collateral Agreement and the
Assignment of Life Insurance Policy (the "Collateral").
6. REPRESENTATIONS AND WARRANTIES. As further inducement to the
Banks and the Agent to enter into this Agreement and make the Revolving Loans
hereunder, the Borrowers hereby represent and warrant, as of the date hereof
and as of the date of each disbursement of each of the Revolving Loans, the
following, which shall survive the execution and delivery of this Agreement and
the Loan Documents and continue until all of the Obligations of the Borrowers
have been paid, satisfied or discharged in full, regardless of any
investigation by the Banks or the Agent of the financial condition or assets of
the Borrowers:
6.1 Corporate Existence. The Borrowers and all of
their Subsidiaries are corporations duly organized, validly existing and in
good standing under the laws of the states of their respective incorporation,
and they are duly qualified and in good standing as foreign corporations
authorized to do business in each state where, because of the nature of their
respective activities or properties, such qualification is required.
6.2 Authorization and Consents. Each Borrower is duly
authorized to execute and deliver this Agreement, the Revolving Notes and the
other Loan Documents and is and will continue to be duly authorized to borrow
monies hereunder and to perform its obligations under this Agreement, the
Revolving Notes and the other Loan Documents. Each Borrower has all
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corporate power and authority to own its property and assets and to carry on
and engage in its business as it is now conducted and as is presently proposed
to be conducted, and each Borrower has all material licenses, permits,
franchises, consents, approvals and authorizations (collectively, "Licenses")
required in connection with the foregoing, all of which Licenses are in full
force and effect and no action or claim is pending, nor, to Borrowers'
knowledge, is threatened, to revoke or terminate any of the Licenses or declare
any License invalid in any material respect. No consent, approval or
authorization of, or filing, registration or qualification with, any Person,
governmental, regulatory, or otherwise, is required to be obtained or effected
by the Borrowers or any Affiliates in connection with the execution, issuance,
delivery and performance of this Agreement, the Notes and the Loan Documents to
which either Borrower or any Affiliates is a party or signatory or the
incurrence or performance of the Obligations of the Borrowers or any Affiliates
or, if so required, it has been duly obtained or effected before the date
hereof.
6.3 No Conflicts. The execution and delivery of this
Agreement, the Revolving Notes and the other Loan Documents, and the
performance by each Borrower of its obligations under this Agreement, the
Revolving Notes and the other Loan Documents, do not and will not conflict with
any Law or any, provision of such Borrower's charter or by-laws or of any
contract, agreement, mortgage, indenture, instrument or judgment binding upon
such Borrower.
6.4 Binding Effect and Enforceability. Upon delivery
hereof and thereof, this Agreement, the Revolving Notes, and the other Loan
Documents will be the legal, valid and binding obligations of the Borrowers
enforceable, in each case, in accordance with their terms and provisions and,
on the date of delivery, the Borrowers will not be in violation or
contravention of, and no Event of Default or event or condition which with the
passage of time or giving notice or both would constitute, mature into or
become a default or Event of Default will exist under, any of the foregoing.
6.5 Default of Indebtedness. Neither Borrower is in
default and no event of default or event, which with the passage of time or
giving of notice or both, would constitute, mature into or become a default or
event of default, has occurred and is continuing with respect to any
Indebtedness of either Borrower of any kind or nature.
6.6 Financial Statements. The Borrowers' audited
consolidated and consolidating Financial Statements at and as of December 31,
1995 and the Borrowers' unaudited consolidated and consolidating Financial
Statement as at August 31, 1996, copies of which have been furnished to each
Bank, have been
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prepared in conformity with GAAP applied on a basis consistent with that of the
preceding fiscal year and period, present fairly the financial condition of the
Borrowers and their Subsidiaries as at such dates, and the results of their
operations for the periods then ended, and since such dates there has been no
material adverse change in the financial condition of the Borrowers and their
Subsidiaries, no dividends or redemptions of or other distributions with
respect to the capital stock of the Borrowers and no Indebtedness of any kind
incurred by the Borrowers, except as permitted hereunder.
6.7 Litigation. Except as set forth on SCHEDULE 6.7,
no litigation, arbitration proceedings or governmental proceedings are pending
or threatened against either Borrower or any of their Subsidiaries which could
materially adversely affect the assets, properties, business or condition,
financial or otherwise, of the Borrowers or affect the ability of the Borrowers
to perform any Obligations. Other than any liability incident to such
litigation or proceedings or provided for or disclosed in the financial
statements referred to in Section 6.6, neither of the Borrowers nor any of
their Subsidiaries has any material contingent liabilities.
6.8 Liens. None of the assets of the Borrowers or any
of their Subsidiaries is subject to any mortgage, pledge, title retention lien,
or other lien, encumbrance or security interest, except (i) for current taxes
not delinquent or taxes being contested in good faith and by appropriate
proceedings, (ii) for liens arising in the ordinary course of business for sums
not due or sums being contested in good faith and by appropriate proceedings
and not involving any deposits or advances or borrowed money or the deferred
purchase price of property or services, (iii) to the extent shown in the
financial statements referred to in Section 6.6 and (iv) as listed on SCHEDULE
6.8.
6.9 Subsidiaries. The Borrowers have no Subsidiaries
except as listed on SCHEDULE 6.9. The Borrowers and their Subsidiaries own the
percentage of their respective Subsidiaries as set forth on SCHEDULE 6.9.
6.10 Purpose. The proceeds of the Revolving Loans will
be used by the Borrowers for working capital and other general corporate
purposes including, without limitation, for the purpose of providing financing
to Eligible Auto Consumers or Eligible Auto Dealers in connection with
Automobile Finance Transactions.
6.11 Regulation U. The Borrowers are not engaged in
the business of purchasing or selling margin stock (as defined in Regulation U
of the Board of Governors of the Federal Reserve System) or extending credit to
others for the purpose
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<PAGE> 25
of purchasing or carrying margin stock and no part of the proceeds of any
borrowing hereunder will be used to purchase or carry any margin stock or for
any other purpose which would violate any of the margin regulations of said
Board of Governors.
6.12 Compliance. The Borrowers and their Subsidiaries
are in material compliance with all Laws and all statutes and governmental
rules and regulations applicable to them, including, without limitation, ERISA
insofar as such Act applies to them. No condition exists or event or
transaction has occurred in connection with any Plan which could result in the
incurrence by the Borrowers or any of their Subsidiaries of any material
liability, fine or penalty.
6.13 Investment Borrower Act Representation. Neither
Borrower is an "investment company" or a company "controlled" by an "investment
company", within the meaning of the Investment Borrower Act of 1940, as
amended.
6.14 Tax Returns and Tax Matters. The Borrowers have
and each of the Subsidiaries has filed all federal and state income tax returns
which are required to be filed, and each has paid all taxes as shown on said
returns and on all assessments received by it to the extent that such taxes
have become due. The Borrowers have no knowledge of any proposed, asserted or
assessed tax deficiency against either of them or any of their Subsidiaries,
where any such deficiency or all such deficiencies, considered in the
aggregate, would reasonably be expected to have a material adverse effect.
6.15 Employee Plans. All of the Plans of the Borrowers
meet the minimum funding standards of Section 302 of ERISA where applicable.
No withdrawal liability has been incurred under any such Plans and no
Prohibited Transaction or Reportable Event as defined in ERISA, has occurred
with respect to any such Plans, unless approved by the appropriate governmental
agencies. All payments and/or contributions required to have been made under
the provisions of any Plan or by law have been timely made.
6.16 Solvency. Each Borrower is (i) currently solvent
and will not be rendered insolvent by the incurrence of the Obligations and
indebtedness hereunder, by the execution of this Agreement and any Loan
Documents, or by any transactions contemplated hereunder or thereunder, (ii)
currently and, after giving effect to the transactions contemplated by this
Agreement and any Loan Documents will be able to pay its debts as they come due
and will not have incurred nor incur debts beyond its ability to pay such debts
as they mature or come due, (iii) has capital sufficient to carry on its
business and any business in which it intends or is about to engage and (iv)
owns property
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<PAGE> 26
and assets having a value (as a going concern) in excess of its liabilities and
debts. No transfer of property is being made and no Obligation is being
incurred in connection with the transactions contemplated by this Agreement
with the intent to (or which will, in effect) hinder, delay or defraud either
present or future creditors of the Borrowers or any Affiliates.
6.17 Capital and Stock Related Matters.
(a) The authorized capital stock of FEFG,
pursuant to FEFG's Articles of Incorporation and Bylaws, consists of
20,000,000 shares of capital stock ("FEFG's Voting Stock"). The
authorized capital stock of FEAC, pursuant to FEAC's Articles of
Incorporation and Bylaws consists of 1,000 shares of common stock,
$0.01 par value per share ("FEAC's Voting Stock"). All of FEAC's
Voting Stock is owned, beneficially and of record, by FEFG. There are
no shares of common stock held as treasury shares. The designations,
powers, preferences, rights, qualifications, limitations and
restrictions in respect of each class and series of authorized capital
stock of each Borrower is as set forth in its Articles of
Incorporation, and all such designations, powers, preferences, rights,
qualifications, limitations, and restrictions are valid, binding and
enforceable and in accordance with all applicable laws. All
outstanding shares of capital stock of the Borrowers have been duly
authorized and validly issued and are fully paid and non-assessable.
(b) The Borrowers have not violated any
applicable federal or state securities laws in connection with the
offer, sale or issuance of any shares of FEFG's Voting Stock or FEAC's
Voting Stock (collectively referred to as the "Borrowers' Voting
Stock"). There are and will be no agreements between any parties with
respect to the voting or transfer of the Borrowers' Voting Stock,
except as previously disclosed by Borrowers to Agent in writing.
(c) Except in connection with the stock
option plans listed and described on Schedule 6.17(c) of this
Agreement (the "Stock Option Plans"), no person holds any right,
option, warrant, preemptive right, call or other right to purchase or
subscribe for any shares of the Borrowers' Voting Stock or any
security convertible or exchangeable therefor. There are and will be
no agreements either express or implied regarding the voting of any
shares of the Borrowers' Voting Stock, and there are no commitments,
undertakings, understandings or arrangements of any kind relating to
the issuance of any shares of the Borrowers' Voting Stock, or any
securities convertible or exchangeable therefor, except in connection
with the Stock Option Plans."
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6.18 Environmental Laws. To the best of Borrowers'
knowledge after diligent inquiry, Borrowers are in material compliance with all
applicable Environmental Laws and regulations. To the best of Borrowers'
knowledge, the real property owned or leased by the Borrowers in the conduct of
their business (the "Real Property") the improvements thereon, and the use and
operation thereof are and have been in compliance with all applicable
Environmental Laws, and there are not and have not been any present or past
events, conditions, circumstances, activities, practices, incidents or actions
(all of the foregoing being referred to herein as "Conditions") which could
reasonably be expected to prevent or interfere with such continued compliance.
The Borrowers have not received notice of, or know of any investigation
relating to, any private, administrative, or judicial action relating to any
Condition. To the best of Borrowers' knowledge, there are no Hazardous
Materials on, in or under the Real Property and the Real Property has not been
used for Hazardous Materials generation (or manufacture, formulation, or
production in any manner), transportation, treatment, storage (including
without limitation, storage by means of underground tanks), disposal, or
handling in any manner.
6.19 Patents and Trademarks. Each Borrower possesses
all of the necessary patents, patent rights, trademarks, trademark rights,
trade names, trade name rights and copyrights to conduct the business of such
Borrower as now operated including, without limitation, all necessary patents
and copyrights on their Computer Equipment and all rights necessary to use and
continue to use all Computer Equipment. The patents, patent rights,
trademarks, trademark rights, trade names, trade name rights and copyrights of
the Borrowers do not infringe on the property rights of any other Person.
6.20 Warranties. With respect to all Eligible
Automobile Finance Receivables listed from time to time on any Borrowing Base
Certificates or which, in any way, are used (either directly or indirectly) to
support the Revolving Loan Borrowing Base, the Borrowers warrant and represent
to the Banks and the Agent that: (i) such Eligible Automobile Finance
Receivables are genuine, are in all respects what they purport to be, and are
not evidenced by a judgment; (ii) such Eligible Automobile Finance Receivables
are assignable and are subject to the first and prior perfected Lien and
security interest of the Banks and no other lien, claim or encumbrance
whatsoever; (iii) such Eligible Automobile Finance Receivables represent
undisputed, bona fide transactions completed in compliance with the terms and
provisions of the documents related thereto; (iv) the amounts shown on the
Borrowers' books and records with respect to the Eligible Automobile Finance
Receivables are actually and absolutely owing to FEFG and are not in any way
contingent; (v) all payments (including, without limitation,
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prepayments) which have been made upon such Eligible Automobile Finance
Receivables have been accurately reflected on the Borrowers' books and records;
(vi) there are no set-offs, counterclaims or disputes existing or asserted with
respect to such Eligible Automobile Finance Receivables and neither (in the
case of the Eligible Automobile Finance Receivables only) has made any
agreement with any applicable Eligible Auto Consumer for any deduction or
discount from any such Eligible Automobile Finance Receivables; (vii) there are
no facts, events or occurrences which in any way impair the validity or the
enforcement of such Eligible Automobile Finance Receivables or tend to reduce
the amounts payable under such Automobile Finance Receivables; (viii) to the
best of the Borrowers' knowledge, there are no proceedings against or otherwise
applicable to any Eligible Auto Consumer which might result in any material
adverse change to the financial condition of the applicable Eligible Auto
Consumer; (ix) the Borrowers have no knowledge of any fact or circumstances
which would impair the validity or collectibility of any Eligible Automobile
Finance Receivables; (x) the terms of each Eligible Automobile Finance
Receivables comply with all Laws applicable to financings of Automobiles,
including, without limitation, any Laws regulating the levels of interest
and/or finance charges which may be imposed by any Eligible Automobile Finance
Receivables; (xii) the Eligible Automobile Finance Receivables and the related
Automobile Finance Agreements are in the exclusive possession of Borrowers and
are held on behalf of FEFG and have not been negotiated or sold to any third
party, including without limitation, any party who would qualify as a purchaser
under Section 9-308 of the Illinois UCC.
6.25 Corporate Names. The Borrowers have no assumed corporate names
and are not doing business under any corporate names other than First
Enterprise Financial Group, Inc., First Enterprise Acceptance Company or FEAC.
7. BORROWER'S COVENANTS. From the date of this Agreement and
thereafter until the expiration or termination of the Credit and until the
Revolving Notes and other Obligations of the Borrowers hereunder are paid in
full, the Borrowers agree that:
7.1 Payments. The Borrowers shall pay, or cause to be
paid, when due all principal and interest under the Notes and all other
Obligations in respect of this Agreement, the Notes and the Loan Documents.
7.2 Financial Statements and Other Information. The
Borrowers shall furnish to the Agent:
(a) within 120 days after each fiscal year of
the Borrowers, a copy of the Borrowers' annual audit report prepared
on a consolidating and consolidated basis
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in conformity with GAAP applied on a basis consistent with that of the
preceding fiscal year and certified by an independent certified public
accountant who shall be satisfactory to the Banks, together with the
written statement of such accountant (i) that in performing the audit
such accountant has not obtained knowledge of any Event of Default, or
disclosing all Events of Default of which it has obtained knowledge
and (ii) that it is aware that Bank is relying on such Financial
Statements; provided, however, Borrowers shall only be obligated to
use their best efforts to provide such reliance letter from their
accountants;
(b) within 30 days after each month (except
the last month) of each fiscal year of the Borrowers, a copy of their
unaudited financial statement, prepared in the same manner as the
audit report referred to in clause (a) hereof and signed by the
Borrowers' chief financial officer, together with the Automobile
Finance Receivable Report as of the end of such month;
(c) together with the financial statements
furnished by the Borrowers under preceding clauses (a) and (b), a
certificate of the Borrowers' chief financial officer substantially in
the form of EXHIBIT H hereto to the effect that no Event of Default or
Unmatured Event of Default has occurred, or, if there is any such
event, describing it and the steps, if any, being taken to cure it and
containing a computation of, and showing compliance with, each of the
financial ratios and restrictions contained in this Section 7;
(d) copies of each filing and report made by
the Borrowers or any Subsidiary with or to any securities exchange or
the Securities and Exchange Commission, and of each communication from
the Borrowers or any Subsidiary to shareholders generally, promptly
upon the filing or making thereof;
(e) immediately upon learning of the
occurrence of any of the following, written notice thereof, describing
the same and the steps being taken by the Borrower or the Subsidiary
affected with respect thereto: (i) the occurrence of an Event of
Default or an Unmatured Event of Default, (ii) the institution of, or
any adverse determination in, any litigation, arbitration proceeding
or governmental proceeding which is material to the Borrowers and
their Subsidiaries on a consolidated basis, (iii) the occurrence of
any other matter which has resulted in, or might result in a
materially adverse change in the financial or other condition or
operations of the Borrowers or their ability to fully perform their
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Obligations under the terms and conditions of this Agreement and the
Loan Documents or their ability to repay the Notes, or (iv) any
material default under any of the obligations secured by the Permitted
Liens;
(f) from time to time, such other information
as any of the Banks may reasonably request;
(g) within 30 days after each month, a
Borrowing Base Certificate along with any schedules or supporting
documents reasonably requested by Agent and in addition, if at any
time the outstanding principal balance of the Loans exceeds 90% of the
Revolving Loan Borrowing Base, Borrowers shall submit by Monday
afternoon, a Borrowing Base Certificate for the preceding week until
such time as the outstanding principal balance of the Loans no longer
exceeds 90% of the Revolving Loan Borrowing Base;
(h) notice of any change in location of any
places of business or the chief executive office or the opening of any
new locations of either Borrower at least thirty (30) days prior to
such change or opening; and
(i) on or before May 15th of any year, a copy of
Borrowers' completed federal tax return for the previous tax year.
7.3 Corporate Existence. Each Borrower shall maintain
and preserve, and cause each Subsidiary to maintain and preserve, its
respective corporate existence and all rights, privileges, licenses, patents,
patent rights, copyrights, trademarks, trade names, franchises and other
authority to the extent material and necessary for the conduct of its
respective business in the ordinary course as conducted from time to time.
7.4 Access. The Borrowers shall permit, and cause
each Subsidiary to permit, access by each of the Banks to the books and records
of the Borrowers and each Subsidiary and such financial information concerning
the Borrowers' Collateral, other Property or assets, business, affairs,
operations or financial condition as reasonably requested by the Banks during
normal business hours and permit, and cause each Subsidiary to permit, each of
the Banks to make copies of said books and records. Agent shall be permitted
to perform annual field due diligence audits of any of the Borrowers' premises
where the Collateral is located at the Borrowers' cost and expense.
7.5 Insurance. The Borrowers shall maintain, and
cause each Subsidiary to maintain, insurance to such extent and against such
hazards and liabilities as is commonly maintained by companies similarly
situated or as any of the Banks may
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reasonably request from time to time which insurance shall name the Agent as
lender loss payee. If the Borrowers fail to maintain any insurance or policies
of insurance as required above, or fail to pay any premium related thereto, the
Banks may obtain or pay the same, but shall be under no obligation to do so. In
the event the Banks obtain such insurance, all sums so paid and any expenses
incurred in connection therewith shall be part of the Obligations payable by
the Borrowers to the Banks on demand pursuant to Section 12.3 hereof
7.6 Repair. Each Borrower shall maintain, preserve
and keep its, and cause each Subsidiary to maintain, preserve and keep their,
properties in good repair, working order and condition and from time to time
make, and cause each Subsidiary to make, all necessary and proper repairs,
renewals, replacements, additions, betterments and improvements thereto so that
at all times the efficiency thereof shall be fully preserved and maintained,
and in the event the Borrowers fail in the foregoing, the Borrowers hereby
authorize, without requiring the Banks, to perform the same and incur such
reasonable costs, fees and expenses which shall be payable on demand by the
Borrowers pursuant to Section 12.3 hereof.
7.7 Taxes and Liabilities. The Borrowers shall pay,
and cause each Subsidiary to pay, when due all taxes, assessments and other
liabilities, except as contested in good faith and by appropriate proceedings.
In the event the Borrowers fail to pay any such taxes, assessments, charges or
levies, the Banks may, without waiving or releasing the Borrower's Obligations
or any Event of Default hereunder, pay the same, but shall be under no
obligation to do so. All sums so expended shall be part of the Obligations
payable by the Borrowers to the Banks on demand pursuant to Section 12.3
hereof.
7.8 Financial Covenants. The Borrower shall maintain
the following (each calculated on a consolidated basis to include all of
Borrower's Subsidiaries other than FESC and any other SPE):
(a) Maximum Ratio of Unsubordinated Debt to
Tangible Net Worth Plus Subordinated Debt. From the date hereof until
the Maturity Date and the repayment in full of all Obligations, the
Borrowers shall maintain a Ratio of Unsubordinated Debt to Tangible
Net Worth Plus Subordinated Debt, no greater than 5:1.
(b) Minimum Ratio of EBIT to Cash Interest
Expense. From the date hereof until the Maturity Date and the
repayment in full of all Obligations, the Borrowers shall maintain a
ratio of EBIT to Cash Interest Expense of no less than 1.25:1,
calculated monthly using the average
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of such ratio for the immediately preceding twelve months.
(c) Minimum Capital Funds. From the date
hereof until the Maturity Date and the payment in full of all
Obligations, the Borrowers shall maintain Capital Funds in an amount
not less than $11,500,000 and provided further, that (i) such minimum
Capital Funds amount shall be increased by fifty percent (50%) of the
monthly Net Income (but not reduced by losses) of Borrowers,
commencing November 1, 1996; and (ii) the amount of Borrowers' Net
Income shall be adjusted, if necessary, after the receipt by Bank of
Borrowers' yearly audited Financial Statements.
(d) Reserves/Portfolio. From the date hereof
until the Maturity Date and the payment in full of all Obligations,
the Borrowers shall maintain a ratio of Total Reserves/Total Portfolio
of not less than eight percent (8%). For purposes of this covenant,
Borrowers' Total Reserves shall include any loan loss reserve, dealer
reserve, acquisition discount, or any similar type of reserve and
Borrowers' Total Portfolio shall mean the outstanding balance of all
of Borrowers' Automobile Finance Receivables, less the Unearned
Finance Charges.
(e) Past Due Automobile Finance Receivables.
From the date hereof until the Maturity Date and the payment in full
of all Obligations, the Borrowers shall not permit more than three
(3%) of Borrowers' Automobile Finance Receivables to be more than
sixty (60) days past due at any time.
7.9 Compliance. The Borrowers shall comply, and cause
each Subsidiary to comply, with all statutes and governmental rules and
regulations applicable to them, including, without limitation, ERISA insofar as
such Act applies to them. The Borrowers shall not permit, and not permit any
Subsidiary to permit, any condition to exist in connection with any Plan which
might constitute grounds for the PBGC to institute proceedings to have such
Plan terminated or a trustee appointed to administer such Plans and not engage
in, or permit to exist or occur, or permit any of their Subsidiaries to engage
in, or permit to exist or occur, any other condition, event or transaction with
respect to any such Plan which could result in the incurrence by the Borrowers
or any of their Subsidiaries of any material liability, fine or penalty.
7.10 Leases. The Borrowers shall maintain and comply
in all material respects with all leases covering the real and personal
property used by the Borrowers in accordance with their terms so as to prevent
any default thereunder which may result in the exercise or enforcement of any
landlord's or
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other lien against either Borrower unless such Borrower is contesting in good
faith, by an appropriate proceeding, the validity, amount or imposition of any
lease charges or expenses while maintaining reserves, deemed adequate by the
Bank, in its sole and complete discretion to cover the above, and such contest
does not have or cause material adverse changes in the Borrowers' financial
condition or operations and does not impair the Borrowers' ability to perform
the Obligations. Furthermore, if either Borrower enters into any leases of
real property, Borrowers shall use their best efforts to cause the lessor of
such property to enter into a landlord's waiver satisfactory to Banks in form
and substance; provided, however, the Agent may waive this requirement in its
sole discretion.
7.11 Merger, Purchase and Sale. Except for the sale of
Automobile Finance Receivables and related property in connection with a
Permitted Securitization Transaction and the transfer of certain assets to
FEAC, the Borrowers shall not, and not permit any Subsidiary to, without the
prior written consent of the Banks:
(a) be a party to any merger or consolidation;
(b) sell, transfer, convey or lease all or any
substantial part of their assets;
(c) sell or assign, with or without recourse,
any accounts receivable or chattel paper;
(d) purchase or otherwise acquire all or
substantially all the assets of any person, corporation, or other
entity, or any shares of stock of, or similar interest in, any other
corporation or entity; or
(e) change their corporate names without
thirty (30) days prior written notice to the Agent.
7.12 Restricted Payments. The Borrowers shall not
purchase or redeem any shares of their stock, declare or pay any dividends
thereon (other than stock dividends), make any distribution to stockholders or
set aside any funds for any such purpose, and not prepay or pay (other than in
accordance with the applicable Subordination Agreement), purchase or redeem,
and not permit any Subsidiary to purchase, any Subordinated Debt of the
Borrowers or any Subsidiary, except that any of either Borrower's Subsidiaries
may from time to time declare and pay dividends in cash to such Borrower.
7.13 Borrower's and Subsidiaries' Stock. The Borrowers
shall not permit any Subsidiary to purchase or otherwise acquire any shares of
the capital stock of either
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Borrower; and not take any action, or permit any Subsidiary to take any action,
which will result in a decrease in either Borrower's or any Subsidiary's
ownership interest in such Subsidiary.
7.14 Indebtedness. The Borrowers shall not, and not
permit any Subsidiary to, incur or permit to exist any Indebtedness or
liability on account of deposits or advances or for borrowed money or for the
deferred purchase price of any property or services, except:
(i) Indebtedness under the terms of this
Agreement;
(ii) other Indebtedness approved in writing by all of
the Banks;
(iii) the Subordinated Debt;
(iv) current accounts payable arising in the ordinary
course of business;
(v) Indebtedness hereafter incurred in connection with
the Permitted Liens; and
(vi) other Indebtedness outstanding on the date hereof
and listed on SCHEDULE 7.14;
(vii) Indebtedness incurred in connection with a
Permitted Securitization Transaction;
(viii) Indebtedness incurred by and between FEAC
and FEFG.
7.15 Liens. The Borrowers shall not, and not permit
any Subsidiary to, create or permit to exist any mortgage, pledge, title
retention lien, or other lien, encumbrance or security interest with respect to
any assets now owned or hereafter acquired, except the following (collectively,
the "Permitted Liens"):
(i) the Borrower's Obligations hereunder;
(ii) in connection with the acquisition of
property after the date hereof, and attaching only to the property
being acquired, if the indebtedness secured thereby does not exceed
66-2/3% of the fair market value of such property at the time of
acquisition thereof or $500,000 in the aggregate for the Borrowers and
all Subsidiaries at any one time outstanding;
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(iii) for current taxes not delinquent or taxes
being contested in good faith and by appropriate proceedings;
(iv) for liens arising in the ordinary course
of business for sums not due or sums being contested in good faith and
by appropriate proceedings and not involving any deposits or advances
or borrowed money or the deferred purchase price of property or
services;
(v) those granted by any Subsidiary to secure
such Subsidiary's Indebtedness to either Borrower or to any other
Subsidiary;
(vi) those referred to in SCHEDULE 7.15;
(viii) any Liens granted by either Borrower to
secure the Subordinated Debt to which the Banks shall have consented;
and
(ix) a Lien on the Automobile Finance
Receivables and related property sold pursuant to a Permitted
Securitization Transaction.
7.16 Guaranties, Revolving Loans or Advances. The
Borrowers shall not, and not permit any Subsidiary to, become or be a guarantor
or surety of, or otherwise become or be responsible in any manner (whether by
agreement to purchase any obligations, stock, assets, goods or services, or to
supply or advance any funds, assets, goods or services, or otherwise) with
respect to, any undertaking of any other person or entity, or make or permit to
exist any loans or advances to any other person or entity, except for
(i) any business normally conducted by a consumer
finance company which has been approved in writing by all of the Banks
(in each Bank's sole discretion);
(ii) the endorsement, in the ordinary course of
collection, of instruments payable to either Borrower or its order;
(iii) advances not to exceed, in the aggregate for the
Borrowers and all Subsidiaries at any one time outstanding, $25,000 to
officers and employees and $25,000 to subcontractors or suppliers
other than Subsidiaries;
(iv) loans made to employees of Borrowers for the
purchase of shares of FEFG's Voting Stock in connection with the
exercise by such employees of stock options, which loans are secured
by those shares of FEFG's
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Voting Stock purchased with the proceeds of such loans; and
(v) obligations incurred by FEFG in connection with a
Permitted Securitization Transaction.
7.17 Leases. The Borrowers shall not enter into or
permit to exist, or permit any of their Subsidiaries to enter into or permit to
exist, any arrangements for the leasing by them or any of their Subsidiaries as
lessee of any real or personal property (or any interest therein) which require
the payment by the Borrowers and their Subsidiaries on a consolidated basis of
rental amount in the aggregate in excess of $500,000 in any one fiscal year;
provided, however, in addition to those leases permitted above, Borrowers may
enter into new leases for additional branch offices which are necessary in the
ordinary and reasonable conduct of their business.
7.18 Unconditional Purchase Obligation. The Borrowers
shall not, and not permit any Subsidiary to, enter into or be a party to any
contract for the purchase of materials, supplies or other property or services,
if such contract requires that payment be made by any of them regardless of
whether or not delivery is ever made of such materials, supplies or other
property or services.
7.19 Other Agreements. Neither Borrower shall enter
into any agreement containing any provision which would be violated or breached
by the performance of its obligations hereunder or under any instrument or
document delivered or to be delivered by it hereunder or in connection
herewith.
7.20 Use of Proceeds. The Borrowers shall not use or
permit any proceeds of the Revolving Loans to be used, either directly or
indirectly, for the purpose, whether immediate, incidental or ultimate, of
"purchasing or carrying any margin stock" within the meaning of Regulation U of
the Board of Governors of the Federal Reserve System, as amended from time to
time, and shall furnish to any of the Banks, upon such Bank's request, a
statement in conformity with the requirements of Federal Reserve Form U-1
referred to in Regulation U of the Board of Governors of the Federal Reserve
System.
7.21 Issuance of Securities. The Borrowers shall not
authorize, issue, grant or dispose of any securities, including, without
limitation, any common stock, options, warrants, debts or securities
convertible into the common stock of the Borrowers, without the prior written
consent of the Banks which will not be unreasonably withheld, except for the
issuance of up to 1,232,334 shares of FEFG's common stock pursuant to the Stock
Option Plans.
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7.22 False Statements. The Borrowers will not furnish
the Bank any certificate or other document that will contain any untrue
statement of material fact or that will omit to state a material fact necessary
to make it not misleading in light of the circumstances under which it was
furnished.
7.23 Transactions with Affiliates. The Borrowers will
not enter into any agreement or arrangement, written or oral, directly or
indirectly, with an Affiliate, or provide services or sell goods to, or for the
benefit of, or pay or otherwise distribute monies, goods or other valuable
consideration to, an Affiliate, except upon fair and reasonable terms no less
favorable to the Borrowers than terms in a comparable arm's length transaction
with an unaffiliated Person, and except in connection with a Permitted
Securitization Transaction or between FEFG and FEAC.
7.24 Capital Structure. Without the prior written
consent of the Banks, the Borrowers shall not make any material change in their
capital structures, enter into any new business or product line unless
substantially related to their current business, or make any material change in
their business objectives, purposes and operations, any of which would
materially adversely affect their business, profits, prospects, any of their
Property, or their ability to repay the Obligations.
7.25 Tennessee UCC. Each Borrower shall, so long as it
shall have an office or offices in the State of Tennessee, maintain a validly
filed UCC financing statement with the State of Tennessee which lists as
"maximum principal indebtedness for Tennessee recording tax purposes" an amount
which equals or exceeds the Revolving Loan amount generated by such Borrower's
Tennessee offices and Borrowers shall pay all recording taxes required with
respect to such UCC financing statement. In the event either Borrower shall
now or hereafter have an office in any other jurisdiction which requires the
payment of any tax or fee in connection with the perfection of Banks' Lien on
the Collateral or the Obligations, Borrowers shall pay all fees or taxes
required thereby.
7.26 Subsidiaries. Borrowers shall not, and shall not
permit any Subsidiary, to create any Subsidiary without the prior written
consent of the Banks, which consent shall not be unreasonably withheld as long
as such Subsidiary becomes a party to this Agreement and grants to Banks a Lien
on and security interest in all of its Property.
7.27 Modification of Certain Agreements. Neither
Borrowers nor any of their Subsidiaries shall consent to or enter into any
amendment, supplement or other modification of any term, provision or agreement
contained in the Trust
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Indenture or any of the Securitization Transaction Documents, if such
amendment, supplement or other modification would be materially adverse to the
Banks, in their sole judgment.
8. CONDITIONS PRECEDENT TO ALL REVOLVING LOANS. The obligation
of the Banks to make any Revolving Loans is subject to the satisfaction of each
of the following conditions precedent.
8.1 Default. Before and after giving effect to such
Revolving Loans, no Event of Default or Unmatured Event of Default shall have
occurred and be continuing.
8.2 Warranties. Before and after giving effect to
such Revolving Loans, the warranties in Section 6 shall be true and correct as
though made on the date of such Revolving Loans, except for such changes as are
specifically permitted hereunder.
8.3 Certification. The Borrowers shall have delivered
to the Agent a certificate of the Borrowers' president or chief financial
officer as to the matters set out in Sections 8.1 and 8.2.
9. CONDITIONS PRECEDENT TO INITIAL REVOLVING LOANS. The
obligation of the Banks to make the initial Revolving Loans hereunder is
subject to the satisfaction of the condition precedent, in addition to the
applicable conditions precedent set forth in Section 8 above, that the
Borrowers shall have delivered to each Bank:
9.1 Revolving Notes. Their duly executed Revolving
Note, payable to such Bank's order in the amount of such Bank's share of the
Credit.
9.2 Resolutions. Copies, duly certified as of the
date of the initial Revolving Loan by each Borrower's secretary or assistant
secretary, of (a) the resolutions of such Borrower's Board of Directors
authorizing the borrowings hereunder and the execution and delivery of this
Agreement, the Revolving Notes and all other Loan Documents, (b) all documents
evidencing other necessary corporate action and (c) all approvals or consents,
if any, with respect to this Agreement, the Revolving Notes and all other Loan
Documents.
9.3 Incumbency. A certificate of each Borrower's
secretary or assistant secretary, dated the date of the initial Revolving Loan,
certifying the names of such Borrower's officers authorized to sign this
Agreement, the Revolving Notes, the Loan Documents and all other documents or
certificates to be delivered hereunder, together with the true signatures of
such officers in the form of EXHIBIT I hereto.
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9.4 Opinion. An opinion of Rudnick & Wolfe, counsel
to the Borrowers, addressed to the Agent and the Banks and dated the date of
the initial Revolving Loan, in substantially the form of EXHIBIT J.
9.5 Financing Statements. Such UCC-1, UCC-3
amendments showing each Borrower's locations and other financing statements
duly executed by the Borrowers and such other financing documents as are
reasonable or necessary to reflect the Banks' security interests hereunder as
the Banks in their sole discretion may request from the Borrowers from time to
time, in form and substance satisfactory to the Banks in their sole discretion;
9.6 Searches. Such Uniform Commercial Code financing
statement, judgment and tax lien searches as the Banks shall require, in their
sole discretion, which searches shall indicate that the Borrowers' assets and
properties are free and clear of all Liens, claims and encumbrances other than
the liens permitted hereunder;
9.7 President's Certificate. A certificate of the
President of each Borrower, in the form attached hereto as EXHIBIT K, duly
executed and dated as of the date hereof;
9.8 Certified Articles. Copies, certified no earlier
than 3 calendar days prior to the date hereof, by the Secretary of State of
Illinois of the Articles of Incorporation, and each and every amendment
thereto, for each Borrower;
9.9 Good Standing Certificates/Foreign Qualifications.
Certificates of the Secretary of State of the state of Illinois dated no
earlier than 10 calendar days prior to the date hereof, as to the good standing
of the Borrowers in the state of Illinois and in any other states in which
either Borrower is qualified as a foreign corporation;
9.10 Financial Statements, etc. All information,
Financial Statements, or notices to be delivered to the Agent pursuant hereto;
and
9.11 Corporate Consents of the Borrower. Certified
copies of the unanimous written consents of the Boards of Directors and
stockholders of the Borrowers in the form attached hereto as EXHIBIT L,
authorizing the execution, delivery and performance of this Agreement and the
other Loan Documents
10. EVENTS OF DEFAULT AND REMEDIES.
10.1 Events of Default. Each of the following shall
constitute an Event of Default under this Agreement.
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(a) Non-Payment. Default, and the continuance
thereof for 5 days after written notice thereof, in the payment of
principal of, or interest on, any Revolving Note when due, or any fee
hereunder.
(b) Non-Payment of Other Indebtedness.
Default in the payment when due (subject to any applicable grace
period), whether by acceleration or otherwise, of any other
Indebtedness of, or guaranteed by, either Borrower or any Subsidiary
(except any such Indebtedness of any Subsidiary to the Borrowers or to
any other Subsidiary) or default in the performance or observance of
any obligation or condition with respect to any such other material
Indebtedness if the effect of such default is to accelerate the
maturity of any such Indebtedness or to permit the holder or holders
thereof, or any trustee or agent for such holders, to cause such
Indebtedness to become due and payable prior to its expressed
maturity.
(c) Insolvency. Either Borrower or any of its
Subsidiaries becomes insolvent or generally fails to pay, or admits in
writing its inability to pay, its debts as they mature, or applies
for, consents to, or acquiesces in the appointment of a trustee,
receiver or other custodian for such Borrower, such Subsidiary or any
Property thereof; or, in the absence of such application, consent or
acquiescence, a trustee, receiver or other custodian is appointed for
either Borrower, any of its Subsidiaries or for a substantial part of
the property of such Borrower or any of its Subsidiaries and is not
discharged within 60 days; or any bankruptcy, reorganization, debt
arrangement, or other proceeding under any bankruptcy or insolvency
law, or any dissolution or liquidation proceeding is instituted by or
against either Borrower or any of its Subsidiaries and if instituted
against either Borrower or any of its Subsidiaries is consented to or
acquiesced in by such Borrower or such Subsidiary or remains for 60
days undismissed; or any warrant of attachment is issued against any
substantial portion of the property of either Borrower or any of its
Subsidiaries which is not released within 60 days of service.
(d) ERISA. The PBGC applies to a United
States District Court for the appointment of a trustee to administer
any Plan or for a decree adjudicating that any such Plan must be
terminated; a trustee is appointed pursuant to ERISA to administer any
such Plan; any action is taken to terminate any such Plan or any such
Plan is permitted or caused to be terminated if, at the time such
action is taken or such termination of any such Plan occurs, the
Plan's "vested liabilities", as defined in
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Section 3(25) of ERISA, exceed the then value of its assets at the
time of such termination.
(e) Agreements. Default in the performance of
any of the Borrowers' agreements herein set forth (and not constituting
an Event of Default under any of the preceding subsections of this
Section 10.1) and continuance of such default for 30 days after notice
thereof to the Borrowers from the Agent; provided, however, that the
requirement that Agent give the Borrowers notice and an opportunity to
cure shall not apply to an Event of Default under this Section 10.1(e)
occasioned by any default under Section 7.11 (a), (b), (c) or (d),
Sections 7.13 through Section 7.18, inclusive, Section 7.20, Section
7.21, Section 7.22 with respect to false statements made by the
Borrowers which the Agent, in its sole discretion, determines to have
been made intentionally, Section 7.26 and Section 7.27.
(f) Warranty. Any warranty made by the
Borrowers herein is untrue in any material respect, or any schedule,
statement, report, notice, writing or certification furnished by the
Borrowers to any Bank is untrue in any material respect on the date as
of which the facts set forth are stated or certified.
(g) Litigation. Notice is given to the
Borrowers by the Agent that, in the opinion of the Banks, any
litigation, arbitration proceeding or government proceeding which has
been instituted against either Borrower or any of their Subsidiaries
will, to a material extent, adversely affect the consolidated
financial condition or continued operation of the Borrowers, and such
litigation or proceeding is not dismissed within 30 days after such
notice.
(h) Material Adverse Change. The Majority
Banks shall have notified the Borrowers that a material adverse change
in the Borrowers' financial condition, results of operations or assets
has occurred since the date of this Agreement.
(i) Invalidity of Loan Documents. Any of the
Loan Documents shall cease for any reason to be in full force and
effect or any party thereto (other than the Banks) shall purport to
disavow its obligations thereunder, shall declare that it does not
have any further obligation thereunder or shall contest the validity
or enforceability thereof.
(j) State Action. Any proceeding is
instituted or commenced by any state or officer thereof,
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including the State of Illinois, the Secretary of State of Illinois,
or the Secretary of State of or any commission or other
instrumentality of the State of Illinois, seeking a forfeiture of
either Borrower's Articles of Incorporation or certificate of
authority to transact business as a foreign corporation or of a
license or permit held by either Borrower necessary to the conduct of
its business, and such Borrower shall fail to vacate any order entered
in such proceeding within thirty (30) days; or if either Borrower
ceases to conduct its business as now conducted or is enjoined,
restrained or in any way prevented by court, governmental or
administrative order from conducting all or any material part of its
business affairs.
(k) Tax Liens. A notice of lien, levy or
assessment other than a Permitted Lien, is filed or recorded with
respect to all or a substantial part of the assets or the Collateral
owned by either Borrower by the United States, or any department,
agency or instrumentality thereof, or by any state, county,
municipality or other governmental agency, or any taxes or debts owing
at any time or times hereafter to any one or more of the foregoing
become a lien other than a Permitted Lien, upon or a substantial part
of the Collateral owned by either Borrower unless such notice or lien
is removed within thirty (30) days after filing or recording of such
notice or becoming such lien, or unless contested in good faith by
appropriate proceedings and the priority of Bank's Lien is not
affected thereby.
(l) Judgments. A final nonappealable judgment
or judgments is or are entered against either Borrower in the
aggregate amount of $500,000 or more on a claim or claims not fully
covered by insurance.
(m) Securitization Transaction Documents. An
"Event of Default" (as defined in the Trust Indenture) shall occur
under the Trust Indenture, or Borrowers or any of their Subsidiaries
shall be in default of any term, covenant, obligation or condition
under the Securitization Transaction Documents which has not been
cured within the time provided therein, if any.
10.2 Remedies.
(a) Termination of Commitment and
Acceleration. Upon the happening or occurrence of an Event of Default
described in Section 10.1(c) above, the Banks' commitments to make the
Revolving Loans, if such commitments have not yet terminated, shall
immediately terminate, and upon the happening or occurrence of any
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other Event of Default, such Event of Default not having been
previously cured or waived in writing by the Majority Banks, the Agent
shall, if directed by Banks holding Percentage Interests in the
aggregate of more than sixty-seven (67%) of the Revolving Loan
Commitment, terminate the commitment to make the Revolving Loans.
Thereupon, the Revolving Notes, including, without limitation, all
principal and interest thereon and all other amounts due under this
Agreement or any other Loan Document, shall be and become forthwith,
due and payable without any presentment, demand, protest, notice of
any of the foregoing or other notice of any kind, all of which are
hereby expressly waived notwithstanding anything contained herein or
in the Revolving Notes to the contrary, and the Banks shall have all
rights and remedies now or hereafter provided by applicable Laws and
without limiting the generality of the foregoing, may, at their
option, also appropriate and apply toward the payment of the Revolving
Notes, or any Indebtedness of the Banks to the Borrowers, howsoever,
created or arising, and may also exercise any and all rights and
remedies hereunder, under the Loan Documents or in and to the
collateral security referred to in Section 5 hereof, including,
without limitation, the collateral defined in the Collateral Agreement
(the "Collateral").
(b) Rights of Secured Creditor. Upon the
occurrence of an Event of Default the Banks shall have, in addition to
the rights and remedies given to them under this Agreement, the
Revolving Notes and the Loan Documents all of the rights and remedies
of secured parties under the Uniform Commercial Code as enacted in any
jurisdiction in which any Collateral may be located, and all rights
and remedies allowed by all applicable Laws, all of which rights and
remedies shall be cumulative and non-exclusive, to the extent
permitted by said Laws. All risk of loss, damage or diminution of
value with respect to the Collateral shall be borne by the Borrowers
at all times and the Banks shall have no responsibility, liability or
obligation to the Borrowers therefor.
(c) Sale of Collateral. Upon the termination
of the Banks' commitment to make the Revolving Loans under Section
10.2(a), the Agent may immediately, with only such demand or notice to
the Borrowers as may be required by the Illinois UCC, all of such
other or further demand or notice hereby expressly waived by the
Borrowers to the extent permitted by law, and without advertisement
except as may be required by the Illinois UCC, lease, sell or
otherwise dispose of or realize upon, at public or private auction or
sale in Chicago, Illinois or elsewhere, the whole or, from time to
time, any part of the Collateral or
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any interest which the Borrowers may have therein. The Borrowers
agree to assemble, or cause to be assembled, at their own expense, the
Collateral at such place or places as the Agent shall reasonably
designate and the Agent may, in its sole and complete discretion,
cause the Collateral of the Borrowers to remain on the Borrowers'
premises at the Borrowers' expense, pending sale, lease or other
disposition of said Collateral. The Agent shall have the right to
conduct such sales on the Borrowers' premises at the Borrowers'
expense or elsewhere. Any sale, lease or other disposition of the
Collateral of the Borrowers may be for cash, credit or any combination
thereof and the Banks (or any of them) may purchase all or any part of
the Collateral and in lieu of actual payment of such purchase price,
may set off the amount of such purchase price against the Obligations
of the Borrowers, free from any right of redemption on the part of the
Borrowers, which right is hereby waived and released. After deducting
from the proceeds of the sale, lease or other disposition of said
Collateral all expenses incurred by the Banks in connection therewith
(including attorneys fees), the Agent shall apply such proceeds
towards the satisfaction of the Obligations of the Borrowers, and
shall account to the Borrowers for any surplus of such proceeds. The
Borrowers shall remain liable for any deficiencies. Any notice
required to be given by the Agent of a sale, lease or other
disposition or other intended action by Banks with respect to any of
the Collateral of the Borrowers shall be mailed by the Agent, ten (10)
days prior to such sale, lease or other disposition or other intended
action by depositing such notice in the United States mail, postage
prepaid and duly addressed to the Borrowers at the address specified
in Section 12.2 hereof and such notice shall constitute, and the
Borrowers agree that such notice constitutes reasonable and seasonable
notice of such sale, lease or other disposition or other intended
action.
(d) Entry on Premises. Upon the occurrence of
an Event of Default, the Agent shall have the right to enter upon the
premises of the Borrowers where the Collateral is located or believed
to be located, without any obligation to pay rent to the Borrowers or
any responsibility or liability to the Borrowers for safeguarding said
Collateral from loss or damage or diminution in value, and render said
Collateral unusable or remove said Collateral therefrom to the
premises of the Agent or any agent of the Agent, for such time as the
Agent may desire in order to effectively collect or liquidate said
Collateral.
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11. RELATIONSHIP AMONG BANKS.
11.1 Appointment and Grant of Authority. Each Bank
hereby appoints the Agent, and the Agent hereby agrees to act, as agent under
this Agreement. The Agent shall have and may exercise such powers under this
Agreement as are specifically delegated to the Agent by the terms hereof,
together with such other powers as are reasonably incidental thereto. Each
Bank hereby authorizes, consents to, and directs the Borrowers to deal with the
Agent as the true and lawful agent of such Bank to the extent set forth herein.
11.2 Non-Reliance on Agent. Each Bank agrees that it
has, independently and without reliance on the Agent or any other Bank, and
based on such documents and information as it has deemed appropriate, made its
own credit analysis of the Borrowers and decision to enter into this Agreement
and that it will, independently and without reliance upon the Agent, and based
on such documents and information as it shall deem appropriate at the time,
continue to make its own analysis and decisions in taking or not taking action
under this Agreement. The Agent shall not be required to keep informed as to
the performance or observance by the Borrowers of this Agreement or any other
document referred to or provided for herein or to inspect the properties or
books of the Borrowers. Except for notices, reports and other documents and
information expressly required to be furnished to the Banks by the Agent
hereunder, the Agent shall not have any duty or responsibility to provide any
Bank with any credit or other information concerning the affairs, financial
condition or business of the Borrowers (or any of their related companies)
which may come into the Agent's possession.
11.3 Responsibility of the Agent and Other Matters.
(a) The Agent shall have no duties or
responsibilities except those expressly set forth in this Agreement
and those duties and liabilities shall be subject to the limitations
and qualifications set forth in this Section. The duties of the Agent
shall be mechanical and administrative in nature.
(b) Neither the Agent nor any of its
directors, officers or employees shall be liable for any action taken
or omitted (whether or not such action taken or omitted is within or
without the Agent's responsibilities and duties expressly set forth in
this Agreement) under or in connection with this Agreement or any
other instrument or document in connection herewith, except for gross
negligence or willful misconduct. Without limiting the foregoing,
neither the Agent nor any of its directors, officers or employees
shall be
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responsible for, or have any duty to examine into, (i) the
genuineness, execution, validity, effectiveness, enforceability, value
or sufficiency of (A) this Agreement, the Revolving Notes or the Loan
Documents, or (B) any document or instrument furnished pursuant to or
in connection with this Agreement, the Revolving Notes or the Loan
Documents, (ii) the collectibility of any amounts owed by the
Borrowers, (iii) any recitals or statements or representations or
warranties in connection with this Agreement, the Revolving Notes or
the Loan Documents, (iv) any failure of any party to this Agreement to
receive any communication sent, or (v) the assets, liabilities,
financial condition, results of operations, business or
creditworthiness of the Borrowers.
(c) The Agent shall be entitled to act, and
shall be fully protected in acting upon, any communication in whatever
form believed by the Agent in good faith to be genuine and correct and
to have been signed or sent or made by a proper person or persons or
entity. The Agent may consult counsel and shall be entitled to act,
and shall be fully protected in any action taken in good faith, in
accordance with advice given by counsel. The Agent may employ agents
and attorneys-in-fact and shall not be liable for the default or
misconduct of any such agents or attorneys-in-fact selected by the
Agent with reasonable care. The Agent shall not be bound to ascertain
or inquire as to the performance or observance of any of the terms,
provisions or conditions of this Agreement, the Revolving Notes or any
other Loan Document on the Borrowers' part.
11.4 Action on Instructions. The Agent shall be
entitled to act or refrain from acting, and in all cases shall be fully
protected in acting or refraining from acting, under this Agreement (including,
without limitation, any acceleration of the Credit under Section 10.2(a) of
this Agreement) the Revolving Notes or any Loan Document or any other
instrument or document in connection herewith or therewith in accordance with
instructions in writing from the Majority Banks.
11.5 Indemnification. To the extent the Borrowers do
not reimburse and save the Agent harmless according to the terms hereof for and
from all costs, expenses and disbursements in connection herewith, such costs,
expenses and disbursements shall be borne by the Banks ratably in accordance
with their Percentage Interests and the Banks hereby agree on such basis (i) to
reimburse the Agent for all such costs, expenses and disbursements on request
and (ii) to indemnify and save harmless the Agent against and from any and all
losses, obligations, penalties, actions, judgments and suits and other costs,
expenses and disbursements of any kind or nature whatsoever
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which may be imposed on, incurred by or asserted against the Agent, other than
as a consequence of actual gross negligence or willful misconduct on the part
of the Agent, arising out of or in connection with this Agreement, the
Revolving Notes or any Loan Document or any instrument or document in
connection herewith or therewith, or any request of the Banks, including
without limitation the costs, expenses and disbursements in connection with
defending itself against any claim or liability, or answering any subpoena,
related to the exercise or performance of any of its powers or duties under
this Agreement or the taking of any action under or in connection with this
Agreement, the Revolving Notes or any other Loan Document.
11.6 LaSalle and Affiliates. With respect to LaSalle's
(or any successor Agent's) commitment and any Loan by LaSalle (or any successor
Agent) under this Agreement and any Revolving Note and any interest of LaSalle
(or any successor Agent) in any Revolving Note, LaSalle (or any successor
Agent) shall have the same rights and powers under this Agreement and such
Revolving Note, as any other Bank and may exercise the same as though it were
not the Agent. LaSalle (or any successor Agent) and its affiliates may accept
deposits from, lend money to, and generally engage, and continue to engage, in
any kind of business with the Borrowers as if LaSalle (or any successor Agent)
were not the Agent.
11.7 Notice to Holder of Revolving Notes. The Agent
may deem and treat the payees of the Revolving Notes as the owners thereof for
all purposes unless a written notice of assignment, negotiation or transfer
thereof has been filed with the Agent. Any request, authority or consent of
any holder of any Revolving Note shall be conclusive and binding on any
subsequent holder, transferee or assignee of such Revolving Note.
11.8 Successor Agent. The Agent may resign at any time
by giving 30 days' written notice thereof to the Banks. Upon any such
resignation, the Majority Banks shall have the right to appoint a successor
Agent. If no successor Agent shall have been appointed by the Majority Banks
and accepted such appointment in connection herewith or therewith within 30
days after the retiring Agent's giving notice of resignation, then the retiring
Agent may, but shall not be required to, on behalf of the Banks, appoint a
successor Agent. Upon the appointment of a successor Agent under the terms of
this Section 11.8, the term "Agent" shall, for all purposes of this Agreement,
thereafter mean such successor. Upon acceptance of the agency, a successor
Agent shall succeed to and become vested with all the rights, powers,
privileges, and duties of the retiring Agent but shall not be liable for any
acts or omissions of the retiring Agent.
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12. GENERAL.
12.1 Delay;Waiver. Any Bank's failure, at any time or
times hereafter, either to require strict performance by the Borrowers of any
provisions of this Agreement, the Notes or any Loan Documents, or to enforce
the Bank's rights under such terms or provisions, shall not waive, effect or
diminish or modify such terms or provisions, notwithstanding any conduct or
custom, actual or implied, of the Banks to the contrary or in refraining from
so doing at any time or times. Any suspension or waiver by the Banks of an
Event of Default hereunder or under any Loan Documents or right or remedy
hereunder or under any Loan Document shall not suspend, waive, release or
affect any other Event of Default or right or remedy hereunder or under any
Loan Documents. No delay on the part of any Bank or the holder of any
Revolving Note in the exercise of any power or right shall operate as a waiver
thereof, nor shall any single or partial exercise of any power or right
preclude other or further exercise thereof, or the exercise of any other power
or right. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.
12.2 Notice. Any notice between the parties hereto or
notices provided herein to be given shall be in writing (unless otherwise
provided herein) and, if mailed, shall be deemed to be given when sent by
registered or certified mail, postage prepaid, and addressed to the Borrowers,
the Agent or the Banks at the respective address set forth on the signature
pages hereof.
12.3 Expenses. The Borrowers agree whether or not any
Revolving Loan is made hereunder, to pay the Agent and the Banks upon demand
for all reasonable expenses, including reasonable fees of attorneys for the
Agent and the Banks (who may be employees of the Agent and the Banks) incurred
by (i) the Agent in connection with the preparation, negotiation and execution
of this Agreement, the Revolving Notes, the Loan Documents and any document
required to be furnished therewith, (ii) the Agent in connection with the
preparation of any and all amendments to this Agreement, the Revolving Notes,
or the Loan Documents and all other instruments or documents provided for
herein or delivered or to be delivered hereunder or in connection herewith,
(iii) the Agent and the Banks in connection with the enforcement of the
Borrowers' obligations hereunder or under any Revolving Note, including,
without limitation, the cost of field audits under Section 7.4 hereof (iv) in
connection with the insurance to be maintained under Section 7.5) hereof; (v)
in the repair or maintenance of the Collateral of the Borrowers; (vi) in
perfecting or protecting the Collateral security or security interest granted
hereunder; and (vii) in connection with any litigation, contest, suit or
proceeding (whether instituted by the Bank, the Borrowers or where payment
-48-
<PAGE> 49
of the Obligations or the Collateral might be materially adversely affected, by
any other Person) in any way relating to the Collateral, this Agreement and the
Loan Documents, except where it is determined that Banks' action or failure to
act constituted gross negligence or willful misconduct. The Borrowers also
agree (i) to indemnify and hold the Agent harmless from any loss or expense
which may arise or be created by the acceptance of telephonic or other
instructions for making Revolving Loans and (ii) to pay, and save the Agent and
the Banks harmless from all liability for, any stamp or other taxes which may
be payable with respect to the execution or delivery of this Agreement or the
issuance of the Revolving Notes or of any other instruments or documents
provided for herein or to delivered hereunder or in connection herewith. The
Borrowers' foregoing obligations shall survive any termination of this
Agreement.
12.4 Severability. Any provision of this Agreement
which is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
12.5 Counterparts. This Agreement may be executed in
as many counterparts as may be deemed necessary or convenient, and by the
different parties hereto on separate counterparts, each of which, when so
executed, shall be deemed an original but all such counterparts shall
constitute but one and the same instrument.
12.6 Merger Clause. This Agreement, the Notes and the
Loan Documents constitute the entire agreement between the parties hereto and
thereto with respect to the Loans and may be amended only by a writing signed
on behalf of each such party. If any provision contained in this Agreement is
in conflict with, or inconsistent with, any provision in the Notes or the Loan
Documents, the provision contained in this Agreement shall govern and control.
12.7 Investment. Each Bank represents and warrants
that: (i) it is acquiring any Revolving Note to be issued to it hereunder for
its own account as a result of making a loan in the ordinary course of its
commercial banking business and not with a view to the public distribution or
sale thereof, nor with any present intention of selling or distributing such
Revolving Note, but subject, nevertheless, to any legal or administrative
requirement that the disposition of such Bank's property at all times be within
its control, and (ii) in good faith it has not and will not rely upon any
margin stock (as such term is defined in Regulation U of the Board of Governors
-49-
<PAGE> 50
of the Federal Reserve System) as collateral in the making and maintaining of
the Revolving Loans.
12.8 Law. This Agreement and each Revolving Note shall
be contracts made under and governed by the laws of the State of Illinois.
12.9 Successors. This Agreement shall be binding upon
the Borrowers, the Banks and the Agent and their respective successors and
assigns, and shall inure to the benefit of the Borrowers, the Banks and the
Agent and the successors and assigns of the Banks and the Agent. The Borrowers
shall not assign their rights or duties hereunder without the consent of the
Majority Banks.
12.10 Amendments. No amendment or waiver of any
provision of this Agreement or the Revolving Notes, nor consent to any
departure therefrom by the Borrowers shall be effective unless the same shall
be in writing and signed by the Borrowers and the Majority Banks (except as
provided in Section 7.10 with respect to the provision of landlord waivers),
and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given; provided, however, that
no amendment, waiver or consent shall, unless in writing and signed by all the
Banks, do any of the following: (a) waive any of the conditions specified in
Sections 8 and 9, (b) increase the amounts or extend the terms of the Banks'
commitments or subject the Banks to any additional obligations, (c) reduce the
principal of, or interest on, the Revolving Notes or any fees hereunder, (d)
postpone any date fixed for any payment of principal of, or interest on, the
Revolving Notes or any fees hereunder, (e) change the definitions of "Eligible
Automobile Finance Receivable", "Majority Banks", or "Revolving Loan Borrowing
Base" (or any of the defined terms used therein), (f) release any of the
Collateral except in the ordinary course of business and in strict compliance
with the terms of the Loan Documents, (g) waive, modify or amend any of the
covenants set forth in Section 7.8(a) or (c), (h) change the percentage of the
commitments or of the aggregate unpaid principal amount of the Revolving Notes,
or the number of Banks which shall be required to take action hereunder, or (i)
change any provisions of this Section 12.10; provided, further, that no
amendment or waiver of or consent required under Section 11 shall be effective
unless signed by the Agent.
12.11 Consent to Service. The Borrowers expressly
submit and consent to the jurisdiction of any state or federal court located
within Cook County, Illinois in any action, suit or proceeding commenced
therein in connection with or with respect to the Obligations, this Agreement,
the Notes or any Loan Documents and waive any right to jury trial and objection
to venue in connection therewith. The Borrowers hereby waive
-50-
<PAGE> 51
personal service of any and all process or papers issued or served in
connection with the foregoing and agree that service of such process or papers
may be made by registered or certified mail, postage prepaid, return receipt
requested, directed to the Borrowers as set forth in Section 12.2 above.
12.12 Waiver of Jury Trial. THE BORROWERS AND THE BANKS
WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR
DEFEND ANY RIGHTS (I) UNDER THIS AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT,
DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN
CONNECTION HEREWITH OR (II) ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN
CONNECTION WITH THIS AGREEMENT, AND AGREE THAT ANY SUCH ACTION OR PROCEEDING
SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.
12.13 Amendment and Restatement. This Agreement shall
constitute an amendment and restatement of the Third Amendment and Restatement
and shall supersede and replace the Amendment and Restatement in its entirety.
12.14 Joint and Several Liability. The obligations and
liabilities of Borrowers hereunder, under the Revolving Notes and the other
Loan Documents shall be joint and several.
-51-
<PAGE> 52
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed at Chicago, Illinois by their respective officers thereunto duly
authorized as of the date first written above.
FIRST ENTERPRISE FINANCIAL
GROUP, INC., f/k/a Centre
Capital Funding Corp.
By /s/ Michael P. Harrington
-------------------------------
Title Chairman of the Board and
President
-------------------------------
Address:
500 Davis Street
Suite 1005
Evanston, Illinois 60201
Attention: Jan W. Erfert
Telephone No.: (847) 866-8665
Telecopier No.: (847) 866-8822
FIRST ENTERPRISE ACCEPTANCE COMPANY
By /s/ Michael P. Harrington
-------------------------------
Title Chairman of the Board and
Chief Executive Officer
-------------------------------
Address:
500 Davis Street
Suite 1005
Evanston, Illinois 60201
Attention: Michael P. Harrington
Telephone No.: (847) 866-8665
Telecopier No.: (847) 866-8222
-52-
<PAGE> 53
Maximum
Amount of Percentage
Commitment Interest
- ---------- ----------
$22,000,000 25.88% LASALLE NATIONAL BANK, in its individual
corporate capacity and as Agent
By /s/ Terry M. Keating
-----------------------------------------
Title 1st Vice President
--------------------------------------
Address:
135 South LaSalle Street
Chicago, Illinois 60603
Attention: Terry Keating
Telephone No.: 904-6389
Telecopier No.: 904-6382
$10,000,000 11.76% FIRST MIDWEST BANK, N.A.
By /s/ Edward Melton
-----------------------------------------
Title Senior Vice President
--------------------------------------
Address:
725 Waukegan Road
Deerfield, Illinois 60015
Attention: Edward J. Melton
Telephone No.: (847) 374-5233
Telecopier No.: (857) 374-5288
$20,000,000 23.53% BANK ONE, CHICAGO, NA
By /s/ Stautorlt Barnett
-----------------------------------------
Title Regional Vice President
--------------------------------------
Address:
800 Davis Street
Evanston, Illinois 60201
Attention: Michael Moran
Telephone No.: (847) 866-5303
Telecopier No.: (847) 866-5338
-53-
<PAGE> 54
$15,000,000 17.65% THE FIRST NATIONAL BANK OF CHICAGO
By /s/ Andrew H. Heinecke
-----------------------------------------
Title First Vice President
--------------------------------------
Address:
Mail Suite 0084
One First National Plaza
Chicago, Illinois 60670-0084
Attention: Toral Stack
Telephone No.: (312) 732-6305
Telecopier No.: (312) 732-6222
$3,000,000 3.53% HARRIS BANK PALATINE, N.A.
By /s/ Paul E. Bailey
-----------------------------------------
Title Vice President
--------------------------------------
Address:
50 North Brockway
Palatine, Illinois 60067
Attention: Paul Bailey
Telephone No.: (847) 359-1070
Telecopier No.: (847) 359-1158
$10,000,000 11.76% FLEET BANK, NATIONAL ASSOCIATION
By /s/ Michael B. Moschetta
-----------------------------------------
Title Assistant Vice President
--------------------------------------
Address:
175 Water Street
New York, New York 10038
Attention: Chris Montagna
Telephone No.: (212) 602-2599
Telecopier No.: (212) 602-2561
-54-
<PAGE> 55
$5,000,000 5.88% CORESTATES BANK, N.A.
By
------------------------------------
Title
---------------------------------
Address:
FC 1-8-12-7
1339 Chestnut Street
Philadelphia, PA 19101-3579
Attention: Mr. John T. Trainor
Telephone No.: (215) 786-4375
Telecopier No.: (215) 786-8304
-55-
<PAGE> 56
Fourth Amended and Restated
Revolving Credit Agreement
--------------------------
Exhibit Description Cross Reference
- ------- ----------- ---------------
[S] [C] [C]
A Assignment of Life Insurance
Policy Section 1.1
B Collateral Identification Stamp Section 1.1
C Borrowing Base Certificate Section 1.1
D Amended and Restated Collateral Section 1.1
Agreement
E Form of Borrowers' Revolving
Note Section 1.1
F Form of Subordination Agreement Section 1.1
G Settlement and Request Statement Section 4.8
H Compliance Certificate Section 7.2
I Incumbency Certificate Section 9.3
J Legal Opinion of Borrower's
Counsel Section 9.4
K President's Certificate Section 9.7
L Corporate Consents Section 9.11
-56-
<PAGE> 57
SCHEDULES TO
FOURTH AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
Schedule No. Description
- ------------ -----------
3.9 Average Daily Balance Computation Formula
6.7 Scheduled Litigation
6.8 Scheduled Liens
6.9 Borrower's Subsidiaries And Percentage Ownership
Thereof
6.17(c) Stock Option Plans
7.14 Existing Indebtedness
7.15 Liens
-57-
<PAGE> 58
Schedule 6.9
Subsidiaries
First Enterprise Securitization Corp., a Delaware corporation
(a wholly-owned subsidiary of FEFG)
First Enterprise Acceptance Company, an Illinois corporation
(a wholly-owned subsidiary of FEFG)
-58-
<PAGE> 59
Schedule 6.17(c)
Stock Option Plans
1992 Stock Option Plan, as amended and restated
1995 Director Stock Option Plan
1995 Employee Stock Purchase Plan
-59-
<PAGE> 1
EXHIBIT 10.6.2
FIRST AMENDMENT TO THE FOURTH AMENDED
AND RESTATED REVOLVING CREDIT AGREEMENT
This FIRST AMENDMENT TO THE FOURTH AMENDED AND RESTATED REVOLVING
CREDIT AGREEMENT (this "Amendment") is made as of January 31, 1997 by and among
FIRST ENTERPRISE FINANCIAL GROUP, INC., formerly known as Centre Capital
Funding Corp., an Illinois corporation ("FEFG"), FIRST ENTERPRISE ACCEPTANCE
COMPANY, an Illinois corporation ("FEAC") (each,individually, a "Borrower" and
collectively, "Borrowers"), FIRST MIDWEST BANK, N.A. ("First Midwest"), BANK
ONE, CHICAGO, NA ("Bank One"), THE FIRST NATIONAL BANK OF CHICAGO, as successor
to NBD Bank ("FNBC"), HARRIS BANK PALATINE, N.A. ("Harris"), FLEET BANK
NATIONAL ASSOCIATION ("Fleet"), CORESTATES BANK, N.A. ("CoreStates") and
LASALLE NATIONAL BANK, a national banking association ("LaSalle") (LaSalle,
First Midwest, Bank One, FNBC, Harris, Fleet and CoreStates are sometimes
collectively referred to herein as the "Banks" and each individually as a
"Bank") and LaSalle as Agent (the "Agent").
BACKGROUND
A. Borrowers, Banks (other than CoreStates) and the Agent entered
into a certain Fourth Amended and Restated Revolving Credit Agreement dated as
of October 16, 1996, which amended and restated in its entirety that certain
Third Amended and Restated Revolving Credit Agreement dated as of September 1,
1995, as amended (as the same may be hereafter amended, modified or
supplemented from time to time, the "Loan Agreement"), pursuant to which the
LaSalle and the other Banks have made revolving loans and advances to
Borrowers.
B. Borrowers have requested that Banks amend the Loan Agreement by
(a) increasing the amount available to Borrowers by $5,000,000 by adding
CoreStates as a New Bank with a commitment of $5,000,000; and (b) making
certain changes in connection with the admission of a New Bank.
C. The Banks and the Agent are willing to make such changes and to
amend the Loan Agreement provided that Borrowers, Banks and Agent enter into
this Amendment and upon the terms and conditions set forth herein, and that
CoreStates, by its execution of this Amendment, become a signatory to the Loan
Agreement.
D. Terms used herein but not defined herein shall have the
meanings assigned to them in the Loan Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein contained, and intending to be legally bound hereby, the
parties hereto agree as follows:
<PAGE> 2
SECTION 1 AMENDMENTS TO LOAN AGREEMENT
1.1 Section 2.1 of the Loan Agreement is hereby amended and
restated in its entirety as follows:
"2.1 Revolving Loans. Subject to the terms of this Agreement, to
make loans to the Borrowers (collectively called the "Revolving
Loans" and individually, each a "Revolving Loan") on any Banking Day,
which Revolving Loans the Borrowers may repay and re-borrow during the
period from the date hereof, to, but not including, the Maturity Date,
in such amounts as FEFG may from time to time request; provided,
however that the aggregate principal amount of all Revolving Loans made
under this Section 2.1 shall not exceed, at any one time, the lowest of
(i) the Revolving Loan Borrowing Base, (ii) $85,000,000, or (iii) such
fixed dollar amount as is (in the aggregate) committed by the Banks
executing this Agreement from time to time if such amount is less than
$85,000,000 (such lowest sum being the "Revolving Loan Commitment");
notwithstanding the foregoing, if no Event of Default shall have
occurred and be continuing on each anniversary of the date hereof, the
Banks shall be under no commitment to extend the Maturity Date, but
each Bank agrees to inform the Borrowers on such anniversary
date whether it intends to extend the Maturity Date for an additional
one-year period. If, at any time the outstanding Revolving Loans
exceed the Revolving Loan Commitment, the Borrowers will immediately
notify the Agent of such excess and pay the Banks the amount thereof.
Notwithstanding anything to the contrary contained herein, no Bank
shall be obligated to advance any funds under this Section 2.1 which
funds exceed the amount determined by multiplying such Bank's
Percentage Interest by the Revolving Loan Commitment."
1.2 The Maximum Amounts of Commitment and Percentage Interest shown
on the signature pages of the Loan and Security Agreement shall be amended as
set forth on Exhibit A to this Amendment.
1.3 Exhibit E to the Loan Agreement is hereby amended by adding a
new Revolving Note payable to the order of CoreStates at the end thereof in the
form of Exhibit B hereto.
SECTION 2 REPRESENTATIONS AND WARRANTIES
To induce the Banks to amend the Loan Agreement and provide their
consent, Borrowers represent and warrant to Banks that:
-2-
<PAGE> 3
2.1 Compliance with Loan Agreement. On the date hereof, Borrowers
are in compliance with the terms and provisions set forth in the Loan Agreement
(as modified by this Amendment), and no unwaived Event of Default specified in
Section 10 of the Loan Agreement nor any event which would, upon notice or
lapse of time, or both, constitute such an Event of Default, has occurred.
2.2 Representations and Warranties. On the date hereof, the
representations and warranties and covenants set forth in Sections 6 and 7 of
the Loan Agreement (as modified by this Amendment) are true and correct with
the same effect as though such representations and warranties and covenants had
been made on the date hereof, except to the extent that such representations
and warranties and covenants expressly relate to an earlier date.
2.3 Corporate Authority of Borrowers. Each Borrower has full power
and authority to enter into this Amendment, to borrow additional funds and to
incur and perform the obligations provided for under this Amendment and the
Loan Agreement, all of which have been duly authorized by all proper and
necessary corporate action. No consent or approval of stockholders or of any
public authority or regulatory body is required as a condition to the validity
or enforceability of this Amendment.
2.4 Amendment as Binding Agreement. This Amendment constitutes the
valid and legally binding obligation of Borrowers, fully enforceable against
Borrowers, in accordance with its terms.
2.5 No Conflicting Agreements. The execution and performance by the
Borrowers of this Amendment will not (i) violate any provision of law, any
order of any court or other agency of government, any provision of the Articles
or By-Laws of Borrowers, or (ii) violate any indenture, contract, agreement or
other instrument to which either Borrower is a party, or by which its property
is bound, or be in conflict with, result in a breach of or constitute (with due
notice and/or lapse of time) a default under, any such indenture, contract,
agreement or other instrument or result in the creation or imposition of any
lien, charge or encumbrance of any nature whatsoever upon any of the property
or assets of Borrowers.
SECTION 3 CONDITIONS PRECEDENT
The agreement by the Banks to amend the Loan Agreement and to provide
their consent is subject to the following conditions precedent:
3.1 Borrowers shall have executed and delivered to CoreStates a
Secured Revolving Note in the form of Exhibit B hereto.
-3-
<PAGE> 4
3.3 Borrowers shall have executed and delivered to Agent certified
copies of the resolutions of their Boards of Directors authorizing the
execution and delivery of this Amendment and the consummation of the
transactions contemplated thereby.
SECTION 4 ADMISSION OF CORESTATES AS A NEW BANK
Corestates hereby agrees and confirms that by its execution and
delivery of this Amendment, it has become a signatory to the Loan Agreement, as
the same has heretofore been amended and to all of the other Loan Documents,
and that it has become entitled to all of the rights and has undertaken all of
the obligations of a Bank under the Loan Agreement.
SECTION 5 GENERAL PROVISIONS
5.1 Except as amended by this Amendment, the terms and provisions of
the Loan Agreement shall remain in full force and effect and are hereby
affirmed, confirmed and ratified in all respects. Borrowers ratify, confirm and
affirm without condition, all liens and security interests granted to the Banks
and the Agent pursuant to the Loan Agreement and the Loan Documents, and such
liens and security interests shall continue to secure the Obligations,
including but not limited to, all loans made by the Bank to the Borrowers under
the Loan Agreement as amended by this Amendment.
5.2 This Amendment shall be construed in accordance with and governed
by the laws of the State of Illinois, and the obligations of Borrowers under
this Amendment are and shall arise absolutely and unconditionally upon the
execution and delivery of this Amendment.
5.3 This Amendment may be executed in any number of counterparts.
5.4 Borrowers hereby agree to pay all out-of-pocket expenses incurred
by Banks in connection with the preparation, negotiation and consummation of
this Amendment, and all other documents related thereto, including without
limitation, the reasonable fees and expense of Agent's counsel, and any filing
fees required in connection with the filing of any documents necessary to
consummate the provisions of this Amendment. Notwithstanding anything contained
herein to the contrary, the only legal fees for which Borrowers shall be
responsible are the fees and expenses of Agent's counsel.
5.5 On or after the effective date hereof, each reference in the Loan
Agreement or any of the Loan Documents to this "Agreement" or words of like
import,shall unless the context otherwise requires, be deemed to refer to the
Loan Agreement as amended hereby.
-4-
<PAGE> 5
5.6 Any provision of this Amendment which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or thereof, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their duly authorized officers, all as of the date and year
first above written.
BORROWERS:
FIRST ENTERPRISE FINANCIAL
GROUP, INC.
By: /s/ Jan W. Erfert
---------------------------
Title: Vice President and Treasurer
---------------------------
FIRST ENTERPRISE ACCEPTANCE
COMPANY
By: /s/ Michael P. Harrington
---------------------------
Title: Chairman
---------------------------
BANKS:
LASALLE NATIONAL BANK,
individually and as Agent
By: /s/ William Swift
---------------------------
Title: Vice President
---------------------------
FIRST MIDWEST BANK, N.A.
By: /s/ Edward Melton
---------------------------
Title: Senior Vice President
---------------------------
-5-
<PAGE> 6
BANK ONE, CHICAGO, NA
By: /s/ Michael Moreen
---------------------------
Title: Vice President
---------------------------
FIRST NATIONAL BANK OF
CHICAGO
By: /s/ Craig Goldsmith
---------------------------
Title: Assistant Vice President
---------------------------
HARRIS BANK PALATINE, N.A.
By: /s/ Paul E. Bailey
---------------------------
Title: Vice President
---------------------------
FLEET BANK NATIONAL
ASSOCIATION
By: /s/ Michael B. Moschetta
---------------------------
Title: Assistant Vice President
---------------------------
CORESTATES BANK, N.A.
By: /s/ John T. Trainor
---------------------------
Title: Vice President
---------------------------
-7-
<PAGE> 7
Exhibit A to First Amendment
<TABLE>
<CAPTION>
Maximum Amount Percentage Financial
of Commitment Interest Institution
- ------------- ---------- -----------
<S> <C> <C>
$22,000,000 25.88% LaSalle National Bank
$10,000,000 11.76% First Midwest Bank, N.A.
$20,000,000 23.53% Bank One, Chicago, NA
$15,000,000 17.65% First National Bank of Chicago
$3,000,000 3.53% Harris Bank Palatine, N.A.
$10,000,000 11.76% Fleet Bank, National Association
$5,000,000 5.88% Corestates Bank, N.A.
</TABLE>
-8-
<PAGE> 8
Exhibit B to First Amendment
EXHIBIT E
SECURED REVOLVING NOTE
$5,000,000.00 January 31, 1997
FIRST ENTERPRISE FINANCIAL GROUP,INC., formerly known as Centre Capital Funding
Corp. ("FEFG"), an Illinois corporation and FIRST ENTERPRISE ACCEPTANCE COMPANY
("FEAC"), an Illinois corporation (collectively,the "Borrowers"), for value
received, jointly and severally promise to pay to the order of CoreStates Bank,
N.A., a national banking association (the "Bank"), on June 1, 1998 the
principal sum of Five Million and No/100 Dollars ($5,000,000.00), or the
aggregate principal amount of all the then outstanding advances made by the
Bank to the Borrowers pursuant to Section 2.1 of the Fourth Amended and
Restated Revolving Credit Agreement (as herein defined) if less than said Five
Million Dollars ($5,000,000) is then outstanding, together with interest
(computed on the basis of a 360-day year) on any and all principal amounts
remaining unpaid hereunder from time to time from the date hereof until
maturity, payable commencing February 1, 1997 and continuing on the first
Banking Day of each successive month thereafter, during the term hereof and on
the date of payment in full, at the rate set forth in the Fourth Amended and
Restated Revolving Credit Agreement.
Any amount of interest or principal hereof which is not paid when due,
whether at stated maturity, by acceleration or otherwise, shall, to the fullest
extent permitted by applicable law, thereafter bear interest (the "Default
Interest") at a fluctuating annual interest rate equal at all times to three
percentage points above the Prime Rate. The Borrowers hereby agree to pay such
Default Interest which has accrued to the holder hereof, on demand. For
purposes hereof, the "Prime Rate" shall mean the rate of interest announced or
published publicly from time to time by LaSalle National Bank as its prime or
equivalent rate of interest. The use of the term "Prime Rate" herein is not
intended nor does it imply that such rate of interest is a preferred rate of
interest or one that is offered by Bank to its most creditworthy customers.
All payments of principal and interest on this Note shall be payable in
lawful money of the United States of America. In no event shall the interest
payable exceed the highest rate permitted by law. Principal and interest shall
be paid to the Bank at the office of the Agent at 135 South LaSalle Street,
Chicago, Illinois 60603, or at such other place as the holder of this Note may
designate in writing to the undersigned. This Note may be prepaid in whole or
in part at any time or from time
-1-
<PAGE> 9
to time without penalty, and shall be prepaid in the amounts and at the times
set forth in the Fourth Amended and Restated Revolving Credit Agreement, and is
subject to mandatory prepayment, in part, in the amounts and at the times set
forth in Section 2.1 of the Fourth Amended and Restated Revolving Credit
Agreement. All payments hereunder shall be applied in the order of priority
set forth in Section 4.7 of the Fourth Amended and Restated Revolving Credit
Agreement. In determining the Borrowers' liability to the Bank hereunder, the
books and records of the Agent shall be controlling except in cases of manifest
error.
This Note evidences certain indebtedness incurred under the Fourth
Amended and Restated Revolving Credit Agreement dated as of October 15, 1996,
as amended as of the date hereof among Borrowers, Bank, LaSalle National Bank,
individually and as Agent, First Midwest Bank, N.A., Bank One Chicago, NA,
Harris Bank Palatine, N.A., NBD Bank and Fleet Bank, National Association. (the
"Fourth Amended and Restated Revolving Credit Agreement"), which amends and
restates that certain Third Amended and Restated Revolving Credit Agreement
dated as of September 1, 1995, as amended, to which reference is hereby made
for a statement of the terms and conditions under which the due date of this
Note or any payment thereon may be accelerated or is automatically accelerated.
Terms used herein but not otherwise defined herein are used as defined in the
Fourth Amended and Restated Revolving Credit Agreement. The Borrowers agree to
pay all costs of collection and all attorneys' fees paid or incurred in
enforcing any of the Bank's rights hereunder promptly on demand of the Agent
and as more fully set forth in the Fourth Amended and Restated Revolving Credit
Agreement.
This Note is secured by, among other things, a security interest in the
Collateral granted to the Banks pursuant to Section 5 of the Fourth Amended and
Restated Revolving Credit Agreement.
Borrowers, endorsers and all other parties to this Note waive
presentment, demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or enforcement
of this Note and the Fourth Amended and Restated Revolving Credit Agreement.
In any action on this Note, the Bank or its assignee need not file the original
of this Note, but need only file a photocopy of this Note certified by Bank or
such assignee to be a true and correct copy of this Note.
-2-
<PAGE> 10
This Note shall be deemed to have been made under and shall be governed
in accordance with the internal laws and not the conflict of law rules of the
State of Illinois.
FIRST ENTERPRISE FINANCIAL
GROUP, INC.
By:
-------------------------------
Title:
-------------------------------
FIRST ENTERPRISE ACCEPTANCE
COMPANY
By:
-------------------------------
Title:
-------------------------------
-3-
<PAGE> 1
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE.
<TABLE>
<CAPTION>
Twelve months ended December 31,
---------------------------------------
1996 1995
---------- ----------
<S> <C> <C>
Income before income taxes and
extraordinary item............................................. $4,928,348 $2,433,752
Pro forma provision for income taxes @ 39%........................ 948,000
Income taxes, including S-Corp. termination benefit............... 1,695,000
Adjustments for reduction in interest
expense and effects of shares
required to pay offering costs,
and debt of $11,527,000........................................ 494,000 799,000
---------- ----------
Pro forma net income before extraordinary item.................... 3,727,348 2,284,752
Extraordinary item from early extinguishment of
debt, net of income taxes...................................... (149,789) --
---------- ----------
Pro forma net income.............................................. $3,577,559 $2,284,752
========== ==========
Weighted average number of common and common
equivalent shares outstanding.................................. 3,513,705 3,238,073
Shares included in the offering................................... 2,169,636 2,169,636
---------- ----------
Pro forma weighted average number of common
and common equivalent shares outstanding....................... 5,683,341 5,407,709
========== ==========
Pro forma net income per common and common
equivalent shares outstanding before
extraordinary item............................................. $0.66 $0.42
Extraordinary item................................................ ($0.03) --
---------- ----------
Pro forma net income per common and common
equivalent shares outstanding.................................. $0.63 $0.42
========== ==========
</TABLE>
NOTE: Net income per share figures will not necessarily add due to rounding
adjustments.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
1. First Enterprise Acceptance Company, an Illinois corporation
2. First Enterprise Securitization Corp., a Delaware corporation
2. First Enterprise Securitization Co. II, a Delaware corporation
E-4
<PAGE> 1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 8, 1997 (except for Note K, as to
which the date is March 7, 1997), accompanying the consolidated financial
statements included in the Annual Report on Form 10-K of First Enterprise
Financial Group, Inc. for the year ended December 31, 1996. We consent to the
incorporation by reference of the aforementioned report in the Registration
Statement of First Enterprise Financial Group, Inc. on Form S-8 (File No.
333-09039, effective July 26, 1996).
GRANT THORNTON LLP
Chicago, Illinois
March 27, 1997
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a
director or officer, or both, of FIRST ENTERPRISE FINANCIAL GTROUP, INC., an
Illinois corporation (the "Company"), does hereby constitute and appoint
MICHAEL P. HARRINGTON, JAN W. ERFERT and PAUL A. STINNEFORD, with full power
to each of them to act alone, as the true and lawful attorneys and agents of
the undersigned, with full power of substitution and resubstitution to each of
said attorneys to execute, file or deliver any and all instruments and to do
all acts and things which said attorneys and agents, or any of them, deem
advisable to enable the Company to comply with the Securities Exchange Act of
1934, as amended, and any requirements of the Securities and Exchange
Commission in respect thereto, relating to annual reports on Form 10-K,
including specifically, but without limitation of the general authority hereby
granted, the power and authority to sign his name as a director or officer, or
both, of the Company, as indicated below opposite his signature, to annual
reports on Form 10-K or any amendments or papers supplemental thereto; and each
of the undersigned does hereby fully ratify and confirm all that said attorneys
and agents, or any of them, or the substitute of any of them, shall do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has subscribed these
presents, this 31st day of January, 1997.
<TABLE>
<S> <C> <C>
/s/ Michael P. Harrington
- -------------------------
Michael P. Harrington Director and Chairman of the Board of
Directors (principal executive officer)
/s/ Louis J. Glunz
- ------------------
Louis J. Glunz Director
/s/ M. William Isbell
- ---------------------
M. William Isbell Director
/s/ Thomas G. Parker
- --------------------
Thomas G. Parker Director
/s/ Paul A. Stinneford
- ----------------------
Paul A. Stinneford Director, Vice President and Secretary
/s/ Joseph H. Stegmayer
- -----------------------
Joseph H. Stegmayer Director
/s/ Kenneth L. Stucky
- ---------------------
Kenneth L. Stucky Director
/s/ Jan W. Erfert
- -----------------
Jan W. Erfert Vice President and Treasurer
(principal financial officer)
/s/ Robert J. Harker
- --------------------
Robert J. Harker Vice President and Controller
(principal accounting officer)
</TABLE>
E-5
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,323,149
<SECURITIES> 0
<RECEIVABLES> 118,537,808
<ALLOWANCES> (11,349,783)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,082,772
<DEPRECIATION> (826,995)
<TOTAL-ASSETS> 119,755,951
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 52,860
<OTHER-SE> 16,263,438
<TOTAL-LIABILITY-AND-EQUITY> 119,755,951
<SALES> 0
<TOTAL-REVENUES> 28,000,247
<CGS> 0
<TOTAL-COSTS> 12,790,471
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,000,000
<INTEREST-EXPENSE> 6,281,428
<INCOME-PRETAX> 4,928,348
<INCOME-TAX> 1,695,000
<INCOME-CONTINUING> 3,233,348
<DISCONTINUED> 0
<EXTRAORDINARY> (149,789)
<CHANGES> 0
<NET-INCOME> 3,083,559
<EPS-PRIMARY> 0.63
<EPS-DILUTED> 0
</TABLE>
