<PAGE>
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 9, 1998
REGISTRATION NO. 333-41257
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AUTOBOND ACCEPTANCE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
TEXAS 6141 75-2487218
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
301 CONGRESS AVENUE
AUSTIN, TEXAS 78701
(512) 435-7000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ADRIAN KATZ, VICE CHAIRMAN
AUTOBOND ACCEPTANCE CORPORATION
301 CONGRESS AVENUE
AUSTIN, TEXAS 78701
(512) 435-7000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPY TO:
GLENN S. ARDEN, ESQ. NORMAN R. MILLER, ESQ.
JONES, DAY, REAVIS & POGUE WOLIN, RIDLEY & MILLER LLP
599 LEXINGTON AVE. 3100 BANK ONE CENTER
NEW YORK, NEW YORK 10022 1717 MAIN STREET
(212) 326-3939 DALLAS, TEXAS 75201-4681
(214) 939-4900
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]_________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]_________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]_________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
AMOUNT MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(3)
<S> <C> <C> <C> <C>
Preferred Stock, no par value ($10 liquidation preference)..... 1,150,000 $ 10 $11,500,000 $ 3,485
</TABLE>
(1) The Company is also registering such number of shares of Common Stock as may
become issuable upon redemption of the preferred stock.
(2) Computed in accordance with Rule 457 under the Securities Act of 1933 solely
for purposes of calculating the registration fee.
(3) Previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
________________________________________________________________________________
<PAGE>
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 6, 1998
PROSPECTUS
1,000,000 SHARES
[LOGO]
15% SERIES A CUMULATIVE PREFERRED STOCK
(LIQUIDATION PREFERENCE $10 PER SHARE)
--------------------------
AutoBond Acceptance Corporation, a Texas Corporation ('AutoBond' or the
'Company'), is offering (the 'Offering') 1,000,000 shares of $10 liquidation
preference 15% Series A Cumulative Preferred Stock, no par value (the 'Preferred
Stock') at $10 per share through Tejas Securities Group, Inc. as the sole
managing underwriter and the representative ('Representative') of the
underwriters ('Underwriters') herein named.
Dividends on the Preferred Stock are cumulative from the date of issuance
and will be payable quarterly on the last day of March, June, September, and
December of each year commencing on June 30, 1998 at a rate of 15% per annum.
The Company, at its option, may redeem one-sixth of the Preferred Stock each
year, after three years from the date of issuance upon 30 days' written notice
(the 'redemption date') in cash at the liquidation preference per share (plus
accrued and unpaid dividends) or, if in Common Stock, that number of shares
equal to $10 per share of Preferred Stock to be redeemed, divided by 85% of the
average closing sale price per share for the Common Stock for the 5 trading days
prior to the redemption date. See 'Description of the Capital Stock.' The
Preferred Stock is not redeemable at the option of the holder and has no stated
maturity.
The Preferred Stock has been approved for listing on the American Stock
Exchange under the symbol 'ABD.Pr.A.'
SEE 'RISK FACTORS' ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE PREFERRED STOCK OFFERED
HEREBY. THIS OFFERING INVOLVES A HIGH DEGREE OF RISK AND SHOULD NOT BE PURCHASED
BY INVESTORS REQUIRING CURRENT INCOME.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNTS(1)(3) COMPANY(2)(3)
<S> <C> <C> <C>
Per Share.................................................................... $10 $0.80 $9.20
Total........................................................................ $10,000,000 $800,000 $9,200,000
</TABLE>
(1) Excludes a nonaccountable expense allowance payable by the Company to the
Representative of 2% of the aggregate initial public offering price of the
Preferred Stock. The Company has agreed to issue a Common Stock Purchase
Warrant (the 'Representative's Warrant') to the Representative exercisable
for four years commencing one year after the date of this Prospectus to
purchase 100,000 shares of Common Stock for $ per share and to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
'Underwriting.'
(2) Before deducting expenses payable by the Company estimated at $400,000,
together with the Representative's nonaccountable expense allowance of
$200,000.
(3) Assumes no exercise of the Representative's option, exercisable within 45
days from the date of this Prospectus, to purchase up to 15% of the
aggregate number of shares of Preferred Stock offered in connection with the
Offering on the same terms, solely to cover overallotments (the
'Overallotment Option'). If the Overallotment Option is exercised in full,
the total Price to Public, Underwriting Discounts and Proceeds to Company
will be $11,500,000, $920,000 and $10,580,000, respectively. See
'Underwriting.'
------------------------
The Preferred Stock is offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters, and subject to
their right to reject orders, in whole or in part. It is expected that delivery
of the Preferred Stock will be made in Austin, Texas on or about February ,
1998.
TEJAS SECURITIES GROUP, INC. NEIDIGER, TUCKER, BRUNER, INC.
------------------------
The date of this Prospectus is February , 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.
<PAGE>
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE PREFERRED STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
PREFERRED STOCK, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE 'UNDERWRITING.'
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
'Commission') a Registration Statement under the Securities Act of 1933, as
amended (the 'Securities Act'), with respect to the securities offered pursuant
to this Prospectus. For further information, reference is made to such
Registration Statement, the amendments thereof and the exhibits thereto, which
are available for inspection without charge at the public reference facilities
of the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549,
as well as the Regional Offices of the Commission at Citicorp Center, 500 West
Madison, Suite 1400, Chicago, Illinois 60661, and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such information can be obtained by
mail from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington D.C. 20549, at prescribed rates. The Commission also maintains
a website, located at http://www.sec.gov, that contains reports, proxy
statements and other information regarding registrants that file electronically
with the Commission, including the Company. The Company also files with the
Commission such periodic reports as are required under the Securities Exchange
Act of 1934, as amended (the 'Exchange Act') and the rules and regulations of
the Commission thereunder.
2
<PAGE>
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, all information presented in this Prospectus assumes no exercise of
the Underwriter's Overallotment Option or the Representatives' Warrants.
AutoBond Acceptance Corporation (the 'Company') is a specialty consumer
finance company engaged in underwriting, acquiring, servicing and securitizing
retail installment contracts ('finance contracts') originated by franchised
automobile dealers in connection with the sale of used and, to a lesser extent,
new vehicles to selected consumers with limited access to traditional sources of
credit ('subprime consumers'). Subprime consumers generally are borrowers unable
to qualify for traditional financing due to one or more of the following
reasons: negative credit history (which may include late payments, charge-offs,
bankruptcies, repossessions or unpaid judgments); insufficient credit,
employment or residence histories or high debt-to-income or payment-to-income
ratios (which may indicate payment or economic risk).
The Company acquires finance contracts directly from franchised automobile
dealers, makes credit decisions using its own underwriting guidelines and credit
personnel and performs the collection function for finance contracts using its
own collections department. The Company also acquires finance contracts from
third parties other than dealers, for which the Company reunderwrites and
collects such finance contracts in accordance with the Company's standard
guidelines. The Company securitizes portfolios of these retail automobile
installment contracts to efficiently utilize limited capital to allow continued
growth and to achieve sufficient finance contract volume to allow profitability.
The Company markets a single finance contract acquisition program to automobile
dealers which adheres to consistent underwriting guidelines involving the
purchase of primarily late-model used vehicles.
THE OFFERING
<TABLE>
<S> <C>
Preferred Stock Offered...................... 1,000,000 shares of 15% Cumulative Series A Preferred Stock (the
'Preferred Stock') (150,000 additional shares if the
Overallotment Option is exercised in full).
Use of Proceeds.............................. Acquisition and financing of finance contracts, working capital
and general corporate purposes. See 'Use of Proceeds.'
Proposed AMEX Symbol......................... 'ABD.Pr.A.'
RISK FACTORS................................. Investment in the securities involves a high degree of risk and
should only be purchased by investors capable of suffering a
loss of their entire investment. See 'Risk Factors.'
</TABLE>
3
<PAGE>
<PAGE>
DESCRIPTION OF PREFERRED STOCK
<TABLE>
<S> <C>
Dividends.................................... Payable quarterly each March 31, June 30, September 30 and
December 31, commencing June 30, 1998, at the rate of 15% per
annum. Dividends are cumulative from the date of issue.
Redemption................................... The Preferred Stock is not redeemable or convertible at the option
of the holder. One-sixth of the outstanding Preferred Stock is
redeemable each year at the Company's option at any time on or
after three years from the date of issuance upon 30 days'
written notice in cash (at the liquidation preference per share
plus accrued and unpaid dividends) or, if in Common Stock, that
number of shares equal to $10 per share of Preferred Stock to be
redeemed, divided by 85% of the average closing sale price per
share for the Preferred Stock for the 5 trading days prior to
the redemption date.
Voting Rights................................ If dividends on the Preferred Stock are in arrears for two
quarterly dividend periods, holders of the Preferred Stock will
have the right to elect three additional directors to serve on
the Board until such dividend arrearage is eliminated. In
addition, certain changes that would be materially adverse to
the rights of holders of the Preferred Stock cannot be made
without the affirmative vote of the holders of two-thirds of the
shares of Preferred Stock, voting as a single class. See
'Description of Capital Stock.'
Ranking...................................... The Preferred Stock will rank senior to the Common Stock (the only
capital stock of the Company outstanding as of the date of this
Prospectus) with respect to the payment of dividends and amounts
upon liquidation, dissolution or winding up.
Liquidation Preference....................... $10 per share, plus accrued and unpaid dividends.
</TABLE>
RECENT DEVELOPMENTS
During January 1998, the Company privately placed $7,500,000 in aggregate
principal amount of senior subordinated notes (the 'Subordinated Notes') to an
affiliate of BankBoston, N.A. The Subordinated Notes bear interest at 15% per
annum, mature on February 1, 2001 and are convertible into up to 368,462 shares
of the Company's Common Stock at a price of $3.30 per share (subject to
adjustment). Although the Subordinated Notes contain customary restrictive
covenants, they do not prohibit the Company from paying dividends on the
Preferred Stock out of earnings legally available therefor. In addition, the
Company issued to the purchaser a warrant to purchase such shares to the extent
the notes have not been converted prior to maturity. Net proceeds from the sale
of the Subordinated Notes were used to pay short-term liabilities, with the
remainder available to provide for the repayment (if necessary) of the Company's
18% Convertible Secured Notes and for working capital. See 'Capitalization',
'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources' and 'Description of Capital
Stock -- Warrants and Convertible Notes.'
The Company acquired $44.8 million in finance contracts during the fourth
quarter of 1997, the highest quarterly amount ever. This represented an increase
of approximately 75% over the comparable fourth quarter of 1996 and
approximately 32% over the third quarter of 1997. During the fourth quarter of
1997, the Company also completed the transfer of all remaining servicing
functions (primarily associated with information software and mailing
technology) from its third party contractor to in-house equipment and personnel.
As of December 31, 1997, the Company's servicing portfolio exceeded 20,000
finance contracts. By assuming the remaining servicing functions, the Company's
gross monthly servicing compensation for these contracts has increased from $7
per contract to $15 per contract (a total of approximately $1,000,000 per
quarter).
4
<PAGE>
<PAGE>
The following table provides information on the delinquency performance of
the Company's servicing portfolio at year end 1996 and 1997. The portfolio at
the end of 1997 is more seasoned than it was at the end of 1996 and as such the
Company believes increased delinquencies are consistent with the effects of
seasoning. For further insight into the effects of seasoning see 'Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Credit Loss Experience.'
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
--------------------- ---------------------
<S> <C> <C> <C> <C>
Principal balance of finance contracts
outstanding............................ $104,888,892 $211,727,750
Delinquent finance contracts(1):
30-59 days past due................. 7,916,425 7.55% 21,484,450 10.15%
60-89 days past due................. 2,102,014 2.00% 11,139,753 5.26%
90 days past due and over........... 2,763,300 2.64% 8,368,493 3.95%
------------ ----- ------------ -----
Total.......................... $ 12,781,739 12.19% $ 40,992,696 19.36%
------------ ----- ------------ -----
------------ ----- ------------ -----
</TABLE>
- ------------
(1) Percentages based upon number of contracts outstanding. Includes finance
contracts in which the underlying vehicle is repossessed (but subject to
redemption), the borrower is in bankruptcy, there is a dealer buy-back
obligation, or there are insurance claims filed and pending. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Delinquency Experience' for delinquency data based upon
outstanding balances and which includes such items.
Effective February 1, 1998, Manuel A. Gonzalez, a former outside director
of the Company, was named President of the Company. See 'Management.'
As part of its year-end reporting analysis, the Company will evaluate its
asset quality, including appropriate allowance levels and provisions. Such
evaluation might result in the revaluation of Interest-only Strip Receivables
for the fourth quarter. The Company cannot predict at this time whether the
amount of any impairment of its assets, increases in allowances or provisions
will be material.
In November 1997, the Company was informed by Moody's, and then by Fitch,
that the rated notes issued in the 1997-B and 1997-C securitization transactions
had been placed under review for possible downgrade, due to certain recent
statements made by representatives of Progressive Northern Insurance Company
('Progressive') about the coverage afforded under the VSI and Deficiency Balance
insurance policies issued in connection with such transactions. Specifically
Moody's and Fitch, after discussions with representatives of Progressive, cited
concerns with Progressive's interpretation of its right to cancel the policies,
as well as its aggregate limit of liability on claims paid under the Deficiency
Balance policy. In February 1998, the Company was informed by Fitch that the two
securitizations had been downgraded and Fitch's ratings withdrawn. The Company
disagrees with the actions taken by Moody's and Fitch and reaffirms its
understanding that (a) coverages under the Progressive policies are not
cancelable with respect to Auto Loans for which premiums have been paid in full,
and (b) Progressive's aggregate limitation of liability per month is 88% of
premiums paid to date. The Company continues to engage in discussions with
Moody's and other parties with regard to this matter.
5
<PAGE>
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM AUGUST YEAR ENDED DECEMBER NINE MONTHS ENDED
1, 1994 (INCEPTION) 31, SEPTEMBER 30,
TO DECEMBER 31, ---------------------- ----------------------
1994(2) 1995 1996 1996 1997
-------------------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net interest income...................... $ 19 $ 781 $ 137 $ 263 $ 177
Servicing fee income..................... 0 0 658 475 660
Gain on sale of finance contracts........ 0 4,086 12,820 9,423 13,533
Other income (loss)...................... 0 0 388 -- (530)
-------- --------- --------- --------- ---------
Total revenues...................... 19 4,867 14,003 10,161 13,840
-------- --------- --------- --------- ---------
Provision for credit losses.............. 45 49 412 113 125
Salaries and benefits.................... 226 1,320 4,529 3,082 5,413
General and administrative............... 245 1,463 2,331 1,318 4,482
Other operating expenses................. 48 963 1,120 842 1,266
-------- --------- --------- --------- ---------
Total expenses...................... 564 3,795 8,392 5,355 11,286
-------- --------- --------- --------- ---------
Income (loss) before taxes and
extraordinary item.................... (545) 1,072 5,611 4,806 2,554
Provision for income taxes............... 0 199 1,926 1,634 896
Extraordinary loss net of tax effect..... -- -- (100) (100) --
-------- --------- --------- --------- ---------
Net income............................... $ (545) $ 873 $ 3,585 $ 3,072 $ 1,658
-------- --------- --------- --------- ---------
-------- --------- --------- --------- ---------
Earnings (loss) per share before
extraordinary item.................... $(0.11) $ 0.17 $ 0.64 $ 0.56 $ 0.25
-------- --------- --------- --------- ---------
-------- --------- --------- --------- ---------
Earnings (loss) per share................ $(0.11) $ 0.17 $ 0.62 $ 0.54 $ 0.25
-------- --------- --------- --------- ---------
-------- --------- --------- --------- ---------
Weighted average shares outstanding...... 5,118,753 5,190,159 5,811,377 5,701,086 6,537,129
CASH FLOW DATA:
Cash used in operating activities........ (2,514) (5,458) (4,169) (2,171) (6,301)
Cash used in investing activities........ (16) (442) (1,140) (1,425) (2,136)
Cash provided by financing activities.... 2,530 5,992 9,337 3,839 4,490
ASSET QUALITY DATA:
Delinquencies as a percentage of
principal balance of finance contract
portfolio serviced (end of period)
30-59 days past due...................... 4.69% 7.55% 6.75% 8.72%
60+ days past due(1)..................... 2.32% 4.63% 4.15% 8.55%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1994 1995 1996 1997
------ ------- ------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................................... $ 0 $ 93 $ 4,121 $ 173
Restricted funds................................................ 0 1,683 2,982 6,165
Finance contracts held for sale, net............................ 2,361 3,355 228 1,000
Interest-only strip receivable.................................. 0 847 4,247 9,979
Total assets............................................... 2,500 11,065 26,277 37,386
Notes payable................................................... 0 2,675 10,175 10,280
Repurchase agreement............................................ 0 1,061 0 0
Revolving credit agreement...................................... 2,055 1,150 0 4,240
Subordinated debt............................................... 0 0 0 0
Total debt................................................. 2,055 4,886 10,175 14,520
Shareholders' equity............................................ (109) 3,026 12,286 15,535
</TABLE>
- ------------
(1) Includes the Company's entire finance contract portfolio of contracts held
and contracts securitized. Includes finance contracts where underlying
vehicle is repossessed (but subject to redemption), the borrower is in
bankruptcy, the dealer is to buy back the loan, or insurance claims have
been filed or are pending.
(2) The Company was incorporated on June 15, 1993 and commenced operations in
August 1994.
6
<PAGE>
<PAGE>
RISK FACTORS
An investment in the shares of Preferred Stock offered hereby involves a
high degree of risk. In addition to the information contained elsewhere in this
Prospectus, prospective purchasers should carefully consider the following risk
factors concerning the Company and its business in evaluating an investment in
the Preferred Stock offered hereby.
LIMITED OPERATING HISTORY
The Company was incorporated in June 1993 and commenced operations in
August 1994 and, accordingly, has only a limited operating history. Although the
Company has experienced substantial growth in dealer relationships, finance
contract acquisitions and revenues, there can be no assurance that this growth
is sustainable or that historical results are indicative of future results. In
addition, the Company's results of operations, financial condition and liquidity
depend, to a material extent, on the performance of its finance contracts.
Because of the Company's limited operating history, its finance contract
portfolio is relatively unseasoned. Thus, the Company's portfolio performance,
including historical delinquency and loss experience, is not necessarily
indicative of future results. Furthermore, the Company's ability to achieve and
maintain profitability on both a quarterly and an annual basis will depend, in
part, upon its ability to implement its business strategy and to securitize
quarterly on a profitable basis. See 'Selected Consolidated Financial and
Operating Data.'
PRESSURES ON NET INCOME FROM EXPENSES
The continued acquisition and servicing of subprime finance contracts by an
independent finance company under current market conditions is a capital and
labor intensive enterprise. Capital is needed to fund the acquisition of finance
contracts and to effectively securitize them so that additional capital is made
available for acquisition activity. While a portion of the Company's capital has
been obtained with investment grade ratings at relatively low interest rates,
the remainder is difficult to obtain and requires the Company to pay high
coupons, fees and other issuance expenses, with a negative impact on earnings.
The underwriting and servicing of a growing subprime finance contract portfolio
requires a higher level of experienced personnel than that required for a
portfolio of higher credit-quality consumer loans. Accordingly, the Company's
growth in finance contract volume since inception has corresponded with a
significant increase in expenses related to building the infrastructure
necessary for effective underwriting and servicing, resulting in an expected
decrease in net income for 1997 fiscal year as compared with 1996. Although the
Company's assumption of all servicing functions in late 1997 is expected to
increase servicing income, it is uncertain when the Company will begin to
realize overall improvements in net income as the growth in acquisition volume
continues, especially in view of the high cost of capital. See 'Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations' and ' -- Liquidity and Captial Resources.'
ABILITY OF THE COMPANY TO IMPLEMENT ITS BUSINESS STRATEGY
The Company's business strategy is principally dependent upon its ability
to increase the number of finance contracts it acquires while maintaining
favorable interest rate spreads and effective underwriting and collection
efforts. Implementation of this strategy will depend in large part on the
Company's ability to: (i) expand the number of dealerships involved in its
financing program and maintain favorable relationships with these dealerships;
(ii) increase the volume of finance contracts purchased from its dealer network;
(iii) obtain adequate financing on favorable terms to fund its acquisition of
finance contracts; (iv) profitably securitize its finance contracts on a regular
basis; (v) maintain appropriate procedures, policies and systems to ensure that
the Company acquires finance contracts with an acceptable level of credit risk
and loss; (vi) hire, train and retain skilled employees; (vii) continue to
expand in the face of increasing competition from other automobile finance
companies; and (viii) increase the rate of revenue growth more rapidly than the
increase of expenses, which would involve a reversal of an adverse trend
experienced through much of 1997. The Company's failure to obtain or maintain
any or all of these factors could impair its ability to implement its business
strategy successfully, which could have a material adverse effect on the
Company's results of operations and financial condition. See 'Business -- Growth
and Business Strategy.'
7
<PAGE>
<PAGE>
LIQUIDITY DEMANDS AND CONTINUED ACCESS TO CAPITAL RESOURCES
LIQUIDITY. The Company requires access to significant sources and amounts
of cash to fund its operations and to acquire and securitize finance contracts.
As a result of the initial period required to accumulate finance contracts prior
to securitization of such contracts and the expected future requirement that the
Company contribute significant equity to its securitizations, the Company's cash
requirements exceed and are expected to continue to exceed cash generated from
operations. The Company's primary operating cash requirements include the
funding of (i) the acquisition of finance contracts prior to securitization,
(ii) the initial cash deposits to reserve accounts in connection with the
warehousing and securitization of contracts in order to obtain such sources of
financing, (iii) fees and expenses incurred in connection with the warehousing
and securitization of contracts and (iv) ongoing administrative and other
operating expenses. The Company has traditionally obtained these funds in three
ways: (a) loans and warehouse financing arrangements, pursuant to which
acquisition of finance contracts are funded on a temporary basis; (b)
securitizations or sales of finance contracts, pursuant to which finance
contracts are funded on a permanent basis; and (c) general working capital
obtained through the issuance of debt or equity. Failure to procure funding from
all or any one of these sources could have a material adverse effect on the
Company. See 'Use of Proceeds' and 'Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources.'
CASH FLOWS ASSOCIATED WITH FINANCINGS. Under the financial structures the
Company has used to date in its warehousing and securitizations, certain excess
cash flows generated by the finance contracts are retained in a cash reserve or
'spread' account to provide liquidity and credit enhancement. While the specific
terms and mechanics of the cash reserve account can vary depending on each
transaction, the relevant agreement generally provides that the Company is not
entitled to receive certain excess cash flows unless certain reserve account
balances have been attained and the delinquency or losses related to the
contracts in the pool are below certain predetermined levels. In the event
delinquencies and losses on the contracts exceed such levels, the terms of the
warehouse facility or securitization may require increased cash reserve account
balances to be accumulated for the particular pool or, in certain circumstances,
may require the transfer of the Company's collection function to another
servicer. The imposition of any of the above-reference conditions could
materially adversely affect the Company's liquidity and financial condition.
DEPENDENCE ON WAREHOUSE CREDIT FACILITIES. The Company's two primary
sources of financing for the acquisition of finance contracts are its (i) $50.0
million warehouse revolving line of credit with Daiwa Finance Corporation and
(ii) $10.0 million warehouse revolving line of credit with Sentry Financial
Corporation (together, the 'Revolving Credit Facilities') which expire in March
1998 and December 31, 2000, respectively. As of December 31, 1997, $15.8 million
and $10 million in funding was available under these respective Revolving Credit
Facilities. As of the date of this Prospectus, the expiration of the Daiwa
Facility has not been extended but the Company is currently in active
discussions with several potential warehouse providers. To the extent that the
Company is unable to maintain the Revolving Credit Facilities or is unable to
arrange new warehouse lines of credit, the Company would have to curtail its
finance contract acquisition activities, which would have a material adverse
effect on operations and cash position. These warehouse lines are typically
repaid with the proceeds received by the Company when its finance contracts are
securitized. The Company's ability to continue to borrow under the Revolving
Credit Facilities is dependent upon its compliance with the terms thereof,
including the maintenance by the Company of certain minimum capital levels.
There can be no assurance that such facilities will be extended or that
substitute facilities will be available on terms acceptable to the Company. The
Company's ability to obtain a successor facility or similar financing will
depend on, among other things, the willingness of financial organizations to
participate in funding subprime finance contracts and the Company's financial
condition and results of operations. The Company's growth is dependent upon its
ability to obtain sufficient financing under its Revolving Credit Facilities,
and any additional or successor facilities, at rates and upon terms acceptable
to the Company. See 'Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources' and
'Business -- Funding/ Securitization of Finance Contracts.'
8
<PAGE>
<PAGE>
DEPENDENCE ON SECURITIZATION TRANSACTIONS. The Company relies significantly
on a strategy of periodically selling finance contracts through asset-backed
securitizations. Proceeds from securitizations are typically used to repay
borrowings under the warehouse credit facilities, thereby making such facilities
available to acquire additional finance contracts. The Company's ability to
access the asset-backed securities market is affected by a number of factors,
some of which are beyond the Company's control and any of which could cause
substantial delays in securitization including, among other things, conditions
in the securities markets in general, conditions in the asset-backed securities
market and investor demand for subprime auto paper. Moreover, because of the
similarity of the Company's name with those of certain securitization issuers
sponsored by William Winsauer, the Company could be adversely affected if such
securitizations suffered losses. Additionally, gain on sale of finance contracts
represents a significant portion of the Company's total revenues and,
accordingly, net income. If the Company were unable to securitize finance
contracts or account for any securitization as a sale transaction in a financial
reporting period, the Company would likely incur a significant decline in total
revenues and net income or report a loss for such period. Moreover, the
Company's ability to monetize excess spread cash flows, has been an important
factor in providing the Company with substantial liquidity, but such ability
appears to be diminishing due to the difficulty in obtaining acceptable
insurance and ratings. If the Company were unable to securitize its finance
contracts and did not have sufficient credit available, either under warehouse
credit facilities or from other sources, the Company would have to sell portions
of its portfolio directly to whole loan buyers or curtail its finance contract
acquisition activities. See 'Business -- Funding/Securitization of Finance
Contracts.'
DEPENDENCE ON INSURANCE POLICIES. In order to limit potential losses on
finance contracts, the Company has purchased insurance under vendor's single
interest ('VSI') insurance policies, including loss deficiency coverages for
certain contracts at the time of its acquisition or upon securitization. VSI
Policies generally include physical damage and loss coverage with respect to the
financed vehicles and may include loss coverage with respect to unpaid amounts
under the related finance contract, subject in each case to certain conditions
and limitations. The protections afforded by the VSI Policies are not complete
and depend on the Company's compliance with the terms and conditions of the
policy. There can be no assurance that such insurance will be available in the
future at reasonable rates. The Company is currently involved with a
disagreement with one of its VSI carriers as to the scope of the policy's
coverage, and the ratings of two securitizations supported in part by such
policy have been put under review. The unavailability of such insurance, coupled
with the absence of alternative forms of credit enhancement, could adversely
affect the Company's ability to profitably acquire and securitize finance
contracts. See 'Business -- Insurance' and ' -- Recent Developments.'
NEED FOR ADDITIONAL CAPITAL. The Company's ability to implement its
business strategy will depend upon its ability to continue to effect
securitizations or to establish alternative long-term financing arrangements and
to obtain sufficient financing under warehousing facilities on acceptable terms.
There can be no assurance that such financing will be available to the Company
on favorable terms. If such financing were not available or the Company's
capital requirements exceeded anticipated levels, then the Company would be
required to obtain additional debt financing, which could impair the ability to
pay dividends, or additional equity financing, which would dilute the interests
of shareholders. Although the Company has no specific plans for additional
equity financings other than this offering of Preferred Stock, the Company may
at some point require additional equity financing. The Company cannot estimate
the amount and timing of additional equity financing requirements because such
requirements are tied to, among other things, the growth of the Company's
finance contract acquisitions, which cannot be definitively forecast for future
periods. If the Company were unable to raise such additional capital, its
results of operations and financial condition could be adversely affected. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources' and 'Business -- Financing
Program.'
POTENTIAL VOLATILITY OF GAIN FROM SECURITIZATION TRANSACTIONS
The gain from securitization transactions recognized by the Company in each
securitization and the value of the future excess spread cash flows in each
transaction reflect, among other things, management's estimate of future
delinquencies, credit losses and prepayments for the finance contracts included
in that securitization. If actual rates of credit loss, delinquencies or
prepayments for the finance
9
<PAGE>
<PAGE>
contracts exceeded those estimated, the value of the interest-only strip
receivables would be impaired. The Company periodically reviews its credit loss,
delinquencies and prepayment assumptions relative to the performance of the
securitized contracts and to market conditions. If necessary, the Company would
adjust the carrying value of the future excess spread cash flows by writing down
the asset and recording a charge to servicing fee income. The Company's results
of operations and liquidity could be adversely affected if credit loss or
prepayment levels on securitized finance contracts substantially exceeded
anticipated levels. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Revenues/Credit Loss Experience' and Note
1 to Notes to Consolidated Financial Statements.
RISK OF ECONOMIC DOWNTURNS
The Company's business is directly related to sales of new and used
automobiles, which are affected by employment rates, prevailing interest rates
and other domestic economic conditions. Delinquencies, foreclosures and losses
generally increase during economic slowdowns or recessions. Because of the
Company's focus on subprime borrowers, the actual rates of delinquencies,
repossessions and losses on such contracts under adverse conditions could be
higher than those currently experienced. Any sustained period of economic
slowdown or recession could adversely affect the Company's ability to sell or
securitize pools of finance contracts. The timing of any economic changes is
uncertain. Decreased sales of automobiles and weakness in the economy could have
an adverse effect on the Company's business and that of the dealers from which
it purchases finance contracts.
DEFAULTS ON CONTRACTS; PREPAYMENTS
The Company is engaged in acquiring automobile finance contracts entered
into by dealers with subprime borrowers who have limited access to traditional
sources of consumer credit. The inability of a borrower to finance an automobile
purchase by means of traditional credit sources generally is due to various
factors, including the borrower's past credit experience and the absence or
limited extent of the borrower's credit history. Consequently, the contracts
acquired by the Company generally bear a higher rate of interest than finance
contracts of borrowers with favorable credit profiles, but also involve a higher
probability of default, may involve higher delinquency rates and involve greater
servicing costs. The majority of the Company's borrowers are classified as
subprime consumers due to negative credit history, including history of
charge-offs, bankruptcies, repossessions or unpaid judgments. Generally,
subprime consumers are those that do not qualify for financing from traditional
lending sources. The Company's continued profitability depends upon, among other
things, its ability to evaluate the creditworthiness of customers to prevent
defaults through proactive collection efforts and to minimize losses following
defaults with proceeds from the sale of repossessed collateral and with
insurance proceeds. Over time, the Company's finance contract portfolio becomes
more seasoned. This effect on the delinquency statistics can be observed in the
comparison of 1997 versus 1996 delinquency percentages, with 9.21% of the loan
balance of finance contracts 60 or more days past due at year end 1997, versus
4.64% at year end 1996. The portfolio is more seasoned as of December 31, 1997
versus December 31, 1996. Accordingly, delinquency and charge-off rates in the
portfolio may not fully reflect the rates that may apply when the average
holding period for finance contracts in the portfolio is longer. Increases in
the delinquency and/or charge-off rates in the portfolio would adversely affect
the Company's ability to obtain credit or securitize its receivables. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and 'Business -- Borrower Characteristics,' ' -- Contract
Acquisition Process,' ' -- Funding/Securitization of Finance Contracts' and
' -- Contract Servicing and Collection.'
The Company's servicing income also can be adversely affected by
prepayments or defaults on contracts in the servicing portfolio. The Company's
servicing revenue is based on the number of outstanding contracts. If contracts
are prepaid or charged-off, the Company's servicing revenue will decline to the
extent of such prepaid or charged-off contracts. There can be no assurance as to
what level of prepayment, if any, will occur on the finance contracts.
Prepayments may be influenced by a variety of economic, geographic, social and
other factors. Factors affecting prepayment of motor vehicle finance contracts
include borrowers' job transfers, unemployment, casualty, trade-ins, changes in
available interest rates, net equity in the motor vehicles and servicing
decisions.
10
<PAGE>
<PAGE>
LOSS OF SERVICING RIGHTS AND SUSPENSION OF FUTURE RETAINED CASH FLOWS
The Company is entitled to receive servicing fee income only while it acts
as collection agent for securitized contracts. Any loss of these collection fees
could have an adverse effect on the Company's results of operations and
financial condition. The Company's right to act as collection agent under the
servicing agreements and as administrator under the trust agreements, and
accordingly to receive collection fees, can be terminated by the trustee upon
the occurrence of certain events of administrator termination (as defined in the
servicing agreements and the trust agreements). See 'Business --
Funding/Securitization of Finance Contracts.'
Under the terms of each of the trust agreements, upon the occurrence of
certain amortization events, the Company's rights to receive payments of its
collection fees and payments in respect of its retained interest in the
securitization excess spread cash flows would be suspended unless and until all
payments of principal and interest due on the investor certificates are made.
Such amortization events include (i) the occurrence of any event of
administrator termination referred to in the immediately preceding paragraph or
(ii) the institution of certain bankruptcy or liquidation proceedings against
any of the securitization subsidiaries of the Company.
Upon the occurrence of certain trigger events under the trust agreements,
the amount required to be retained in the cash reserve accounts is increased
such that future residual cash flows would be retained in such accounts rather
than paid to the Company. Such cash reserve trigger events include: (i)
increases in the net loss ratio and delinquency ratios above certain levels for
each pool of securitized finance contracts; or (ii) the occurrence of an event
of administrator termination resulting from a bankruptcy event of the Company.
In addition to the foregoing, the trust agreements provide that, upon the
occurrence of any amortization event, a greater portion of the excess spread
cash flows available for funding the cash reserve account be directed to such
account than would be required in the absence of an amortization event, and that
payment to the Company of its retained interest in such excess spread cash flows
be withheld until payments of principal and interest then due the holders of the
investor certificates are paid in full. See 'Business -- Funding/Securitization
of Finance Contracts.'
The Company's loss of rights to servicing fees under the trust agreements
or the occurrence of a trigger event that limited release of future residual
cash flows from the pooled contracts and cash reserve accounts could have an
adverse effect on the Company's results of operations and financial condition.
To date, no suspension of residual cash flows to the Company and no termination
of servicing rights have occurred under any securitization transactions.
VARIABLE QUARTERLY EARNINGS
The Company's revenues and income have fluctuated in the past and may
fluctuate in the future. Several factors affecting the Company's business can
cause significant variations in its quarterly results of operations. In
particular, variations in the volume of the Company's contract acquisitions, the
interest rate spreads between the Company's cost of funds and the average
interest rate of purchased contracts, the certificate rate for securitizations
and the timing and size of securitizations can result in significant increases
or decreases in the Company's revenues from quarter to quarter. Any significant
decrease in the Company's quarterly revenues could have a material adverse
effect on the Company's results of operations and its financial condition. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
In addition, income in any quarterly period may be affected by the
revaluation of interest-only strip receivables, which are valued at the present
value of the expected future excess spread cash flows using a market discount
rate. If actual prepayment or default rates on securitized finance contracts
exceed those assumed in the Company's calculations of the gain from
securitization transactions, the Company could be required to record a charge to
earnings. As a result of these factors, the Company's operating results may vary
from quarter to quarter, and the results of operations for any particular
quarter are not necessarily indicative of results that may be expected for any
subsequent quarter or related fiscal year. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations' and Note 1 to Notes
to Consolidated Financial Statements.
11
<PAGE>
<PAGE>
COMPETITION AND INDUSTRY CONDITIONS
The market in which the Company operates is highly competitive and
fragmented, consisting of many national, regional and local competitors, and is
characterized by relative ease of entry and the recent arrival of a number of
new competitors. Existing and potential competitors include well-established
financial institutions, such as banks, savings and loans, small loan companies,
industrial thrifts, leasing companies and captive finance companies owned by
automobile manufacturers and others. Many of these competitors are substantially
larger and better capitalized than the Company and may have other competitive
advantages over the Company. Competition by existing and future competitors
would result in competitive pressures, including reductions in the Company's
finance contract acquisitions or reduced interest spreads, that would materially
adversely affect the Company's profitability. Further, as the Company seeks to
increase its market penetration, its success will depend, in part, on its
ability to gain market share from established competitors. Additionally, during
the first half of 1997, several of the Company's competitors have experienced
serious problems ranging from allegedly fraudulent misstatements of earnings to
increasing losses and inadequate reserves. Although the Company believes it has
made adequate reserves to cover losses, the ability of the Company to obtain
funding in the future and the rates at which such financings may be obtained
could be impaired as a result of the turmoil in the sub-prime auto finance
industry. There can be no assurance that the turmoil in the sub-prime auto
finance industry will not continue to have an effect on the Company's ability to
raise funds and may result in an increased cost of funding to the Company. The
Company's management decided in 1997 to take advantage of the industry turmoil
through the more rapid hiring of professional talent that became available from
the Company's competitors. By pursuing this aggressive hiring strategy, the
Company increased expenses in 1997 more rapidly than revenue growth. See
'Business -- Competition,' ' -- Selected Financial Data' and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
INABILITY TO MAINTAIN RELATIONSHIPS WITH DEALERS
The Company's business depends in large part upon its ability to maintain
and service its relationships with automobile dealers. There can be no assurance
the Company will be successful in maintaining such relationships or increasing
the number of dealers with which it does business or that its existing dealer
base will continue to generate a volume of finance contracts comparable to the
volume historically generated by such dealers.
INTEREST RATE RISK
The Company's profitability is dependent upon the difference, or 'spread,'
between the effective rate of interest received by the Company on the finance
contracts it acquires and the interest rates payable either under its warehouse
credit facilities or on securities issued in securitizations. Several factors
affect the Company's ability to manage interest rate risk. First, finance
contracts are purchased at fixed rates, while amounts borrowed under certain of
the Company's credit facilities bear interest at variable rates that are subject
to frequent adjustment to reflect prevailing rates for short-term borrowings.
Second, the interest rate demanded by investors in securitizations is a function
of prevailing market rates for comparable transactions and of the general
interest rate environment. Because the finance contracts purchased by the
Company have fixed rates, the Company bears the risk of spreads narrowing
because of interest rate increases during the period from the date the finance
contracts are purchased until the closing of its securitization of such finance
contracts. Narrowing spreads would adversely affect the net interest income
earned by the Company while finance contracts are held for sale. In addition,
increases in interest rates prior to the securitization or sale of finance
contracts may reduce the gain realized by the Company. The Company does not
currently hedge its interest rate exposure. While the Company may consider
hedging strategies to attempt to limit such exposure in the future, there can be
no assurance that any such strategy, if adopted, will be successful. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
GEOGRAPHIC CONCENTRATION AND EXPANSION RISKS
For the period from inception through December 31, 1997, approximately 34%
of the Company's finance contracts, as a percentage of the aggregate nominal
principal balance of such finance contracts, had been originated in the State of
Texas. Such geographic concentration could have an adverse effect
12
<PAGE>
<PAGE>
on the Company should negative economic and other factors occur in Texas that
would cause the finance contracts to experience delinquencies and losses in
excess of those experienced historically. It is the Company's current intention
to expand the number and proportion of finance contracts acquired from dealers
in states other than Texas. Geographic expansion resulted in added expense,
which during 1997 grew more rapidly than revenue. Such geographic expansion may
entail greater risks as the Company does business in areas and with dealers with
which it is less familiar than in Texas. Such expansion also entails risks
associated with the adequate retention and training of sufficient personnel and
the need for sufficient financing sources. See 'Business -- Growth and Business
Strategy.'
REGULATION
The Company's business is subject to numerous federal and state consumer
laws and regulations, which, among other things: (i) require the Company to
obtain and maintain certain licenses and qualifications; (ii) limit the interest
rates, fees and other charges the Company is allowed to charge; (iii) limit or
prescribe certain other terms of the Company's contracts, (iv) require the
Company to provide specified disclosure; and (v) define the Company's rights to
collect on finance contracts and to repossess and sell collateral. A change in
existing laws or regulations, or in the creation or enforcement thereof, or the
promulgation of any additional laws or regulations could have a material adverse
effect on the Company's business. See 'Business -- Regulation.'
DEPENDENCE ON KEY EXECUTIVES
The success of the Company's operations is dependent upon the experience
and ability of William O. Winsauer, the Chairman of the Board and Chief
Executive Officer, Manuel A. Gonzalez, the President, and Adrian Katz, the Vice
Chairman of the Board and Chief Operating Officer. The loss of the services of
Messrs. Winsauer, Gonzalez or Katz could have an adverse effect on the Company's
business. In addition, if the loss of either Mr. Winsauer or Mr. Katz
constituted a 'change in control,' it could result in an amortization event
under certain trust agreements relating to the Company's securitizations,
reducing future cash flows from securitizations or an event of funding
termination. The Company does not maintain key man life insurance on any of its
officers, directors or employees at the present time. See 'Business -- Funding/
Securitization of Finance Contracts' and 'Management -- Employment Agreements.'
CONTROL BY MAJORITY SHAREHOLDER
William O. Winsauer beneficially owns an aggregate of approximately 55.8%
of the outstanding shares of Common Stock. Accordingly, Mr. Winsauer has
majority control of the Company, with the ability to elect the Board of
Directors and to approve or prevent certain fundamental corporate transactions
(including mergers, consolidations and sales of all or substantially all of the
Company's assets). See 'Certain Transactions,' 'Beneficial Ownership of Common
Shares' and 'Description of Capital Stock.'
PREFERRED STOCK RISKS
In addition to the Preferred Stock, the Board of Directors, without further
vote or action by the Company's shareholders, is authorized to issue shares of
preferred stock in one or more series and to fix the terms and provisions of
each series, including dividend rights and preferences over dividends on the
Common Stock, conversion rights, voting rights (in addition to those provided by
law) which may be senior to the voting rights of the Common Stock, redemption
rights and the terms of any sinking fund therefor, and rights upon liquidation,
including preferences over the Common Stock. Under certain circumstances, the
issuance of a series of preferred stock could have the effect of delaying,
deferring or preventing a change of control of the Company and could adversely
affect the rights of the holders of the Common Stock. These provisions could
limit the price that certain investors might be willing to pay in the future for
shares of the Common Stock. See 'Description of Capital Stock.'
REDEMPTION OF PREFERRED STOCK. Commencing three years from the date of this
Prospectus, the Preferred Stock may be redeemed by the Company at its option in
cash or in Common Stock. Accordingly, holders of the Preferred Stock may be
required to either exchange their Preferred Stock for Common Stock or accept a
fixed payment price for each share of Preferred Stock. See 'Description of
Capital Stock.'
NO ASSURANCE OF AN ACTIVE PUBLIC MARKET. While the Preferred Stock will be
free of restrictions on transfer, there is presently no public market for the
Preferred Stock and although the Preferred Stock
13
<PAGE>
<PAGE>
has been approved for listing on AMEX, there can be no assurance that an active
market will develop or be maintained. Accordingly, there can be no assurance
that the purchasers will be able to sell the Preferred Stock in the future. See
'Description of Securities.'
NON-REGISTRATION IN CERTAIN JURISDICTIONS OF SHARES OF COMMON STOCK
UNDERLYING THE PREFERRED STOCK. The Preferred Stock is not redeemable unless, at
the time of redemption, the Company has a current prospectus covering the shares
of Common Stock issuable upon redemption of such Preferred Stock and such shares
of Common Stock have been registered, qualified or deemed to be exempt under the
securities laws of the state of residence of the holders of such Preferred
Stock. Although the Company is registering the underlying Common Stock hereby
and will use its best efforts to maintain a current prospectus relating thereto
while the Preferred Stock is outstanding, there is no assurance that it will be
able to do so.
Purchasers may buy Preferred Stock in the aftermarket or may move to
jurisdictions in which the shares of Common Stock underlying the Preferred Stock
are not so registered or qualified during the period that the Preferred Stock is
outstanding. In this event, the Company would be unable to issue Common Stock to
those persons desiring to convert their shares of Preferred Stock unless and
until such shares could be qualified for sale in jurisdictions in which such
purchasers reside, or an exemption from such qualification exists in such
jurisdiction. In such event, the holders of Preferred Stock could be unable to
convert their shares to Common Stock. See 'Description of Securities.'
OFFERING PRICE ARBITRARILY DETERMINED. The offering price of the Preferred
Stock will be arbitrarily determined through negotiations between the
Representative and the Company and does not necessarily bear any relationship to
the Company's assets, earnings or other investment criteria. See 'Underwriting.'
SHARES ELIGIBLE FOR FUTURE SALE
The Company currently has 6,531,311 shares of Common Stock outstanding. Of
such shares, 1,075,000 shares are available for immediate sale in the public
market and 5,456,311 shares of Common Stock are 'restricted securities,' as that
term is defined under Rule 144 promulgated under the Securities Act, and may
only be sold pursuant to a registration statement under the Securities Act or an
applicable exemption from the registration requirements of the Securities Act,
including Rule 144 and 144A thereunder. Approximately 64,500 shares of Common
Stock are eligible for sale pursuant to Rule 144, subject to compliance with
such Rule and the contractual provisions described below. No predictions can be
made as to the effect, if any, that market sales of shares of existing
shareholders or the availability of such shares for future sale will have on he
market price of shares of Common Stock prevailing from time to time. The
prevailing market price of the Common Stock could be adversely affected by
future sales of substantial amounts of Common Stock by existing shareholders or
the perception that such sales could occur. See 'Beneficial Ownership of Common
Shares.'
In addition up to 515,000 shares of Common Stock have been reserved for
issuance upon exercise of employee stock options, up to 741,275 shares of Common
Stock may be issued upon exercise of outstanding warrants and 100,000 shares may
be issued upon exercise of warrants to be issued to the Representative. In
addition, up to 851,651 shares of Common Stock may be issued upon conversion of
the Company's outstanding 18% Convertible Notes. See 'Management -- Option Plan'
and 'Description of Capital Stock -- Warrants and Convertible Notes.'
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has been, and may continue
to be, extremely volatile and the market price of the Preferred Stock may also
be volatile. Factors such as expanding competition in the consumer automobile
finance market, quarterly fluctuations in the operating results of the Company,
its competitors and other similar finance companies and general conditions in
the automobile manufacturer and consumer lender markets, including changing
economic conditions for obligors, used automobile resale market conditions,
servicing practices, may have a significant impact on the market price of the
Common Stock. In particular, if the Company were to report operating results
that did not meet the expectations of research analysts, the market price of the
Common Stock could be materially adversely affected. In addition, the stock
market has recently experienced substantial price and volume fluctuations, which
have particularly affected the market prices of the stock of many consumer
automobile finance companies.
14
<PAGE>
<PAGE>
USE OF PROCEEDS
The aggregate net proceeds from the sale of the Preferred Stock being
offered by the Company in the Offering (at an assumed initial public offering
price of $10 per share and after deducting underwriting discount and estimated
offering expenses) will be approximately $8,750,000 (approximately $10,130,000
if the Underwriters' Over-allotment Option is exercised in full).
The Company intends to apply the net proceeds from the sale of the
Preferred Stock offered hereby primarily to the acquisition and financing of
finance contracts, including the funding of reserves and other credit
enhancements. In addition, any remaining net proceeds may be used for working
capital and general corporate purposes. Pending such uses, the Company may
invest the proceeds from this offering in short-term, investment-grade
securities.
DIVIDEND POLICY
Pursuant to the terms of the Preferred Stock, the Company will pay (when
and as declared by the Board of Directors) on the Preferred Stock quarterly
cumulative dividends of 15% per annum in cash. See 'Description of Capital
Stock -- Preferred Stock.' The Company has not paid and does not presently
intend to pay cash dividends on its Common Stock. The Company anticipates that
its earnings for the foreseeable future will be used to pay dividends on the
Preferred Stock and retained for use in the operation and expansion of its
business. Payment of cash dividends on its Common Stock, if any, in the future
will be at the sole discretion of the Company's Board of Directors and will
depend upon the Company's financial condition, earnings, current and anticipated
capital requirements, terms of indebtedness and other factors deemed relevant by
the Company's Board of Directors.
PRICE RANGE OF COMMON STOCK
On November 8, 1996, the Company's Common Stock was listed for quotation
and began trading on Nasdaq National Market ('Nasdaq') under the symbol 'ABND'.
Prior to such date, the Company's stock was closely held and not traded on any
regional or national exchange.
HIGH AND LOW SALE PRICES BY PERIOD
<TABLE>
<CAPTION>
PERIOD HIGH LOW
- ----------------------------------------------------------------------------- ------------ --------------
<S> <C> <C>
November 8, 1996 -- December 31, 1996........................................ $11 $9 1/4
January 1, 1997 -- March 31, 1997............................................ $10 3/8 $4
April 1, 1997 -- June 30, 1997............................................... $ 4 3/4 $2 1/4
July 1, 1997 -- September 30, 1997........................................... $ 5 1/8 $3 13/16
October 1, 1997 -- December 31, 1997......................................... $ 4 1/2 $2 5/8
January 1, 1998 -- February 2, 1998.......................................... $ 6 $2 13/16
</TABLE>
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company. As of January 26, 1998, the Company had approximately
15 stockholders of record, exclusive of holders who own their shares in 'street'
or nominee names.
15
<PAGE>
<PAGE>
CAPITALIZATION
The following table sets forth information regarding the capitalization of
the Company as of September 30, 1997 (i) on an actual basis and (ii) on an as
adjusted basis to give effect to the issuance of $7.5 million in Subordinated
Notes and the sale of 1,000,000 shares of Preferred Stock offered by the Company
(at an assumed public offering price of $10.00 per share and after deducting the
underwriting discount and estimated offering expenses) and the application of
the estimated net proceeds therefrom. See 'Use of Proceeds.'
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term Debt -- Bank overdraft (3).................................................... $ 445 $ 0
------- -----------
Long-term Debt -- Notes Payable.......................................................... 10,280 15,780
------- -----------
Shareholder's Equity:
Common Stock, no par value, 25,000,000 shares authorized; 6,512,500 shares issued
and outstanding, actual and as adjusted(1)......................................... 1 1
Preferred Stock, 5,000,000 shares authorized, no par value; no shares issued and
outstanding, actual; 1,000,000 shares of Series A Cumulative Preferred Stock, $10
liquidation preference, issued and outstanding, as adjusted........................ -- 10,000
Additional paid-in capital (2)........................................................... 8,704 7,304
Retained earnings........................................................................ 5,572 5,572
Deferred compensation.................................................................... (1) (1)
Loans to shareholders.................................................................... (7) (7)
Unrealized appreciation on interest-only strip receivables............................... 1,266 1,266
------- -----------
Total shareholders' equity..................................................... 15,535 24,135
------- -----------
Total capitalization........................................................... $26,260 $39,915
------- -----------
------- -----------
</TABLE>
- ------------
(1) Excludes (i) 515,000 shares of Common Stock reserved for issuance under the
Option Plan, (ii) 1,281,060 shares of Common Stock issuable upon the
exercise of outstanding warrants and notes, and (iii) 100,000 shares of
Common Stock which may be issued and sold upon the exercise in full of the
Representative's Warrants. See 'Description of Capital Stock -- Warrants,'
and 'Management -- Option Plan.'
(2) Includes the effect of Offering commissions and expenses estimated at
$1,400,000.
(3) Bank overdraft increased to approximately $4.5 million prior to the issuance
of the Subordinated Notes.
16
<PAGE>
<PAGE>
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
The following table sets forth the historical ratios of earnings to
combined fixed charges and preferred stock dividends of the Company for the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ -----------------
1995 1996 1997
---------- ---------- -----------------
<S> <C> <C> <C>
Net Income....................................................... $ 873,487 $3,584,886 $ 1,657,711
Extraordinary loss, net of tax benefit...................... -- 100,000 --
Provision for income taxes.................................. 199,000 1,926,553 895,685
---------- ---------- -----------------
1,072,487 5,611,439 2,553,396
---------- ---------- -----------------
Add fixed charges and preferred stock dividends:
Interest expense............................................ 2,099,867 2,382,818 2,930,592
Preferred stock dividends................................... -- -- --
---------- ---------- -----------------
Total combined fixed charges and preferred stock
dividends............................................ 2,099,867 2,382,818 2,930,592
---------- ---------- -----------------
Total earnings......................................... $3,172,354 $7,994,257 $ 5,483,988
---------- ---------- -----------------
---------- ---------- -----------------
Ratio of earnings to combined fixed charges and preferred stock
dividends...................................................... 1.51 3.35 1.87
---- ---- ----
---- ---- ----
</TABLE>
The ratio of earnings to combined fixed charges and preferred stock
dividends is not presented for the period from August, 1, 1994 (inception) to
December 31, 1994 as earnings were inadequate to cover combined fixed charges
and preferred stock dividends. The amount of such deficiency was $525,409.
See Risk Factors -- Liquidity Demands and Continued Access to Capital
Resources.
17
<PAGE>
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
Company and its subsidiaries for the periods and at the date indicated. The
selected income statement and balance sheet data for the period from August 1,
1994 (inception) to December 31, 1994, and the years ended December 31, 1995 and
1996, and as of December 31, 1994, 1995 and 1996 presented below were derived
from the financial statements of the Company which were audited by Coopers &
Lybrand L.L.P. independent accountants, as indicated in their report thereon
appearing elsewhere in this Prospectus, and are qualified by reference to such
consolidated financial statements. The financial data as of and for the nine
months ended September 30, 1996 and September 30, 1997 have been derived from
the Company's unaudited interim financial statements, prepared in conformity
with generally accepted accounting principles, and include all adjustments which
are, in the opinion of management, necessary for a fair presentation of the
results for the interim periods presented. The operating data and selected
portfolio data are derived from the Company's accounting records. Results of
operations for the nine months ended September 30, 1997 are not necessarily
indicative of results to be expected for the fiscal year ending December 31,
1997. The data presented below should be read in conjunction with the
consolidated financial statements, related notes and other financial information
included herein.
<TABLE>
<CAPTION>
PERIOD FROM AUGUST YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
1, 1994 (INCEPTION) SEPTEMBER 30,
TO DECEMBER 31, ----------------------- -----------------------
1994(2) 1995 1996 1996 1997
-------------------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net interest income................... $ 19 $ 781 $ 137 $ 263 $ 177
Servicing fee income.................. 0 0 658 475 660
Gain on sale of finance contracts..... 0 4,086 12,820 9,423 13,533
Other income (loss)................... 0 0 388 -- (530)
------- --------- --------- --------- ---------
Total revenues................... 19 4,867 14,003 10,161 13,840
------- --------- --------- --------- ---------
Provision for credit losses........... 45 49 412 113 125
Salaries and benefits................. 226 1,320 4,529 3,082 5,413
General and administrative............ 245 1,463 2,331 1,318 4,482
Other operating expenses.............. 48 963 1,120 842 1,266
------- --------- --------- --------- ---------
Total expenses................... 564 3,795 8,392 5,355 11,286
------- --------- --------- --------- ---------
Income before taxes and extraordinary
item................................ (545) 1,072 5,611 4,806 2,554
Provision for income taxes............ 0 199 1,926 1,634 896
Extraordinary loss net of tax
effect.............................. -- -- (100) (100) --
------- --------- --------- --------- ---------
Net income............................ $ (545) $ 873 $ 3,585 $ 3,072 $ 1,658
------- --------- --------- --------- ---------
------- --------- --------- --------- ---------
Earnings per share before
extraordinary item.................. $(0.11) $ 0.17 $ 0.64 $ 0.56 $ 0.25
------- --------- --------- --------- ---------
------- --------- --------- --------- ---------
Earnings per share.................... $(0.11) $ 0.17 $ 0.62 $ 0.54 $ 0.25
------- --------- --------- --------- ---------
------- --------- --------- --------- ---------
Weighted average shares outstanding... 5,118,753 5,190,159 5,811,377 5,701,086 6,537,129
CASH FLOW DATA:
Cash used in operating activities..... (2,514) (5,458) (4,169) (2,171) (6,301)
Cash used in investing activities..... (16) (442) (1,140) (1,425) (2,136)
Cash provided by financing
activities.......................... 2,530 5,992 9,337 3,839 4,490
ASSET QUALITY DATA:
Delinquencies as a percentage of
principal balance of finance
contract portfolio serviced (end of
period)(1)
30-59 days past due................... 4.69% 7.55% 6.75% 8.72%
60+ days past due..................... 2.32% 4.63% 4.15% 8.55%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1994 1995 1996 1997
------ ------- ------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 0 $ 93 $ 4,121 $ 173
Restricted funds...................... 0 1,683 2,982 6,165
Finance contracts held for sale,
net.................................. 2,361 3,355 228 1,000
Interest-only strip receivable........ 0 847 4,247 9,979
Total assets..................... 2,500 11,065 26,277 37,386
Notes payable......................... 0 2,675 10,175 10,280
Repurchase agreement.................. 0 1,061 0 0
Revolving credit agreement............ 2,055 1,150 0 4,240
Subordinated debt..................... 0 0 0 0
Total debt....................... 2,055 4,886 10,175 14,520
Shareholders' equity.................. (109) 3,026 12,286 15,535
</TABLE>
- ------------
(1) Includes the Company's entire finance contract portfolio of contracts held
and contracts securitized. Includes finance contracts where underlying
vehicle is repossessed (but subject to redemption), the borrower is in
bankruptcy, the dealer is to buy back the loan, or insurance claims have
been filed and are pending.
(2) The Company was incorporated on June 15, 1993 and commenced operations in
August 1994.
18
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of operations
of the Company should be read in conjunction with the preceding 'Selected
Financial Data' and the Company's Consolidated Financial Statements and Notes
thereto and the other financial data included herein. The financial information
set forth below has been rounded in order to simplify its presentation. However,
the ratios and percentages set forth below are calculated using the detailed
financial information contained in the Financial Statements and the Notes
thereto, and the financial data included elsewhere in this Prospectus.
The Company is a specialty consumer finance company engaged in
underwriting, acquiring, servicing and securitizing retail installment contracts
('finance contracts') originated by franchised automobile dealers in connection
with the sale of used and, to a lesser extent, new vehicles to selected
consumers with limited access to traditional sources of credit ('sub-prime
consumers'). Sub-prime consumers generally are borrowers unable to qualify for
traditional financing due to one or more of the following reasons: negative
credit history (which may include late payments, charge-offs, bankruptcies,
repossessions or unpaid judgments); insufficient credit; employment or residence
histories; or high debt-to-income or payment-to-income ratios (which may
indicate payment or economic risk).
The Company acquires finance contracts generally from franchised automobile
dealers, makes credit decisions using its own underwriting guidelines and credit
personnel and performs the collection function for finance contracts using its
own collections department. The Company also acquires finance contracts from
third parties other than dealers, for which the Company reunderwrites and
collects such finance contracts in accordance with the Company's standard
guidelines. The Company securitizes portfolios of these retail automobile
installment contracts to efficiently utilize limited capital to allow continued
growth and to achieve sufficient finance contract volume to allow profitability.
The Company markets a single finance contract acquisition program to automobile
dealers which adheres to consistent underwriting guidelines involving the
purchase of primarily late-model used vehicles. The Company has experienced
significant growth in its finance contract portfolio since it commenced
operations in August 1994.
REVENUES
The Company's primary sources of revenues consist of three components:
interest income, gain on sale of finance contracts and servicing fee income.
Interest Income. Interest income consists of the sum of three primary
components: (i) interest income earned on finance contracts held for sale by the
Company and (ii) interest income earned on Class B certificates. Other factors
influencing interest income during a given fiscal period include (a) the annual
percentage rate of the finance contracts acquired, (b) the aggregate principal
balance of finance contracts acquired and funded through the Company's warehouse
and other credit facilities prior to securitization, and (c) the length of time
such contracts are funded by the warehouse and other credit facilities. Finance
contract acquisition growth has had a significant impact on the amount of
interest income earned by the Company.
Gain on Sale of Finance Contracts. Upon completion of a securitization
prior to 1997, the Company recognized a gain on sale of finance contracts equal
to the present value of future excess spread cash flows from the securitization
trust, and the difference between the net proceeds from the securitization and
the net carrying cost (including the cost of insurance premiums, if any) to the
Company of the finance contracts sold. Excess spread cash flows represent the
difference between the weighted average contract rate earned and the rate paid
on multiple class certificates issued to investors in the securitization, taking
into account certain assumptions regarding prepayments, defaults, proceeds from
disposal of repossessed assets, and servicing and other costs, over the life of
the securitization.
The Company implemented Statement of Financial Accounting Standards No. 125
'Transfer and Servicing of Financial Assets and Extinguishment of Liabilities'
(SFAS No. 125) as of January 1, 1997. SFAS No. 125 provides new accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities. This statement also provides consistent standards
for
19
<PAGE>
<PAGE>
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings and requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be initially
measured at fair value. For transfers that result in the recognition of a sale,
SFAS No. 125 requires that the newly created assets obtained and liabilities
incurred by the transferors as a part of a transfer of financial assets be
initially measured at fair value. Interests in the assets that are retained are
measured by allocating the previous carrying amount of the assets (e.g. finance
contracts) between the interests sold (e.g. investor certificates) and interests
retained (e.g. interest-only strip receivable) based on their relative fair
values at the date of the transfer. The amounts initially assigned to these
financial components is a determinant of the gain or loss from a securitization
transaction under SFAS No. 125.
The discounted excess spread cash flows are reported on the consolidated
balance sheet as 'Interest-Only Strip Receivable'. The fair value of the
interest-only strip receivable is determined by discounting the excess spread
cash flows at a rate based on assumptions that market participants would use for
similar financial instruments subject to prepayment, default, collateral value
and interest rate risks. The subordinated certificates are then formed by
carving out a portion of the discounted excess spread cash flows. The remainder
of the discounted excess spread cash flows represent the interest-only strip
receivable. All of the excess spread cash flows are paid by the securitization
trustee to the investor security holders until such time as all accrued interest
together with principal have been paid in full. Subsequently, all remaining
excess spread cash flows are paid to the Company.
An impairment review of the interest-only strip receivable is performed
quarterly by calculating the net present value of the expected future excess
spread cash flows after giving effect to changes in assumptions due to market
and economic changes and the performance of the loan pool to date. The discount
rate used is the same as that used to record the initial interest-only strip
receivable. Impairment is determined on a disaggregated basis consistent with
the risk characteristics of the underlying finance contracts, consisting
principally of origination date and originating dealership, as well as the
performance of the pool to date. To the extent that the Company deems the asset
to be permanently impaired, the Company would record a charge against earnings
and write down the asset accordingly. The Company recorded an adjustment to
other income (loss) of $467,926 during the nine months ended September 30, 1997
as a result of the impairment review. Should the Company be unable to sell
finance contracts acquired during a financial reporting period, the Company
would likely incur a significant decline in total revenues and net income or
report a loss for such period.
The Company's cost basis in finance contracts sold has varied from
approximately 97.5% to 103% of the value of the principal balance of such
finance contracts. This portion of recognized gain on sale varies based on the
Company's cost of insurance covering the finance contracts and the discount
obtained upon acquisition of the finance contracts. Generally, the Company has
acquired finance contracts from dealers at a greater discount than with finance
contracts acquired from third parties. Additionally, costs of sale reduce the
total gain recognized. As the Company's securitization program matures,
placement fees and other costs associated with the sale are expected to shrink
as a percentage of the size of the securitization.
Further, the excess spread component of recognized gain is affected by
various factors, including most significantly, the coupon on the senior investor
securities and the age of the finance contracts in the pool, as the excess
spread cash flow from a pool of aged, as opposed to new, finance contracts is
less. The aging (capture of excess spread prior to securitization) necessarily
results in less available excess spread cash flow from the securitization. The
Company believes that margins in the range of those previously recognized are
sustainable subject to adverse interest rate movements, availability of VSI
insurance at current rates and the Company's ability to continue purchasing
finance contracts from dealers at approximately an 8.5% discount.
The gain on sale of finance contracts is affected by the aggregate
principal balance of contracts securitized and the gross interest spread on
those contracts. The following table illustrates the gross interest spread for
each of the Company's securitizations (dollars in thousands):
20
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
WEIGHTED
REMAINING AVERAGE
BALANCE AT CONTRACT CERTIFICATE GROSS
SECURITIZATION BALANCE(1) SEPTEMBER 30, 1997 RATE RATE RATINGS(2) SPREAD(3)
- ------------------------------------------ ---------- ------------------ -------- ----------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AutoBond Receivables Trust 1995-A......... $ 26,261 $ 13,577 18.9% 7.23% A/A3 11.7%
AutoBond Receivables Trust 1996-A......... 16,563 10,438 19.7% 7.15% A/A3 12.5%
AutoBond Receivables Trust 1996-B......... 17,833 12,001 19.7% 7.73% A/A3 12.0%
AutoBond Receivables Trust 1996-C......... 22,297 18,248 19.7% 7.45% A/A3 12.3%
AutoBond Receivables Trust 1996-D......... 25,000 21,862 19.5% 7.37% A/A3 12.1%
AutoBond Receivables Trust 1997-A(4)...... 27,196 23,951 20.8% 7.82% A/A2 13.0%
BBB/BB
AutoBond Receivables Trust 1997-B(6)...... 34,725 33,937 19.9% 7.66% A/A3 12.3%
AutoBond Receivables Trust 1997-C(5)(6)... 34,430 34,430 20.0% 7.56% A/A3 12.5%
---------- ------------------
Total................................ $204,305 $168,444
---------- ------------------
---------- ------------------
</TABLE>
- ------------
(1) Refers only to balances on senior investor certificates.
(2) Indicates ratings by Fitch Investors Service, L.P. ('Fitch') and Moody's
Investors Service, Inc. ('Moody's'), respectively.
(3) Difference between weighted average contract rate and senior certificate
rate.
(4) Includes Class A and Class B Notes.
(5) Transaction closed subsequent to September 30, 1997.
(6) See 'Prospectus Summary -- Recent Developments' for a discussion of recent
actions taken by Fitch and Moody's.
------------------------
On June 30, 1997, a new warehouse and securitization structure was formed
whereupon finance contracts were transferred to a special purpose entity. The
special purpose entity issued variable funding warehouse notes which are
convertible into term notes at the option of the holder of such notes. The
transfer of the finance contracts to the special purpose entity was recognized
as a sale under SFAS No. 125.
Servicing Fee Income. The Company earns substantially all of its servicing
fee income on the contracts it services on behalf of securitization trusts.
Servicing fee income consists of: (i) contractual administrative fees received
through securitizations, equal to $7.00 per month per contract included in each
trust (excluding amounts paid to third-party servicers by the trust); (ii) the
accretion of the discount applied to excess spread cash flows in calculating the
carrying value of the interest-only strip receivable; and (iii) fee income
earned as servicer for such items as late charges and documentation fees, which
are earned whether or not a securitization has occurred. During 1997, the
Company assumed all loan servicing responsibilities in respect of warehousing
and the securitization trusts, resulting in an increase in gross contractual
servicing fees from $7 to $15 per month per contract.
FINANCE CONTRACT ACQUISITION ACTIVITY
The following table sets forth information about the Company's finance
contract acquisition activity (dollars in thousands):
21
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Number of finance contracts acquired......................................... 5,624 9,208
Principal balance of finance contracts acquired......................... $ 62,080 $ 104,811
Number of active dealerships(1)......................................... 322 839
Number of enrolled dealerships(2)....................................... 603 1,383
</TABLE>
- ------------
(1) Dealers who have sold at least one finance contract to the Company during
the period.
(2) Total number of dealerships which were enrolled as of the end of the period.
RESULTS OF OPERATIONS
Period-to-period comparisons of operating results may not be meaningful,
and results of operations from prior periods may not be indicative of future
results. The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
NET INCOME
In the three months ended September 30, 1997, net income decreased $771,568
to $511,814 from $1,283,382 for the three months ended September 30, 1996. The
decrease in net income was attributable to the expense factors discussed below.
The Company does not expect any material benefits from the increase in personnel
and infrastructure investments to be realized until 1998 at the earliest, due to
the time required to integrate such personnel into its operations, and realize
the benefits of increased capacity.
TOTAL REVENUES
Total revenues increased $1,892,983 to $6,370,219 for the three months
ended September 30, 1997 from $4,477,236 for the three months ended September
30, 1996 due to expansion of the Company's finance contract acquisition and
securitization activities.
Interest Income. Interest income increased $713,112 to $1,313,670 for the
three months ended September 30, 1997 from $600,558 for the three months ended
September 30, 1996 due the growth and timing of finance contract acquisitions.
The Company acquired finance contracts totaling $34.6 million during the three
months ended September 30, 1997 compared to $28.1 million in the comparable 1996
period. Accretion on the interest-only strip receivables increased $176,412 from
the respective 1996 period to $236,483 during the three months ended September
30, 1997.
Gain on Sale of Finance Contracts. The Company recognized gain on sale
totaling $4,840,621 on finance contracts carried at $31.0 million (15.6%) during
the three months ended September 30, 1997. Gain on sale amounted to $3,679,081
on finance contracts carried at $23.2 million (15.9%) in the comparable 1996
period. Accordingly, gain on sale of finance contracts rose $1,161,540 during
the three months ended September 30, 1997 over the comparable 1996 period.
Servicing Fee Income. The Company reports servicing fee income only with
respect to finance contracts that are securitized. For the three months ended
September 30, 1997, servicing fee income was $225,389, primarily collection
agent fees. Servicing fee income increased by $27,792 from the three months
ended September 30, 1996 as a result of increased securitization activity by the
Company. The ratio of servicing fee income to the average principal balance of
finance contracts outstanding declined from 1.1% at September 30, 1996 to .5% at
September 30, 1997 on an annualized basis as the Company waived $55,843 in
servicing fees during the latter period. The Company waived these servicing fees
to enhance the liquidity of specific outstanding securitization trusts during
the third quarter of 1997, increasing the rate of repayment of non-recourse
notes. The result of such waiver is the deferral and subordination of the
Company's ultimate receipt of such waived fees.
22
<PAGE>
<PAGE>
Other Income (Loss). For three months ended September 30, 1997, other loss
amounted to $9,461, compared with $0 for the comparable 1996 period. Other loss
included unrealized loss on the Company's Class B certificates totaling $27,463
recorded during the three months ended September 30, 1997.
TOTAL EXPENSES
Total expenses of the Company increased $2,993,727 to $5,573,445 for the
three months ended September 30, 1997 from $2,579,718 for the three months ended
September 30, 1996. The ratio of total expenses to the average principal balance
of finance contracts outstanding declined from 14.9% for the three months ended
September 30, 1996 to 13.5% for the three months ended September 30, 1997 on an
annualized basis.
Provision for Credit Losses. Provision for credit losses on finance
contracts rose to $125,000 for the three months ended September 30, 1997
compared to $49,750 for the three months ended September 30, 1996. The Company
charged off loans totaling $105,173 to the allowance for credit losses during
the three months ended September 30, 1997.
Interest Expense. Interest expense rose to $1,102,195 for the three months
ended September 30, 1997 from $669,815 for the three months ended September 30,
1996. Interest expense increased by $432,380 due to higher net borrowing costs
associated with the revolving credit facilities, along with increased debt
issuance costs amortization of $96,800.
Salaries and Benefits. Salaries and benefits increased $904,058 to
$2,140,420 for the three months ended September 30, 1997 from $1,236,352 for the
three months ended September 30, 1996. This increase was due primarily to an
increase in the number of the Company's employees necessary to handle the
increased contract acquisition volume and the collection activities on a growing
portfolio of finance contracts. The number of employees of the Company increased
by 99 to 198 employees at September 30, 1997, compared to 99 employees at
September 30, 1996. Due to weakened competitors, the Company more aggressively
added professionals as they became available in the three months ended September
30, 1997 and this added to the growth in salary and benefit expenses.
General and Administrative Expenses. General and administrative expenses
increased $1,289,526 to $1,722,689 for the three months ended September 30, 1997
from $433,163 for the three months ended September 30, 1996. This increase was
due primarily to growth in the Company's operations. General and administrative
expenses consist principally of office, furniture and equipment leases,
professional fees, non-employee marketing commissions, communications and office
supplies, and are expected to increase as the Company continues to grow and also
due to the costs of operating as a public company.
Other Operating Expenses. Other operating expenses (consisting principally
of servicer fees, credit bureau reports and insurance) increased $292,503 to
$483,141 for the three months ended September 30, 1997 from $190,638 for the
three months ended September 30, 1996. This increase was due to increased
finance contract acquisition volume.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
NET INCOME
In the nine months ended September 30, 1997, net income decreased
$1,414,436 to $1,657,711 from $3,072,147 for the nine months ended September 30,
1996. The decrease in net income was primarily attributable to an increase in
infrastructure costs to support higher finance contract acquisition and
servicing volume, as more fully discussed under 'Total Expenses' below. The
principal balance of finance contracts acquired increased $42.7 million to
$104.8 million for the nine months ended September 30, 1997 from $62.1 million
for the nine months ended September 30, 1996. Due to weakened competitors, the
Company more aggressively added qualified personnel as they became available in
the nine months ended September 30, 1997, and this added to the growth in salary
and benefit expenses.
23
<PAGE>
<PAGE>
TOTAL REVENUES
Total revenues increased $4,800,928 to $16,769,709 for the nine months
ended September 30, 1997 from $11,968,781 for the nine months ended September
30, 1996 due to expansion of the Company's finance contract acquisition and
securitization activities.
Interest Income. Interest income increased $1,036,493 to $3,107,402 for the
nine months ended September 30, 1997 from $2,070,909 for the nine months ended
September 30, 1996 due the growth and timing of finance contract acquisitions.
The Company acquired finance contracts totaling $104.8 million during the nine
months ended September 30, 1997 compared to $62.1 million in the comparable 1996
period. Accretion on the interest-only strip receivables increased $225,285 from
the respective 1996 period to $339,266 during the nine months ended September
30, 1997.
Gain on Sale of Finance Contracts. The Company realized gain on sale
totaling $13,532,765 on finance contracts carried at $97.2 million (14.0 %)
during the nine months ended September 30, 1997. Gain on sale amounted to
$9,423,067 on finance contracts carried at $59.0 million (16.0%) in the
comparable 1996 period. Accordingly, gain on sale of finance contracts rose
$4,109,698 during the nine months ended September 30, 1997 over the comparable
1996 period.
Servicing Fee Income. The Company reports servicing fee income only with
respect to finance contracts that are securitized. For the nine months ended
September 30, 1997, servicing fee income was $659,791, primarily collection
agent fees. Servicing fee income increased by $184,986 from the nine months
ended September 30, 1996 as a result of increased securitization activity by the
Company. The ratio of servicing fee income to the average principal balance of
finance contracts outstanding declined from 1.2% at September 30, 1996 to .6% at
September 30, 1997 on an annualized basis, as the Company waived $55,843 in
servicing fees during the later period. The Company waived these servicing fees
to enhance the liquidity of specific outstanding securitization trusts during
the third quarter of 1997, increasing the rate of repayment of non-recourse
notes. The result of such waiver is the deferral and subordination of the
Company's ultimate receipt of such waived fees.
Other Income (Loss). For nine months ended September 30, 1997, other loss
amounted to $530,249, compared with $0 for the comparable 1996 period. The
Company recorded a charge against earnings for permanent impairment of the
interest-only strip receivable, determined on a disaggregated basis, of $467,926
during nine months ended September 30, 1997. Additionally, unrealized loss on
the Company's Class B certificates totaled $80,325 during the nine months ended
September 30, 1997.
TOTAL EXPENSES
Total expenses of the Company increased $7,053,815 to $14,216,313 for the
nine months ended September 30, 1997 from $7,162,498 for the nine months ended
September 30, 1996. The ratio of total expenses to the average principal balance
of finance contracts outstanding declined from 17.6% for the nine months ended
September 30, 1996 to 13.4% for the nine months ended September 30, 1997 on an
annualized basis. As of December 1, 1997 the Company completed the transfer of
certain servicing functions from LSE to in-house personnel and equipment. The
Company incurred significant expenses in the hiring and training of personnel as
well as the acquisition and leasing of equipment primarily to facilitate the
servicing transfer during the nine months ended September 30, 1997. For example,
the incremental equipment expense for the period was approximately $340,000.
Provision for Credit Losses. Provision for credit losses on finance
contracts increased $11,766 to $125,000 for the nine months ended September 30,
1997 from $113,234 for the nine months ended September 30, 1996.
Interest Expense. Interest expense rose to $2,930,592 for the nine months
ended September 30, 1997 from $1,807,335 for the nine months ended September 30,
1996. Interest expense increased by $1,123,257 due to higher borrowing volumes
outstanding under the revolving credit facilities, along with increased debt
issuance costs amortization of $391,962.
Salaries and Benefits. Salaries and benefits increased $2,330,646 to
$5,413,045 for the nine months ended September 30, 1997 from $3,082,399 for the
nine months ended September 30, 1996. This increase was due primarily to an
increase in the number of the Company's employees necessary to handle the
24
<PAGE>
<PAGE>
increased contract acquisition volume and the collection activities on a growing
portfolio of finance contracts. As of December 1, 1997 the Company completed the
transfer of certain servicing functions from LSE to in-house personnel and
equipment. The Company incurred significant expenses in the hiring and training
of personnel as well as the acquisition and leasing of equipment to facilitate
the servicing transfer during the nine months ended September 30, 1997.
General and Administrative Expenses. General and administrative expenses
increased $3,164,335 to $4,481,846 for the nine months ended September 30, 1997
from $1,317,511 for the nine months ended September 30, 1996. This increase was
due primarily to growth in the Company's operations. General and administrative
expenses consist principally of office, furniture and equipment leases,
professional fees, non-employee marketing commissions, communications and office
supplies, and are expected to increase as the Company continues to grow and also
due to the costs of operating as a public company.
Other Operating Expenses. Other operating expenses (consisting principally
of servicer fees, credit bureau reports and insurance) increased $423,811 to
$1,265,830 for the nine months ended September 30, 1997 from $842,019 for the
nine months ended September 30, 1996. This increase was due to increased finance
contract acquisition volume.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET INCOME
In the year ended December 31, 1996, net income increased to $3.6 million
from $873,487 for the year ended December 31, 1995. Net income for the year
ended December 31, 1996 includes an extraordinary charge of $100,000, net of
income tax benefits of $50,000, which represents the prepayment penalty
associated with the early redemption of the Class B Certificate Notes from the
1995-A securitization. The increase in net income was primarily attributable to
an increase in the number of finance contracts securitized during 1996: $81.6
million, compared to $26.2 million in 1995.
TOTAL REVENUES
Total revenues increased $9.1 million to $14.0 million for the year ended
December 31, 1996 from $4.9 million for the year ended December 31, 1995 due to
growth in finance contract acquisition and securitization activity.
Net Interest Income. Net interest income decreased $644,300 to $136,794 for
the year ended December 31, 1996 from $781,094 for the year ended December 31,
1995. The decrease in net interest income was primarily due to a reduction in
the average daily balance of finance contracts held for sale. This was due to
the fact that the Company securitized its production quarterly in 1996 versus a
single securitization in 1995. Interest income also declined due to an increase
in overall net borrowing costs and fees associated with non-recourse term loans
and Revolving Credit Facilities. Finally, there is no spread between the
interest rate earned on the Class B certificates and the related non-recourse
loans collateralized by such certificates. The increase in the outstanding
balance of the Class B certificates and the related debt causes net interest
income to narrow. The average APR of outstanding finance contracts was 19.8% at
December 31, 1997, compared with 19.5% at December 31, 1996.
Gain on Sale of Finance Contracts. For the year ended December 31, 1996,
gain on sale of finance contracts amounted to $12.8 million. For the year ended
December 31, 1996, the Company completed four securitizations aggregating
approximately $81.6 million in principal amount of finance contracts and the
gain on sale of finance contracts accounted for 91.6% of total revenues. For the
year ended December 31, 1995, there was one securitization transaction in the
principal amount of $26.2 million. The gain on sale of finance contracts for
this sale transaction accounted for 84.0% of total revenues in 1995.
Servicing Fee Income. The Company reports servicing fee income only with
respect to finance contracts that are securitized. For the year ended December
31, 1996, servicing fee income was $657,950, of which $402,017 was collection
agent fees, $154,029 resulted from discount accretion on the excess servicing
receivable, $50,000 was management fees from an affiliated company, and $51,904
arose
25
<PAGE>
<PAGE>
from other sources. The Company had completed only one securitization in 1995,
which was completed at December 31, 1995, and had no servicing fee income for
such period.
TOTAL EXPENSES
Total expenses of the Company increased $4.6 million to $8.4 million for
the year ended December 31, 1996 from $3.8 million for the year ended December
31, 1995. Although operating expenses increased during the year ended December
31, 1996, the Company's finance contract portfolio grew at a faster rate than
the rate of increase in operating expenses. Total expenses as a percentage of
total percentage balance of finance contracts acquired in the period decreased
slightly to 10.1% during the year ended December 31, 1996 from 12.2% for the
year ended December 31, 1995, reflecting improved efficiency in the Company's
operations.
Salaries and Benefits. Salaries and benefits increased $3.2 million to $4.5
million for the year ended December 31, 1996 from $1.3 million for the year
ended December 31, 1995. This increase was due primarily to an increase in the
number of the Company's employees necessary to handle the increased contract
acquisition volume and the collection activities on a growing portfolio of
loans, and due to compensation of the Company's Chief Executive Officer, which
the Company began paying in May 1996. See Note 13 to Notes to Consolidated
Financial Statements.
General and Administrative Expenses. General and administrative expenses
increased $868,506 to $2.3 million for the year ended December 31, 1996 from
$1.5 million for the year ended December 31, 1995. This increase was due
primarily to growth in the Company's operations. General and administrative
expenses consist principally of office, furniture and equipment leases,
professional fees, communications and office supplies, and are expected to
increase as the Company continues to grow and also due to the costs of operating
as a public company.
Other Operating Expenses. Other operating expenses (consisting principally
of servicing fees, credit bureau reports and insurance) increased $156,628 to
$1.1 million for the year ended December 31, 1996 from $963,017 for the year
ended December 31, 1995. This increase was due to increased finance contract
acquisition volume.
FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED TO PERIOD FROM AUGUST 1, 1994
(INCEPTION) THROUGH DECEMBER 31, 1994
NET INCOME
Net income increased to $873,487 for the fiscal year ended December 31,
1995 from a net loss of $544,605 for the period from inception through December
31, 1994. This increase was primarily attributable to the Company's initial
securitization transaction having been completed in December 1995, as well as
growth in finance contract acquisitions.
TOTAL REVENUES
Total revenues increased to $4.9 million for the fiscal year ended December
31, 1995 from $19,001 for the period from inception through December 31, 1994.
Although the Company was incorporated in June 1993, it did not commence
operations until August 1994; thus the period from inception through December
31, 1994 reflects only five months of start-up operations.
Net Interest Income. Net interest income increased $762,093 to $781,094 for
the fiscal year ended December 31, 1995 from $19,001 for the period from
inception through December 31, 1994. The increase in net interest income was
primarily due to an increase in average balance of finance contracts held for
sale. The average daily balance of outstanding finance contracts increased $13.8
million to $14.7 million for the fiscal year ended December 31, 1995 from
$855,640 for the period from inception through December 31, 1994. The average
APR of finance contracts outstanding was 19.3% at December 31, 1995 as compared
to 19.1% at December 31, 1994.
Gain on Sale of Finance Contracts. In the fiscal year ended December 31,
1995, the gain on sale of finance contracts was $4.1 million, or 83.9% of total
revenues, from the securitization of approximately
26
<PAGE>
<PAGE>
$26.2 million in finance contracts and the sale of finance contracts to a third
party. For the period from inception through December 31, 1994, there were no
securitization.
Servicing Fee Income. The Company completed its first securitization
transaction on December 29, 1995; therefore prior to 1996 there was no servicing
fee income collected by the Company.
TOTAL EXPENSES
Total expenses of the Company increased $3.2 million to $3.8 million for
the fiscal year ended December 31, 1995 from $563,606 for the five-month period
ended December 31, 1994. Although operating expenses increased during the year
ended December 31, 1995, the Company's finance contract portfolio grew at a
faster rate than the rate of increase in operating expenses. As a result, total
expenses as a percentage of total principal balance of finance contracts
acquired in period decreased to 12.2% in the year ended December 31, 1995 from
23.0% in the five months ended December 31, 1994.
Provision for Credit Losses. Provision for credit losses increased $3,702
to $48,702 for the fiscal year ended December 31, 1995, from $45,000 for the
period from inception through December 31, 1994. This increase was due primarily
to increased acquisition volume and does not reflect any change in expected
defaults as a percentage of finance contracts purchased.
Salaries and Benefits. Salaries and benefits increased $1.1 million to $1.3
million for the fiscal year ended December 31, 1995 from $225,351 for the
five-month period ended December 31, 1994. This increase was due primarily to an
increase in the number of the Company's employees.
General and Administrative Expenses. General and administrative expenses
increased $1.2 million to $1.5 million for the fiscal year ended December 31,
1995 from $244,974 for the five-month period ended December 31, 1994. This
increase was due primarily to growth in the Company's operations.
Other Operating Expenses. Other operating expenses increased $914,736 to
$963,017 for the fiscal year ended December 31, 1995, from $48,281 for the
five-month period ended December 31, 1994, due to the increase in finance
contracts acquired.
FINANCIAL CONDITION
Restricted Cash. Restricted cash increased $3.2 million to $6.2 million at
September 30, 1997 from $3.0 million at December 31, 1996. In accordance with
the Company's revolving credit facilities, proceeds advanced by the lender for
purchase of finance contracts are held by a trustee until the Company delivers
qualifying collateral to release the funds, normally in a matter of days. The
trustee held $6.1 million of funds advanced for the purchase of finance
contracts at September 30, 1997. The Company is also required to maintain a cash
reserve with its lenders of 1% to 6% of the proceeds received from the lender
for the origination of the finance contracts. Access to these funds is
restricted by the lender; however, such funds may be released in part upon the
occurrence of certain events including payoffs of finance contracts.
Finance Contracts Held for Sale, Net. Finance contracts held for sale, net
of allowance for credit losses, increased $771,109 to $1.0 million at September
30, 1997, from $228,429 at December 31, 1996. The number and principal balance
of contracts held for sale are largely dependent upon the timing and size of the
Company's securitizations. The Company plans to securitize finance contracts on
a regular basis.
27
<PAGE>
<PAGE>
Interest-Only Strip Receivable. The following table provides historical
data regarding the interest-only strip receivable:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1997
-------------
<S> <C>
Beginning balance.................................................... $ 4,247,274
Unrealized appreciation.............................................. 1,918,138
Additions............................................................ 3,942,033
Accretion............................................................ 339,266
Impairment charge.................................................... (467,926)
-------------
Ending balance....................................................... $ 9,978,785
-------------
-------------
</TABLE>
Trust Receivable. At the time a securitization closes, the Company's
securitization subsidiary is required to fund a cash reserve account within the
trust to provide additional credit support for the senior investor securities.
Additionally, depending on the structure of the securitization, a portion of the
future excess spread cash flows from the trust is required to be deposited in
the cash reserve account to increase the initial deposit to a specified level.
Amounts on deposit in cash reserve accounts are also reflected as advances to
the relevant trust under the item 'Cash flows from investing activities' in the
Company's consolidated statements of cash flows. The initial cash reserve
deposits for the Company's securitizations follow:
<TABLE>
<CAPTION>
SENIOR INVESTOR INITIAL
CERTIFICATE RESERVE
SECURITIZATION AMOUNT(1) DEPOSIT PERCENT
- ------------------------------------------------------------------ --------------- -------- -------
<S> <C> <C> <C>
AutoBond Receivables Trust 1995-A................................. $26,261,009 $525,220 2.0%
AutoBond Receivables Trust 1996-A................................. 16,563,366 331,267 2.0%
AutoBond Receivables Trust 1996-B................................. 17,833,885 356,658 2.0%
AutoBond Receivables Trust 1996-C................................. 22,297,719 445,934 2.0%
AutoBond Receivables Trust 1996-D................................. 25,000,000 500,000 2.0%
AutoBond Receivables Trust 1997-A(2).............................. 28,037,167 560,743 2.0%
AutoBond Receivables Trust 1997-B................................. 34,725,196 868,130 2.5%
AutoBond Receivables Trust 1997-C(3).............................. 34,430,079 860,752 2.5%
</TABLE>
- ------------
(1) Refers only to balances on senior investor certificates upon issuance.
(2) Includes Class A, Class B and Class C-1 Notes.
(3) Transaction closed subsequent to September 30, 1997.
------------------------
A portion of excess spread cash flows will increase such reserves until
they reach a target reserve level (initially 6%) of the outstanding balance of
the senior investor certificates.
Prepaid Expenses and Other Assets. Prepaid expenses and other assets
increased $4.9 million to $5.6 million at September 30, 1997 from $683,955 at
December 31, 1996. The Company carried $3.9 million in other assets as of
September 30, 1997 related to the Company's retained interest in amounts
transferred to a special purpose subsidiary which issued variable rate funding
notes. Subsequent to September 30, 1997, Daiwa exercised its option to surrender
its variable rate funding notes for term notes in connection with the AutoBond
Receivables Trust 1997-C securitization.
28
<PAGE>
<PAGE>
DELINQUENCY EXPERIENCE
The following table reflects the delinquency experience of the Company's
finance contract portfolio:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------------- ---------------------
<S> <C> <C> <C> <C>
Principal balance of finance contracts
outstanding...................................... $104,888,892 $165,317,326
Delinquent finance contracts(1):
30-59 days past due........................... 7,916,425 7.55% 14,412,275 8.72%
60-89 days past due........................... 2,102,014 2.00 6,470,196 3.91
90 days past due and over..................... 2,763,300 2.63 7,660,848 4.63
------------ ----- ------------ -----
Total.................................... $ 12,781,739 12.19% $ 28,543,319 17.27%
------------ ----- ------------ -----
------------ ----- ------------ -----
</TABLE>
- ------------
(1) Percentage based upon outstanding balance. Includes finance contracts where
the underlying vehicle is repossessed (but subject to redemption), the
borrower is in bankruptcy, a dealer buy back is expected or where insurance
claims are filed and pending.
CREDIT LOSS EXPERIENCE
An allowance for credit losses is maintained for contracts held for sale.
The Company reports a provision for credit losses on finance contracts held for
sale. Management evaluates the reasonableness of the assumptions employed by
reviewing credit loss experience, delinquencies, repossession trends, the size
of the finance contract portfolio and general economic conditions and trends. If
necessary, assumptions will be changed in the future to reflect historical
experience to the extent it deviates materially from that which was assumed.
Since inception, the Company's assumptions have been consistent and are adequate
based upon actual experience.
If a delinquency exists and a default is deemed inevitable or the
collateral is in jeopardy, and in no event later than the 90th day of
delinquency, the Company's Collections Department will initiate the repossession
of the financed vehicle. Bonded, insured outside repossession agencies are used
to secure involuntary repossessions. In most jurisdictions, notice to the
borrower of the Company's intention to sell the repossessed vehicle is required,
whereupon the borrower may exercise certain rights to cure his or her default
and redeem the automobile. Following the expiration of the legally required
notice period, the repossessed vehicle is sold at a wholesale auto auction (or
in limited circumstances, through dealers), usually within 60 days of the
repossession. The Company closely monitors the condition of vehicles set for
auction, and procures an appraisal under the relevant VSI policy prior to sale.
Liquidation proceeds are applied to the borrower's outstanding obligation under
the finance contract and insurance claims under the VSI policy and, if
applicable, the deficiency balance policy are then filed.
Because of the Company's limited operating history, its finance contract
portfolio is somewhat unseasoned. This effect on the delinquency statistics can
be observed in the comparison of 1997 versus 1996 delinquency percentages. The
portfolio is tangibly more seasoned as of December 31, 1997 versus December 31,
1996. Accordingly, delinquency and charge-off rates in the portfolio may not
fully reflect the rates that may apply when the average holding period for
finance contracts in the portfolio is longer. Increases in the delinquency
and/or charge-off rates in the portfolio would adversely affect the Company's
ability to obtain credit or securitize its receivables.
REPOSSESSION EXPERIENCE -- STATIC POOL ANALYSIS
Because the Company's finance contract portfolio is continuing to grow
rapidly, management does not manage losses on the basis of a percentage of the
Company's finance contract portfolio, because percentages can be favorably
affected by large balances of recently acquired finance contracts. Management
monitors actual dollar levels of delinquencies and charge-offs and analyzes the
data on a 'static pool' basis.
29
<PAGE>
<PAGE>
The following table provides static pool repossession frequency analysis in
dollars of the Company's portfolio performance from inception through September
30, 1997. In this table, all finance contracts have been segregated by quarter
of acquisition. All repossessions have been segregated by the quarter in which
the repossessed contract was originally acquired by the Company. Cumulative
repossessions equals the ratio of repossessions as a percentage of finance
contracts acquired for each segregated quarter. Annualized repossessions equals
an annual equivalent of the cumulative repossession ratio for each segregated
quarter. This table provides information regarding the Company's repossession
experience over time. For example, recently acquired finance contracts
demonstrate very few repossessions because properly underwritten finance
contracts to subprime consumers generally do not default during the initial term
of the contract. Between approximately one year and 18 months of seasoning,
frequency of repossessions on an annualized basis appear to reach a plateau.
Based on industry statistics and the performance experience of the Company's
finance contract portfolio, the Company believes that finance contracts seasoned
in excess of approximately 18 months will start to demonstrate declining
repossession frequency. The Company believes this may be due to the fact that
the borrower perceives that he or she has equity in the vehicle. The Company
also believes that since the loans generally amortize more quickly than the
collateral depreciates, losses and/or repossessions will decline over time.
<TABLE>
<CAPTION>
REPOSSESSION FREQUENCY
---------------------------------------------------------------------------
PRINCIPAL BALANCE OF PRINCIPAL BALANCE
YEAR AND QUARTER OF REPOSSESSIONS BY OF CONTRACTS
ACQUISITION QUARTER ACQUIRED CUMULATIVE(1) ANNUALIZED(2) ACQUIRED
- ------------------------------------------- -------------------- ------------- ------------- -------
<S> <C> <C> <C> <C>
1994
Q3.................................... $ 21,925 21.67% 6.67% $ 101,161
Q4.................................... 565,274 23.19% 7.73% 2,437,674
1995
Q1.................................... 1,434,481 22.73% 8.27% 6,310,421
Q2.................................... 1,386,939 22.40% 8.96% 6,190,596
Q3.................................... 1,482,370 20.48% 9.10% 7,239,813
Q4.................................... 2,725,649 22.36% 11.18% 12,188,863
1996
Q1.................................... 3,041,912 19.67% 11.24% 15,460,823
Q2.................................... 3,584,686 19.36% 12.90% 18,520,410
Q3.................................... 3,199,673 11.39% 9.11% 28,089,899
Q4.................................... 2,653,282 10.86% 10.86% 24,442,500
1997
Q1.................................... 2,318,406 6.65% 8.86% 34,875,869
Q2.................................... 313,936 0.89% 1.78% 35,305,817
Q3.................................... 34,939 0.10% 0.40% 34,629,616
</TABLE>
- ------------
(1) For each quarter, cumulative repossession frequency equals the number of
repossessions divided by the number of contracts acquired.
(2) Annualized repossession frequency converts cumulative repossession frequency
into an annual equivalent (e.g., for Q4 1994, principal balance of $565,274
in repossessions divided by principal balance of $2,437,674 in contracts
acquired, divided by 12 quarters outstanding times four equals an annual
repossession frequency of 7.73%).
30
<PAGE>
<PAGE>
NET LOSS PER REPOSSESSION
Upon initiation of the repossession process, it is the Company's intent to
complete the liquidation process as quickly as possible. The majority of
repossessed vehicles are sold at wholesale auction. The Company is responsible
for the costs of repossession, transportation and storage. The Company's net
charge-off per repossession equals the unpaid balance less the auction proceeds
(net of associated costs) and less proceeds from insurance claims. As less of
the Company's finance contracts are acquired with credit deficiency insurance,
the Company expects its net loss per repossession to increase. The following
table demonstrates the net charge-off per repossessed automobile since
inception.
<TABLE>
<CAPTION>
FROM AUGUST 1, 1994
(INCEPTION) TO
SEPTEMBER 30, 1997
-----------------------
<S> <C>
Number of finance contracts acquired.................................................... 19,405
Number of vehicles repossessed.......................................................... 2,146
Repossessed units disposed of........................................................... 797
Repossessed units awaiting disposition(2)............................................... 1,349
Cumulative gross charge-offs(1)......................................................... $ 8,672,289
Costs of repossession(1)................................................................ 441,147
Proceeds from auction, physical damage insurance and refunds(1)......................... 5,241,514
-----------
Net loss................................................................................ 3,871,922
Deficiency insurance settlement received(1)............................................. (2,082,812)
-----------
Net charge-offs(1)...................................................................... $ 1,789,110
-----------
-----------
Net charge-offs per unit disposed....................................................... 2,245
Recoveries as a percentage of cumulative gross charge-offs(3)........................... 84.46%
</TABLE>
- ------------
(1) Amounts are based on actual liquidation and repossession proceeds (including
insurance proceeds) received on units for which the repossession process had
been completed as of September 30, 1997.
(2) The vehicles may have been sold at auction; however the Company might not
have received all insurance proceeds as of September 30, 1997.
(3) Not including the costs of repossession which are reimbursed by the
securitization trusts.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has primarily funded its operations and the
growth of its finance contract portfolio through six principal sources of
capital: (i) funds provided from borrowers' payments received under finance
contracts held for sale; (ii) borrowings under various warehouse and working
capital facilities; (iii) proceeds from securitization transactions; (iv) cash
flows from servicing fees; (v) proceeds from the issuances of convertible and
subordinated debt and capital contributions of principal shareholders and (vi)
an initial public offering of common stock.
Cash Flows. Significant cash flows related to the Company's operating
activities include the use of cash for purchases of finance contracts, and, cash
provided by payments on finance contracts and sales of finance contracts. Net
cash used in operating activities totaled $6.3 million during the nine months
ended September 30, 1997. The Company used $5.1 million to fund an increase in
other assets during the period, including $3.9 million received upon closing of
the AutoBond Master Funding Corporation 1997-C securitization subsequent to
September 30, 1997. The Company used $99.2 million to purchase finance contracts
and $96.7 million was received from sales of finance contracts, primarily
through securitizations during the nine months ended September 30, 1997.
Significant activities comprising cash flows from investing activities include
net advances to AutoBond securitization trusts of $2.5 million for the nine
months ended September 30, 1997. Cash flows from financing activities include
net borrowings under revolving credit facilities of $4.2 million for the nine
months ended September 30, 1997.
Revolving Credit Facilities. The Company obtains a substantial portion of
its working capital for the acquisition of finance contracts through revolving
credit facilities. Under a warehouse facility, the lender generally advances
amounts requested by the borrower on a periodic basis, up to an aggregate
31
<PAGE>
<PAGE>
maximum credit limit for the facility, for the acquisition and servicing of
finance contracts or other similar assets. Until proceeds from a securitization
transaction are used to pay down outstanding advances, as principal payments are
received on the finance contracts, the principal amount of the advances may be
paid down incrementally or reinvested in additional finance contracts on a
revolving basis.
At September 30, 1997, the Company had no outstanding balance on a $10.0
million revolving credit facility (the 'Sentry Facility') with Sentry Financial
Corporation ('Sentry'), which expires on December 31, 2000. The proceeds from
borrowings under the Sentry Facility are used to acquire finance contracts, to
pay applicable credit default insurance premiums and to make deposits to a
reserve account with Sentry. The Company pays a utilization fee of up to 0.21%
per month on the average outstanding balance under the Sentry Facility. The
Sentry Facility also requires the Company to pay up to 0.62% per quarter on the
average unused balance. Interest is payable monthly and accrues at a per annum
rate of prime plus 1.75% (10.25% at September 30, 1997).
The Sentry Facility contains certain conditions and imposes certain
requirements, including, among other things, minimum net worth and cash and cash
equivalent balances in the reserve accounts. In April 1996, the Company paid a
one-time commitment fee of $700,000 to Sentry. Under the Sentry Facility, the
Company incurred interest expense of $358,174 for the nine months ended
September 30, 1997.
The Company and its wholly owned subsidiary, AutoBond Funding Corporation
II, entered into a $50 million revolving warehouse facility (the 'Daiwa
Facility') with Daiwa Finance Corporation ('Daiwa') effective as of February 1,
1997. Advances under the Daiwa Facility mature on the earlier of 120 days
following the date of the advance or March 31, 1998. The proceeds from the
borrowings under the Daiwa Facility are to be used to acquire finance contracts
and to make deposits to a reserve account. The Daiwa Facility is collateralized
by the finance contracts acquired with the outstanding advances. The Daiwa
Facility does not require that the loans funded be covered by default deficiency
insurance. Interest is payable upon maturity of the advances and accrues at the
lesser of (x) 30 day LIBOR plus 1.15% (6.81% at September 30, 1997), or (y) 11%
per annum. The Company also pays a non-utilization fee of .25% per annum on the
unused amount of the line of credit. Pursuant to the Daiwa Facility, the Company
paid a $243,750 commitment fee. The debt issuance cost is being amortized as
interest expense on a straight line basis through March 1998. The Daiwa Facility
contains certain covenants and representations similar to those in the
agreements governing the Company's existing securitizations including, among
other things, delinquency and repossession triggers. At December 31, 1997,
remaining availability under the Daiwa Facility totaled $15.8 million. The
Company incurred interest expense under the Daiwa Facility of approximately
$816,396 during the nine months ended September 30, 1997.
On June 30, 1997, the Daiwa Facility was amended to allow the Company, at
its election, to transfer finance contracts into a qualified unconsolidated
special purpose subsidiary, AutoBond Master Funding Corporation. In conjunction
with these transfers, this special purpose subsidiary issues variable funding
warehouse notes which are convertible into term notes at the option of the
holder of such notes. Transfers of finance contracts to the special purpose
entity have been recognized as sales under SFAS No. 125.
Notes Payable. In January 1998, the Company privately placed with
BancBoston Investments, Inc. ('BancBoston') $7,500,000 in aggregate principal
amount of its 15% senior subordinated convertible notes (the 'Subordinated
Notes'). Interest on the Subordinated Notes is payable quarterly until maturity
on February 1, 2001. The Subordinated Notes are convertible at the option of the
holder for up to 368,462 shares of Common Stock, at a conversion price of $3.30
per share, subject to adjustment under standard anti-dilution provisions. In the
event of a change of control transaction, the holder of the Subordinated Notes
may require the Company to repurchase the Subordinated Notes at 100% of the
principal amount plus accrued interest. The Subordinated Notes are redeemable at
the option of the Company on or after July 1, 1999 at redemption prices starting
at 105% of the principal amount, with such premium reducing to par on and after
November 1, 2000, plus accrued interest. The Subordinated Notes were issued
pursuant to an Indenture, dated as of January 30, 1998 (the 'Indenture') between
the Company and BankBoston, N.A., as agent. The Indenture contains certain
restrictive covenants
32
<PAGE>
<PAGE>
including (i) a consolidated leveraged ratio not to exceed 2 to 1 (excluding
nonrecourse warehouse debt and securitization debt), (ii) limitations on
restricted payments such as dividends (but excluding, so long as no event of
default has occurred under the Indenture, dividends or distributions on the
Preferred Stock), (iii) limitations on sales of assets other than in the
ordinary course of business and (iv) certain financial covenants, including a
minimum consolidated net worth test of $12 million (plus proceeds from equity
offerings), a minimum ratio of earnings to interest of 1.5 to 1, and a maximum
cumulative repossession ratio of 27%.
Events of default under the Indenture include failure to pay, breach of
covenants, cross-defaults in excess of $1 million, or material breach of
representations or covenants under the purchase agreement with BancBoston.
In connection with the issuance of the Subordinated Notes, the Company
issued a warrant to BancBoston for the purchase, commencing after the maturity
of the Subordinated Notes, of shares of Common Stock to the extent not issued
upon conversion of the Subordinated Notes, at an exercise price of $3.30 per
share. BancBoston has the option, upon the commencement of this Offering, to
purchase an additional $2,500,000 in Subordinated Notes, convertible into an
additional 122,820 shares of Common Stock at $3.30 per share.
Pursuant to an agreement (the 'Securities Purchase Agreement') entered into
on June 30, 1997, the Company issued by private placement $2,000,000 in
aggregate principal amount of senior secured convertible notes ('Convertible
Notes'). Interest is payable quarterly at a rate of 18% per annum until maturity
on June 30, 2000. If the Company pays down the Convertible Notes in full prior
to June 30, 1998, the holders will have no conversion rights. The Convertible
Notes, collateralized by the interest-only strip receivables from the Company's
first four securitizations, are convertible into shares of common stock of the
Company upon the earlier to occur of (i) an event of default on the Convertible
Notes and (ii) June 30, 1998, through the close of business on June 30, 2000,
subject to prior redemption. The conversion price is equal to the outstanding
principal amount of the Convertible Note being converted divided by the lesser
of (x) $5.00 (as adjusted by the terms of the Securities Purchase Agreement) and
(y) 85% of the average of the five lowest closing bid prices of the Company's
common stock on the Nasdaq Stock Market, or such other exchange or market where
the common stock is then traded during the 60 trading days immediately preceding
the date the Convertible Note is converted or the applicable date of repayment
(subject to adjustment under certain circumstances specified in the Securities
Purchase Agreement). The Company also paid certain debt issuance costs to the
purchaser totaling $25,000, which is being amortized as interest expense on a
straight line basis through June 30, 2000.
Also pursuant to the Securities Purchase Agreement, the Company issued
warrants which upon exercise allow the holders to purchase up to 200,000 shares
of common stock at $4.225 per share. The warrants are exercisable to the extent
the holders thereof purchase up to $10,000,000 of the Company's subordinated
asset-backed securities before June 30, 1998. To date, the holders have
purchased $5,800,000 of subordinated asset-backed securities.
Securitization Program. In its securitization transactions through the end
of 1996, the Company sold pools of finance contracts to a special purpose
subsidiary, which then assigned the finance contracts to a trust in exchange for
cash and certain retained beneficial interests in future excess spread cash
flows. The trust issued two classes of fixed income investor certificates:
'Class A Certificates' which were sold to investors, generally at par with a
fixed coupon, and subordinated excess spread certificates ('Class B
Certificates'), representing a senior interest in excess spread cash flows from
the finance contracts, which were typically retained by the Company's
securitization subsidiary and which collateralize borrowings on a non-recourse
basis. The Company also funded a cash reserve account that provides credit
support to the Class A Certificates. The Company's securitization subsidiaries
also retained a 'Transferor's Interest' in the contracts that is subordinate to
the interest of the investor certificate holders.
In the Company's March 1997, August 1997 and October 1997 securitization
transactions, the Company sold a pool of finance contracts to a special purpose
subsidiary, which then assigned the finance contracts to an indenture trustee.
Under the trust indenture, the special purpose subsidiary issued classes of
senior and subordinated fixed income investor notes, which were sold to
investors, generally at par, with fixed coupons. The subordinated notes
represent a senior interest in certain excess
33
<PAGE>
<PAGE>
spread cash flows from the finance contracts. In addition, the securitization
subsidiary retained rights to the remaining excess spread cash flows. The
Company also funded cash reserve accounts that provide credit support to the
notes.
The retained interests entitle the Company to receive the future cash flows
from the trust after payment to investors, absorption of losses, if any, that
arise from defaults on the transferred finance contracts and payment of the
other expenses and obligations of the trust.
Securitization transactions impact the Company's liquidity primarily in two
ways. First, the application of proceeds toward payment of the outstanding
advances under warehouse credit facilities makes additional borrowing available,
to the extent of such proceeds, under those facilities for the acquisition of
additional finance contracts. During the nine months ended September 30, 1997,
the Company securitized approximately $97.2 million in nominal principal amount
of finance contracts and used the net proceeds to pay down borrowings under its
warehouse credit facilities.
Second, additional working capital has been obtained through the Company's
practice of borrowing funds, on a non-recourse basis, its interest in future
excess spread cash flows from its securitizations. At September 30, 1997, the
Company held interest-only strip receivables and Class B Certificates totaling
$18.4 million, substantially all of which had been pledged to collateralize
notes payable of $10.3 million. To date the Company has raised $17.8 million
through such non-recourse excess spread notes which is more than the amount the
company has raised in all other recourse debt and equity offerings. This is
significant in two respects: (i) the Company has in eight securitizations
monetized 3-12% more than the principal balance of securitized contracts and
(ii) the Company has not had as much of a mismatch between cash and GAAP income
as is typically the case in the sub-prime auto finance industry. However,
successful marketing of subordinated securities, including excess spread notes,
from securitizations has become more difficult and the Company will not longer
rely on monetizing these interests.
Management recognizes that the ability to monetize residual cash flows from
securitizations in 1998 is uncertain and that both warehousing and
securitization of the Company's finance contracts will require greater levels of
cash outlays by the Company. Accordingly, the Company intends to tap the equity
markets, initially in the context of this Offering, as well as the debt markets
(initially in connection with the Company's placement of Senior Subordinated
Notes), in order to meet its cash needs during 1998 and to take better advantage
of growth opportunities. There can be no assurance, however, that the Company
will be able to obtain such additional funding.
Initial Public Offering. On November 14, 1996, the Company completed the
initial public offering of its Common Stock. The closing comprised 825,000
shares sold by the Company (including 75,000 shares issued pursuant to the
exercise of the underwriters over allotment option) and 250,000 shares sold by
the Selling Shareholders. With a price to public of $10 per share and an
underwriting discount at $.70 per share, the Company received gross proceeds of
$7,492,500 from the offering, from which it paid offering expenses of
approximately $1.8 million. The net proceeds were utilized for working capital,
repayment of subordinated debt of $300,000 and investment in finance contracts.
The statements contained in this document that are not historical facts are
forward looking statements. Actual results may differ from those projected in
the forward looking statements. These forward looking statements involve risks
and uncertainties, including but not limited to the following risks and
uncertainties: changes in the performance of the financial markets, in the
demand for and market acceptance of the Company's loan products, and in general
economic conditions, including interest rates, presence of competitors with
greater financial resources and the impact of competitive products and pricing;
the effect of the Company's policies; and the continued availability to the
Company of adequate funding sources. Investors are also directed to other risks
discussed in document filed by the Company with the Securities and Exchange
Commission.
IMPACT OF INFLATION AND CHANGING PRICES
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 during the
period leading up to a securitization, and in many cases purchases finance
contracts bearing a fixed rate nearly equal but less than the maximum interest
rate permitted by law, increased costs of borrowed funds
34
<PAGE>
<PAGE>
could have a material adverse impact on the Company's profitability. Inflation
also can adversely affect the Company's operating expenses.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ('FASB') issued
Statement of Financial Accounting Standards ('SFAS') No. 128 'Earnings Per
Share.' SFAS No. 128 specifies the computation, presentation and disclosure
requirements for earnings per share and is designed to improve earnings per
share information by simplifying the existing computational guidelines and
revising the previous disclosure requirements. The statement is effective for
periods ending after December 15, 1997, including interim periods.
In June 1997, the FASB issued SFAS No. 130, 'Reporting Comprehensive
Income,' which establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Also in June 1997, the FASB issued SFAS No. 131, 'Disclosure about Segments
of an Enterprise and Restated Information,' which establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
is effective for financial statements for periods beginning after December 15,
1997.
The Company does not believe the implementation of these recent accounting
pronouncements will have a material effect on its consolidated financial
statements.
35
<PAGE>
<PAGE>
BUSINESS
GENERAL
The Company is a specialty consumer finance company engaged in
underwriting, acquiring, servicing and securitizing retail installment contracts
('finance contracts') originated by franchised automobile dealers in connection
with the sale of used and, to a lesser extent, new vehicles to selected
consumers with limited access to traditional sources of credit ('sub-prime
consumers'). Sub-prime consumers generally are borrowers unable to qualify for
traditional financing due to one or more of the following reasons: negative
credit history (which may include late payments, charge-offs, bankruptcies,
repossessions or unpaid judgments); insufficient credit; employment or residence
histories; or high debt-to-income or payment-to-income ratios (which may
indicate payment or economic risk).
The Company acquires finance contracts generally from franchised automobile
dealers, makes credit decisions using its own underwriting guidelines and credit
personnel and performs the collection function for finance contracts using its
own collections department. The Company also acquires finance contracts from
third parties other than dealers for which the Company reunderwrites and
collects such finance contracts in accordance with the Company's standard
guidelines. The Company securitizes portfolios of these retail automobile
installment contracts to efficiently utilize limited capital to allow continued
growth and to achieve sufficient finance contract volume to allow profitability.
The Company markets a single finance contract acquisition program to automobile
dealers which adheres to consistent underwriting guidelines involving the
purchase of primarily late-model used vehicles. This has enabled the Company to
securitize those contracts into investment grade securities with similar terms
from one issue to another providing consistency to investors. For the period of
inception through December 31, 1997, the Company acquired 23,386 finance
contracts with an aggregate outstanding principal balance of $269,922,491. Since
inception, the Company has completed eight securitizations pursuant to which it
privately placed $204 million in finance contract-backed securities.
GROWTH AND BUSINESS STRATEGY
The Company's growth strategy anticipates the acquisition of an increasing
number of finance contracts. The key elements of this strategy include: (i)
increasing the number of finance contracts acquired per automobile dealer; (ii)
expanding the Company's presence within existing markets; (iii) penetrating new
markets that meet the Company's economic, demographic and business criteria and
(iv) securitizing portfolios of acquired finance contracts.
To foster its growth and increase profitability, the Company will continue
to pursue a business strategy based on the following principles:
Targeted Market and Product Focus -- The Company targets the sub-prime
auto finance market because it believes that sub-prime finance presents
greater opportunities than does prime lending. This greater opportunity
stems from a number of factors, including the relative newness of sub-prime
auto finance, the range of finance contracts that various sub-prime auto
finance companies provide, the relative lack of competition compared to
traditional automotive financing and the potential returns sustainable from
large interest rate spreads. The Company focuses on late model used rather
than new vehicles, as management believes the risk of loss is lower on used
vehicles due to lower depreciation rates, while interest rates are
typically higher than on new vehicles. For the period from inception
through December 31, 1997, new vehicles and used vehicles represented 6.8%
and 93.2%, respectively, of the finance contract portfolio. In addition,
the Company concentrates on acquiring finance contracts from dealerships
franchised by major automobile manufacturers because they typically offer
higher quality vehicles, are better capitalized, and have better service
facilities than used car dealers.
Efficient Funding Strategies -- Through an investment-grade warehouse
facility and a periodic securitization program, the Company increases its
liquidity, redeploys its capital and reduces its exposure to interest rate
fluctuations. The Company has also developed the ability to borrow funds on
a non-recourse basis, collateralized by excess spread cash flows from its
securitization trusts. The net effect of the Company's funding and
securitization program is to provide more proceeds than
36
<PAGE>
<PAGE>
the Company's acquisition costs, resulting in positive revenue cash flow,
lower overall costs of funding, and permitting loan volume to increase with
limited additional equity capital.
Uniform Underwriting Criteria -- To manage the risk of delinquency or
defaults associated with sub-prime consumers, the Company has utilized
since inception underwriting criteria which are uniformly applied in
evaluating credit applications. This evaluation process is conducted on a
centralized basis utilizing experienced personnel. These uniform
underwriting criteria create consistency in the securitization portfolios
of finance contracts that make them more easily analyzed by the rating
agencies and more marketable and permit static pool analysis of loan
defaults to optimally structure securitizations. See 'Management's
Discussion and Analysis -- Repossession Experience -- Static Pool
Analysis.'
Centralized Operating Structure -- While the Company establishes and
maintains relationships with dealers through sales representatives located
in the geographic markets served by the Company, all of the Company's
day-to-day operations are centralized at the Company's offices in Austin,
Texas. This centralized structure allows the Company to closely monitor its
marketing, funding, underwriting and collections operations and eliminates
the expenses associated with full-service branch or regional offices.
Experienced Management Team -- The Company actively recruits and
retains experienced personnel at the executive, supervisory and managerial
levels. The senior operating management of the Company consists of seasoned
automobile finance professionals with substantial experience in
underwriting, collecting and financing automobile finance contracts. In
1997 the difficulties experienced by several competitors provided an
opportunity to attract experienced personnel to work for the Company.
Hiring in 1998 is not expected to be as rapid but will continue
selectively.
Intensive Collection Management -- The Company believes that intensive
collection efforts are essential to ensure the performance of sub-prime
finance contracts and to mitigate losses. The Company's collections
managers contact delinquent accounts frequently, working cooperatively with
customers to get full or partial payments, but will initiate repossession
of financed vehicles no later than the 90th day of delinquency. As of
September 30, 1997, a total of $20,882,470 or 12.63%, of the Company's
finance contract portfolio were between 30 and 89 days past due and
$7,660,848, or approximately 4.63%, of the Company's finance contracts
outstanding were 90 days past due or greater. The aforementioned
percentages and amounts include loans in the Company's finance contract
portfolio where the Company has discontinued collection efforts, such as
where the underlying vehicle has been repossessed, the borrower is in
bankruptcy, the dealer is to buy back the loan, or where an insurance claim
has been filed. From inception through September 30, 1997, the Company
repossessed 2,146 (approximately 10%) of its financed vehicles, and the
Company had completed the disposal of 797 vehicles, resulting in an average
loss per repossession of approximately $2,245 per vehicle. See
'Management's Discussion and Analysis of Financial Condition & Results of
Operations -- Net Loss Per Repossession.'
Limited Loss Exposure -- To reduce its potential losses on defaulted
finance contracts, the Company historically has insured each finance
contract it funds against damage to the financed vehicle through a vendor's
comprehensive single interest physical damage insurance policy (a 'VSI
Policy'). In addition, in connection with the Company's warehouse financing
and securitizations through December 31, 1996, the Company purchased credit
default insurance through a deficiency balance endorsement (the 'Credit
Endorsement') to the VSI Policy. The Credit Endorsement reimburses the
Company for the difference between the unpaid contract finance balance and
the net proceeds received in connection with the sale of the repossessed
vehicle. Moreover, the Company limits loan-to-value ratios and applies a
purchase price discount to the finance contracts it acquires. The Company's
combination of underwriting criteria, intensive collection efforts and the
VSI Policy and Credit Endorsement has resulted in net charge-offs (after
receipt of liquidation and insurance proceeds) of 15.49% (excluding
repossession costs) of the principal balance outstanding on disposed
repossessed vehicles for which the liquidation process has been completed
as of September 30, 1997. For its 1997-B and 1997-C securitizations, the
Company purchased credit default insurance from Progressive Northern
Insurance Company. See 'Recent Developments'
37
<PAGE>
<PAGE>
' -- Insurance' and 'Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Net Loss per Repossession.'
As discussed, the Company's business strategy depends on its ability to
increase the rate of revenue growth more rapidly than the increase of expenses,
which would involve a reversal of an adverse trend experienced through much of
1997. Thus, continued growth in revenues is important for the Company to succeed
in its business strategy.
BORROWER CHARACTERISTICS
Borrowers under finance contracts in the Company's finance contract
portfolio are generally sub-prime consumers. Sub-prime consumers are purchasers
of financed vehicles with limited access to traditional sources of credit and
are generally individuals with weak or no credit histories. Based on a sample of
1,533 finance contracts in the finance contract portfolio which the Company
believes are representative of the portfolio as a whole, the Company has
determined the following characteristics with respect to its finance contract
borrowers. The average borrower's monthly income is $2,400, with an average
payment-to-income ratio of 15.7%. The Company's guidelines permit a maximum
payment-to-income ratio and debt-to-income ratio of 20% and 50%, respectively.
The Company's guidelines require a cash down payment of 10% of the vehicle
selling price. Based upon a sample of its borrowers which the Company believes
to be representative, the average borrower's time spent at current residence is
65.6 months, while the average time of service at current employer is 46.6
months. The average borrower's age is 34.3 years.
CONTRACT PROFILE
From inception to December 31, 1997, the Company acquired 23,638 finance
contracts with an aggregate initial principal balance of $289,042,166. Of the
finance contracts acquired, approximately 6.8% have related to the sale of new
automobiles and approximately 93.2% have related to the sale of used
automobiles. The average age of used finance vehicles was approximately two
years at the time of sale. The finance contracts had, upon acquisition, an
average initial principal balance of $12,228; a weighted average APR of 19.8%;
and a weighted average contractual maturity of 52.5 months. As of December 31,
1997, the finance contracts in the finance contract portfolio had a weighted
average remaining maturity of 43.6 months.
DEALER NETWORK
General. The Company acquires finance contracts originated by automobile
dealers in connection with the sale of late-model used and, to a lesser extent,
new cars to sub-prime borrowers. Accordingly, the Company's business development
strategy depends on enrolling and promoting active participation by automobile
dealers in the Company's financing program. Dealers are selected on the basis of
geographic location, financial strength, experience and integrity of management,
stability of ownership quality of used car inventory, participation in sub-prime
financing programs, and the anticipated quality and quantity of finance
contracts which they originate. The Company principally targets dealers
operating under franchises from major automobile manufacturers, rather than
independent used car dealers. The Company believes that franchised dealers are
generally more stable and offer higher quality vehicles than independent
dealers. This is due, in part, to careful initial screening and ongoing
monitoring by the automobile manufacturers and to the level of financial
commitment necessary to secure and maintain a franchise. As of September 30,
1997, the Company was licensed or qualified to do business in 40 states. Over
the near terms, the Company intends to focus its proposed geographic expansion
on states in the midwest and mid-Atlantic regions.
Location of Dealers. Approximately 28% of the Company's dealer network
consists of dealers located in Texas, where the Company has operated since 1994.
A group of six dealerships (including Charlie Thomas Ford, Inc.) under
substantial common ownership accounted for approximately 26.51% and 17.56% for
the fiscal year ended 1995 and 1996 respectively, of finance contracts acquired
during the same period. One dealership, Charlie Thomas Ford, Inc. of Houston,
Texas, accounted for 8.79% of the finance contracts acquired by the Company for
the period from inception through December 31, 1996 (8.77% and 8.94% for the
fiscal year ended
38
<PAGE>
<PAGE>
1995 and 1996 respectively). The Company is no longer purchasing contracts from
these dealerships due to a dispute over repurchase obligations. See 'Legal
Proceedings.'
DEALER SOLICITATION
Marketing Representatives. As of December 31, 1997, the Company utilized
43 marketing representatives, 36 of whom were individuals employed by the
Company and seven of whom were marketing organizations serving as independent
representatives. The Company also maintained one loan production office. These
representatives have an average of ten years experience in the automobile
financing industry. The Company is currently evaluating candidates for
additional marketing representative positions. The marketing representatives
reside in the region for which they are responsible. Marketing representatives
are compensated on the basis of a salary plus commissions based on the number of
finance contracts purchased by the Company in their respective areas. The
Company maintains an exclusive relationship with the independent marketing
representatives and compensates such representatives on a commission basis. All
marketing representatives undergo training and orientation at the Company's
Austin headquarters.
The Company's marketing representatives establish financing relationships
with new dealerships, and maintain existing dealer relationships. Each marketing
representative endeavors to meet with the managers of the finance and insurance
('F&I') departments at each targeted dealership in his or her territory to
introduce and enroll dealers in the Company's financing program, educating the
F&I managers about the Company's underwriting philosophy, its practice of using
experienced underwriters (rather than computerized credit scoring) to review
applications, and the Company's commitment to a single lending program that is
easy for dealers to master and administer. The marketing representatives offer
training to dealership personnel regarding the Company's program guidelines,
procedures and philosophy.
After each dealer relationship is established, a marketing representative
continues to actively monitor the relationship with the objective of maximizing
the volume of applications received from the dealer that meet the Company's
underwriting standards. Due to the non-exclusive nature of the Company's
relationships with dealers, the dealers retain discretion to determine whether
to seek financing from the Company or another financing source. Each
representative submits a weekly call report describing contacts with prospective
and existing dealers during the preceding week and monthly competitive survey
relating to the competitive situation and possible opportunities in the region.
The Company provides each representative a weekly report detailing applications
received and finance contracts purchased from all dealers in the region. The
marketing representatives regularly telephone and visit F&I managers to remind
them of the Company's objectives and to answer questions. To increase the
effectiveness of these contracts, the marketing representatives can obtain
real-time information from the Company's newly installed management information
systems, listing by dealership the number of applications submitted, the
Company's response to such applications and the reasons why a particular
application was rejected. The Company believes that the personal relationships
its marketing representatives establish with the F&I managers are an important
factor in creating and maintaining productive relationships with its dealership
customer base.
The role of the marketing representatives is generally limited to marketing
the Company's financing program and maintaining relationships with the Company's
dealer network. The marketing representatives do not negotiate, enter into or
modify dealer agreements on behalf of the Company, do not participate in credit
evaluation or loan funding decisions and do not handle funds belonging to the
Company or its dealers. The Company intends to develop notable finance contract
volume in each state in which it initiates coverage. The Company has elected not
to establish full service branch offices, believing that the expenses and
administrative burden of such offices are generally unjustified. The Company has
concluded that the ability to closely monitor the critical functions finance
contract approval and contract administration and collection are best performed
and controlled on a centralized basis from its Austin facility.
Dealer Agreements. Each dealer with which the Company establishes a
financing relationship enters into a non-exclusive written dealer agreement (a
'Dealer Agreement') with the Company, governing the Company's acquisition of
finance contacts from such dealer. A Dealer Agreement generally provides
39
<PAGE>
<PAGE>
that the dealer shall indemnify the Company against any damages or liabilities,
including reasonable attorney's fees, 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 borrower may have against a dealer relating to
financing contract. Representations and warranties in a Dealer Agreement
generally relate to matters such as whether (a) the financed automobile is free
of all liens, claims and encumbrances except the Company's lien, (b) the down
payment specified in the finance contract has been paid in full and whether any
part of the down payment was loaned to the borrower by the dealer and (c) the
dealer has complied with applicable law. If the dealer violates the terms of the
Dealer Agreement with respect to any finance contract, the dealer is obligated
to repurchase such contract on demand for an amount equal to the unpaid balance
and all other indebtedness due to the Company from the borrower.
FINANCING PROGRAM
Unlike certain competitors who offer numerous marketing programs that the
Company believes serve to confuse dealers and borrowers, the Company markets a
single financing contract acquisition program to its dealers. The Company
believes that by focusing on a single program, it realizes consistency in
achieving its contract acquisition criteria, which aids the funding and
securitization process. The finance contracts purchased by the Company must meet
several criteria, including that each contract: (i) meets the Company's
underwriting guidelines; (ii) is secured by a new or late-model used vehicle of
a type on the Company's approved list; (iii) was originated in a jurisdiction in
the United States in which the Company was licensed or qualified to do business,
as appropriate; (iv) provides for level monthly payments (collectively, the
'Scheduled Payments') that fully amortize the amount financed over the finance
contract's original contractual term; (v) has an original contractual term from
24 to 60 months; (vi) provides for finance charges at an APR of at least 14%;
(vii) provides a verifiable down payment of 10% or more of the cash selling
price; and (viii) is not past due or does not finance a vehicle which is in
repossession at the time the finance contract is presented to Company for
acquisition. Although the Company has in the past acquired a substantial number
of finance contracts for which principal and interest are calculated according
to the Rule of 78s, the Company's present policy is to acquire primarily finance
contracts calculated using the simple interest method.
The amount financed with respect to a finance contract will generally equal
the aggregate amount advanced toward the purchase price of the financed vehicle,
which equals the net selling price of the vehicle (cash selling price less down
payment and trade-in), plus the cost of permitted automotive accessories (e.g.,
air conditioning, standard transmission, etc.), taxes, title and license fees,
credit life, accident and health insurance policies, service and warranty
contracts and other items customarily included in retail automobile installment
contracts and related costs. Thus, the amount financed may be greater than the
Manufacturer's Suggested Retail Price ('MSRP') for new vehicles or the market
value quoted for used vehicles. Down payments must be in cash or real value of
traded-in vehicles. Dealer-assisted or deferred down payments are not permitted.
The Company's current purchase criteria limit acceptable finance contracts
to a maximum (a) net selling price of the lesser of (i) 112% of wholesale book
value (or dealer invoice for new vehicles) or (ii) 95% of retail book value (or
MSRP for new vehicles) and (b) amount financed of 120% of retail book value in
the case of a used vehicle, or 120% of MSRP in the case of a new vehicle. In
assessing the value of a trade-in for purposes of determining the vehicle's net
selling price, the Company uses the published wholesale book value without
regard to the value assigned by the dealer.
The credit characteristics of an application approved by the Company for
acquisition generally consist of the following: (i) stability of applicant's
employment, (ii) stability of applicant's residence history, (iii) sufficient
borrower income, (iv) credit history, and (v) payment of down payment.
The Company applies a loan-to-value ratio in selecting finance contracts
for acquisitions calculated as equaling the quotient of: (a) the cash selling
price less the down payment on the vehicle, divided by (b) the wholesale value
of the vehicle (net of additions or subtractions for mileage and equipment
additions listed in the applicable guide book). For new vehicles, wholesale
value is based on the invoice amount, including destination charges. For used
vehicles, wholesale value is computed using the applicable guide book (Kelley or
NADA) in use within the market in which the vehicle is located.
40
<PAGE>
<PAGE>
All of the Company's finance contracts are prepayable at any time. Finance
contracts acquired by the Company must prohibit the sale or transfer of the
financed vehicle without the Company's prior consent and provide for
acceleration of the maturity of the finance contract in the absence of such
consent. For an approved finance contract, the Company will agree to acquire
such finance contract from the originating dealer at a non-refundable contract
acquisition discount of approximately 8.5% to 12% of the amount financed.
CONTRACT ACQUISITION PROCESS
General. Having selected an automobile for purchase, the sub-prime consumer
typically meets with the dealership's F&I manager to discuss options for
financing the purchase of the vehicle. If the sub-prime consumer elects to
finance the vehicle's purchase through the dealer, the dealer will typically
submit the borrower's credit application to a number of potential financing
sources to find the most favorable terms. In general, an F&I department's
potential sources of financing will include banks, thrifts, captive finance
companies and independent finance companies.
For the year ended December 31, 1997, 133,039 credit applications were
submitted to the Company. Of these 133,039 applications, approximately 23.4%
were approved and 7.9%, or 10,554 contracts, were acquired by the Company. The
difference between the number of applications approved and the number of finance
contracts acquired is attributable to a common industry practice in which
dealers often submit credit applications to more than one finance company and
select on the basis of the most favorable terms offered. The prospective
customer may also decide not to purchase the vehicle notwithstanding approval of
the credit application.
Contract Processing. Dealers send credit applications along with other
information to the Company's Credit Department in Austin via facsimile. Upon
receipt, the credit application and other relevant information is entered into
the Company's computerized contract administration system by the Company's
credit verification personnel and a paper-based file where the original
documents are created. Once logged into the system, the applicant's credit
bureau reports are automatically accessed and retrieved directly into the
system. At this stage, the computer assigns the credit application to the
specific credit manager assigned to the submitting dealer for credit evaluation.
Credit Evaluation. The Company applies uniform underwriting standards. In
evaluating the applicant's creditworthiness and the collateral value of the
vehicle, the credit underwriter reviews each application in accordance with the
Company's guidelines and procedures, which take into account, among other
things, the individual's stability of residence, employment history, credit
history, ability to pay, income, discretionary income and debt ratio. In
addition, the credit underwriter evaluates the applicant's credit bureau report
in order to determine if the applicant's (i) credit quality is deteriorating,
(ii) credit history suggests a high probability of default or (iii) credit
experience is too limited for the Company to assess the probability of
performance. The Company also assesses the value and useful life of the
automobile that will serve as collateral under the finance contract. Moreover,
the credit underwriters consider the suitability of a proposed loan under its
financing program in light of the (a) proposed contract term and (b) conformity
of the proposed collateral coverage to the Company's underwriting guidelines.
Verification of certain applicant-provided information (e.g., employment
and residence history) is required before the Company makes its credit decision.
Such verification typically requires submission of supporting documentation,
such as a paycheck stub or other substantiation of income, or a telephone bill
evidencing a current address. In addition, the Company does not normally approve
any applications from persons who have been the subject of two or more
bankruptcy proceedings or two or more repossessions.
The Company's underwriting standards are applied by experienced credit
underwriters with a personal analysis of each application, utilizing experienced
judgment. These standards have been developed and refined by the Company's
senior credit and collections management who, on average, possess more than 24
years in the automobile finance industry. The Company believes that having its
credit underwriters personally review and communicate to the submitting
dealership the decision with respect to each application, including the reasons
why a particular application may have been declined, enhances the Company's
relationship with such dealers. This practice encourages F&I managers to
41
<PAGE>
<PAGE>
submit contracts meeting the Company's underwriting standards, thereby
increasing the Company's operating efficiency by eliminating the need to process
applications unlikely to be approved.
The Company's Credit Department personnel undergo ongoing internal training
programs that are scheduled on a weekly basis and are attended by such personnel
depending on their responsibilities. All of these personnel are located in the
Company's offices in Austin where they are under the supervision of the Vice
President -- Credit and the credit manager. The credit manager and the Vice
President -- Credit have an aggregate of more than 30 years of experience in the
automobile finance business. In addition, the Company reviews all repossessions
to identify factors that might require refinements in the Company's credit
evaluation procedures.
Approval Process. The time from receipt of application to final credit
approval is a significant competitive factor, and the Company seeks to complete
its funding approval decision in an average of two to three hours. When the
Company approves the purchase of a finance contract, the credit manager notifies
the dealer by facsimile or telephone. Such notice specifies all pertinent
information relating to the terms of approval, including the interest rate, the
term, information about the automobile to be sold and the amount of discount
that the Company will deduct from the amount financed prior to remitting the
funds to the dealer. The discount is not refundable to the dealer.
Contract Purchase and Funding. Upon final confirmation of the terms by the
borrower, the dealer completes the sale of the automobile to the borrower. After
the dealer delivers all required documentation (including an application for
title or a dealer guaranty of title, naming the Company as lienholder) to the
Company, the Company remits funds to the dealer via overnight delivery service
within a commercially reasonable time of having received the complete loan
funding package. As a matter of policy, the Company takes such measures as it
deems necessary to obtain a perfected security interest in the related financed
vehicles under the laws of the states in which such vehicles are originated.
This generally involves taking the necessary steps to obtain a certificate of
title which names the Company as lienholder. Each finance contract requires that
the automobile be adequately insured and that the Company be named as loss
payee, and compliance with these requirements is verified prior to the
remittance of funds to the dealer.
From time to time, the Company also acquires bulk portfolios from other
originators. In this event, the Company reunderwrites such contracts to ensure
appropriate credit standards are maintained. The Company acquired approximately
$14.8 million in finance contracts in 1996 from Greenwich Capital Financial
Products which were originated by First Fidelity Acceptance Corp. During the
first quarter of 1997, the Company acquired approximately $12.8 million in
finance contracts from Credit Suisse First Boston Mortgage Capital LLC ('CSFB')
which were originated by Jefferson Capital Corporation. During the third quarter
of 1997, the Company acquired a total of $7.9 million in finance contracts from
three originators. During the fourth quarter of 1997, the Company acquired a
total of $7.4 million in finance contracts from third party originators and,
from CSFB, approximately $12.5 million in finance contracts, which were
originated by several third parties. CSFB also provided acquisition financing
for the purchase.
CONTRACT SERVICING AND COLLECTION
Contract servicing includes contract administration and collection. Because
the Company believes that an active collection program is essential to success
in the sub-prime automobile financing market, the Company retains responsibility
for finance contract servicing and collection. Prior to December 1997, the
Company engaged CSC Logic/MSA L.L.P. (a Texas limited liability partnership
doing business as 'Loan Servicing Enterprise') ('LSE') to provide contract
administration for its warehouse arrangements and securitizations.
Contract Administration. The Company, as servicer, provides certain
contract administration functions in connection with finance contracts
warehoused or sold to securitization trusts, including payment processing,
statement rendering, insurance tracking, data reporting and customer service for
finance contracts. The Company inputs newly originated finance contracts on the
contract system daily. The servicer then mails a welcome letter to the borrower
and subsequently mails monthly billing statements to each borrower approximately
ten days prior to each payment due date. Any borrower remittances are directed
to a lock box. Remittances received are then posted to the proper account on
42
<PAGE>
<PAGE>
the system. The Company also handles account inquiries from borrowers and
performs insurance tracking services. The Company also sends out notices to
borrowers for instances where proper collateral insurance is not documented.
Contract Collection. As collection agent, the Company is responsible for
pursuing collections from delinquent borrowers. The Company utilizes proactive
collection procedures, which include making early and frequent contact with
delinquent borrowers, educating borrowers as to the importance of maintaining
good credit, and employing a consultative and customer service approach to
assist the borrower in meeting his or her obligations. The Company's ability to
monitor performance and collect payments owed by contract obligors is a function
of its collection approach and support systems. The Company's approach to the
collection of delinquent contracts is to minimize repossessions and charge-offs.
The Company maintains a computerized collection system specifically designed to
service sub-prime automobile finance contracts. The Company believes that if
problems are identified early, it is possible to correct many delinquencies
before they deteriorate further.
As of December 31, 1997, the Company employed 191 people full-time,
including 81 collections specialists and other support personnel, in the
Collections Department. Each employee is devoted exclusively to collection
functions. The Company attempts to maintain a ratio of between 500 and 600
finance contracts per collections specialist. As of December 31, 1997, there
were 236 finance contracts in the Company's finance contract portfolio for every
collections specialist. The Collections Department is managed by the Vice
President -- Collections, who possesses 30 years' experience in the automotive
and finance industry. The Company hires additional collections specialists in
advance of need to ensure adequate staffing and training.
Accounts reaching five days past due are assigned to collectors who have
specific responsibility for those accounts. These collectors contact the
customer frequently, both by phone and in writing. Accounts that reach 60 days
past due are assigned to two senior collectors who handle those accounts until
resolved. To facilitate collections from borrowers, the Company has increased
its utilization of Western Union's 'Quick Collect,' which allows borrowers to
pay from remote locations, with a check printed at the Company's office.
Consistent with the Company's internal policies and securitization documents,
finance contract provisions, such as term, interest rate, amount, maturity date
or payment schedule will not be amended, modified or otherwise changed, except
when required by applicable law or court order or where permitted under the
applicable documentation.
Payment extensions may be granted if, in the opinion of management, such
extension provides a permanent solution to resolve a temporary problem. An
extension fee must be paid by the customer prior to the extension. Normally,
there can be only one extension during the first 18 months of a finance
contract. Additional extensions may be granted if allowed under the applicable
VSI Policy, although the Company's securitization documents restrict permitted
extensions to no longer than one month and not more than once per year. Payment
due dates can be modified once during the term of the contract to facilitate
current payment by the customer.
Repossessions and Recoveries. If a delinquency exists and a default is
deemed inevitable or the collateral is in jeopardy, and in no event later than
the 90th day of delinquency (as required by the applicable VSI Policy), the
Company's Collections Department will initiate the repossession of the financed
vehicle. Bonded, insured outside repossession agencies are used to secure
involuntary repossessions. In most jurisdictions, the Company is required to
give notice to the borrower of the Company's intention to sell the repossessed
vehicle, whereupon the borrower may exercise certain rights to cure his or her
default or redeem the automobile. Following the expiration of the legally
required notice period, the repossessed vehicle is sold at a wholesale auto
auction (or in limited circumstances, through dealers), usually within 60 days
of the repossession. The Company closely monitors the condition of vehicles set
for auction, and procures an appraisal under the applicable VSI Policy prior to
sale. Liquidation proceeds are applied to the borrower's outstanding obligation
under the finance contract and loss deficiency claims under the VSI Policy and,
if applicable, Credit Endorsement, are then filed. See ' -- Insurance.'
43
<PAGE>
<PAGE>
INSURANCE
Each finance contract requires the borrower to obtain comprehensive and
collision insurance with respect to the related financed vehicle with the
Company named as a loss payee. The Company relies on a written representation
from the selling dealer and independently verifies that a borrower in fact has
such insurance in effect when it purchases contracts. Each finance contract
acquired by the Company prior to December 31, 1996 is covered by the Interstate
VSI Policy, including the Credit Endorsement. The Interstate VSI Policy has been
issued to the Company by Interstate Fire & Casualty Company ('Interstate').
Interstate is an indirect wholly-owned subsidiary of Fireman's Fund Insurance
Company. Certain finance contracts acquired by the Company after December 31,
1996 are covered by either the Interstate VSI Policy, including the Credit
Endorsement, another VSI Policy (which does not include a Credit Endorsement),
or the VSI Policy and deficiency balance endorsement (the 'Progressive Policy')
issued by Progressive Northern Insurance Company ('Progressive').
Physical Damage and Loss Coverage. The Company initially relies on the
requirement, set forth in its underwriting criteria, that each borrower maintain
adequate levels of physical damage loss coverage on the respective financed
vehicles. The Company tracks the physical damage insurance of borrowers, and
contacts borrowers in the event of a lapse in coverage or inadequate
documentation. Moreover, the VSI policies insure against: (i) all risk of
physical loss or damage from any external cause to financed vehicles which the
Company holds as collateral; (ii) any direct loss which the Company may sustain
by unintentionally failing to record or file the instrument evidencing each
contract with the proper public officer or public office, or by failing to cause
the proper public officer or public office to show the Company's encumbrance
thereon, if such instrument is a certificate of title; (iii) any direct loss
sustained during the term of the VSI Policy, by reason of the inability of the
Company to locate the borrower, the related financed vehicle, or by reason of
confiscation of the financed vehicle by a public officer or public office; and
(iv) all risk of physical loss or damage from any external cause to a
repossessed financed vehicle for a period of 60 days while such financed vehicle
is (subject to certain exceptions) held by or being repossessed by the Company.
The physical damage provisions of a VSI Policy generally provided coverage
for losses sustained on the value of the financed vehicle securing a contract,
but in no event is the coverage to exceed: (i) the cost to repair or replace the
financed vehicle with material of like kind and quality; (ii) the actual cash
value of the financed vehicle at the date of loss, less its salvage value; (iii)
the unpaid balance of the contract; (iv) $40,000 per financed vehicle (or, in
the case of losses or damage sustained on repossessed financed vehicles, $25,000
per occurrence), or $50,000 in the case of the Progressive Policy; or (v) the
lesser of the amounts due the Company under clauses (i) through (iv) above, less
any amounts due under all other valid insurance on the damaged financed vehicle
less its salvage value. No assurance can be given that the insurance will cover
the amount financed with respect to a financed vehicle.
All claim settlements for physical damage and loss coverage under the
Interstate Policy are subject to a $500 deductible per loss ($250 for the
Progressive Policy). There is no aggregate limitation or other form of cap on
the number of claims under the VSI Policy. Coverage on a financed vehicle is for
the term of the related contract and is noncancellable. Each VSI Policy requires
that, prior to filing a claim, a reasonable attempt be made to repossess the
financed vehicle and, in the case of claims on skip losses, every professional
effort be made to locate the financed vehicle and the related borrower.
Deficiency Balance Endorsements. In addition to physical damage and loss
coverage, the Interstate VSI Policy contains a Credit Endorsement which provides
that Interstate shall indemnify the Company for certain losses incurred due to a
deficiency balance following the repossession and resale of financed vehicles
securing defaulted finance contracts eligible for coverage. Coverage under the
Credit Endorsement is strictly conditioned upon the Company's maintaining and
adhering to the credit underwriting criteria set forth in the Credit
Endorsement. Losses on each eligible contract are covered in an amount equal to
the deficiency balance resulting from the Net Payoff Balance less the sum of (i)
the Actual Cash Value of the financed vehicle plus (ii) the total amount
recoverable from all other applicable insurance, including refunds from
cancelable add-on products. The maximum coverage under the Credit Endorsement is
$15,000 per contract.
'Actual Cash Value' for the purposes of the Credit Endorsement only, means
the greater of (i) the price for which the subject financed vehicle is sold or
(ii) the wholesale market value at the time of the
44
<PAGE>
<PAGE>
loss as determined by an automobile guide approved by Interstate applicable to
the region in which the financed vehicle is sold.
'Net Payoff Balance' for the purposes of the Credit Endorsement, means the
outstanding principal balance as of the default date plus late fees and
corresponding interest no more than 90 days after the date of default. In no
event shall Net Payoff Balance include non-approved fees, taxes, penalties or
assessments included in the original instrument, or repossession, disposition,
collection, remarketing expenses and fees or taxes incurred.
The Progressive Policy contains a Deficiency Balance Endorsement (the
'DBE'), pursuant to which Progressive will insure the Company's interest in the
Financed Vehicles against direct loss incurred due to the Company's inability to
recover one hundred percent (100%) of the balance due under an instrument
representing a Finance Contract. Under the DBE, Progressive will cover such
impairment of the Company's interest in the Financed Vehicle, measured as the
Net Payoff Amount, reduced by (a) claim settlements from other insurance
policies, (b) claim settlements due under other coverage provisions of the VSI
Policy or its other endorsements, and (c) monies recoverable under any other
recourse or repurchase agreement or through any dealer hold-back, or any other
source. The maximum liability under the DBE is Five Thousand Dollars ($5,000)
for any financed contract, and claims payments may not exceed, on a monthly
basis, 88% of the premiums paid. See ' -- Recent Developments.'
MANAGEMENT INFORMATION SYSTEMS
Management believes that a high level of real-time information flow and
analysis is essential to manage the Company's informational and reporting needs
and to enhance the Company's competitive position. Significant infrastructure
development was completed throughout 1997 to accommodate the servicing functions
which were assumed from LSE. Such development of both personnel and technology
increased expenses in 1997. The Company hopes to realize the benefits of such
investment in 1998 and thereafter.
In addition, management uses customized reports, with a download of
information to personal computers, to issue investor reports and to analyze the
Company's finance contract portfolio on a monthly basis. The system's
flexibility allows the Company to achieve productivity improvements with
enhanced data access. Management believes that it has sufficient systems in
place to permit significant growth in the Company's finance contract portfolio
without the need for material additional investment in management information
systems.
FUNDING/SECURITIZATION OF FINANCE CONTRACTS
Warehouse Credit Facilities. The Company obtains a substantial portion of
its working capital for the acquisition of finance contracts through warehouse
credit facilities. Under a warehouse facility, generally the lender advances
amounts requested by the borrower on a periodic basis, up to an aggregate
maximum credit limit for the facility, for the acquisition and servicing of
finance contracts or other similar assets. Until proceeds from a securitization
transaction are used to pay down outstanding advances, as principal payments are
received on the finance contracts, the principal amount of the advances may be
paid down incrementally or reinvested in additional finance contracts on a
revolving basis.
At December 31, 1997, the Company had no balances outstanding under the $10
million Sentry Facility, which expires on December 31, 2000. The proceeds from
borrowings under the Sentry Facility are used to acquire finance contracts, to
pay credit default insurance premiums and to make deposits to a reserve account
with Sentry. The Company pays a utilization fee of up to 0.21% per month on the
average outstanding balance under the Sentry Facility. The Sentry Facility also
requires the Company to pay up to 0.62% per quarter on the average unused
balance. Interest is payable monthly and accrues at a per annum rate of prime
plus 1.75%.
The Sentry Facility contains certain conditions and imposes certain
requirements, including, among other things, minimum net worth and cash and cash
equivalent balances in the reserve account. Under the Sentry Facility, the
Company paid interest of $241,767 for the six months ended June 30, 1997.
45
<PAGE>
<PAGE>
During 1996, the Company also paid $700,000 in commitment fees pursuant to its
agreement with Sentry.
On May 22, 1996 the Company, through its wholly-owned subsidiary AutoBond
Funding Corporation II, entered into the Providian Facility, which expired
December 15, 1996. The proceeds from the borrowings under the Providian Facility
were used to acquire finance contracts, to pay credit default insurance premiums
and to make deposits to a reserve account. Interest was payable monthly with a
delay of 15 days and accrued at a per annum rate of LIBOR plus 2.60% (which was
8.0375% when initially determined on May 17, 1996). The Providian Facility also
required the Company to pay a monthly fee on the average unused balance at a per
annum rate of 0.25%. Borrowings under the Providian Facility were rated
investment-grade by a nationally recognized statistical rating organization. As
of December 31, 1996, no advances were outstanding with respect to the Providian
Facility.
The Company's wholly-owned subsidiary, AutoBond Funding Corporation I,
entered into the Nomura Facility, pursuant to a credit agreement dated as of
June 16, 1995, with a final maturity date of June 16, 2005. This facility was
terminated at the lender's option, and no new advances were made after February
6, 1996. The Nomura Facility provided for advances up to a maximum aggregate
principal amount of $25 million, for the acquisition of finance contracts.
On February 14, 1997 the Company, though its wholly-owned subsidiary
AutoBond Funding Corporation II, entered into the $50,000,000 Daiwa Facility,
which expires March of 1998. The proceeds from borrowings under the Daiwa
Facility are used to acquire finance contracts, and to make deposits to a
reserve account of 10% of the advance. Interest is payable monthly at the 30-day
LIBOR plus 1.15% annum rate. The Daiwa Facility also requires the Company to pay
a monthly fee on the average unused balance at a per annum rate of 0.25%.
Borrowings under the Daiwa Facility are rated investment-grade by a nationally
recognized statistical rating organization. The Daiwa Facility contains certain
conditions and imposes certain requirements similar to those in the agreements
relating to the Company's existing securitizations including, among other
things, delinquency and repossession triggers. On June 30, 1997, the Daiwa
Facility was bifurcated to include a special purpose issuer, AutoBond Master
Funding Corporation ('Master Funding') to which finance contracts securing
advances could be sold pursuant to SFAS No. 125. As Master Funding is not a
consolidated subsidiary of the Company, advances outstanding under the Daiwa
Facility that relate to contracts sold to Master Funding are not recognized as
liabilities on the Company's balance sheet.
On December 31, 1997, the Company purchased approximately $12.5 million of
finance contracts from Credit Suisse First Boston Mortgage Capital LLC ('CSFB'),
at a purchase price of 93.5% of the outstanding principal balance of the finance
contracts. The Company financed its purchase through a warehouse securitization
facility with CSFB pursuant to which the finance contracts were transferred to a
bankruptcy remote, special purpose corporation, AutoBond Master Funding
Corporation II. Pursuant to the structure, the Company agreed to maintain
sufficient overcollateralization such that CSFB's investment in the special
purpose corporation is collateralized by assets having a value equal to or
greater than 117% of such investment. Recourse to the Company is limited to 10%
of the original unpaid balance of the finance contracts, and the investment
accrues interest at LIBOR plus 3% per annum. The investment matures at 120 days
and is convertible at CSFB's option into a term securitization.
Securitization Program. The periodic securitization of finance contracts is
an integral part of the Company's business. Securitizations enable the Company
to monetize its assets and redeploy its capital resources and warehouse credit
facilities for the purchase of additional finance contracts. To date, the
Company has completed eight securitizations involving approximately $204 million
in aggregate principal amount of finance contracts.
In its securitization transactions through December 31, 1996, the Company
sold pools of finance contracts to a special purpose subsidiary, which then
assigned the finance contracts to a trust in exchange for cash and certain
retained beneficial interests in the trust. The trust issued two classes of
fixed income investor certificates: Class A Certificates which were sold to
investors, generally at par with a fixed coupon, and subordinated excess spread
certificates (representing a senior interest in excess spread cash flows from
the finance contracts) which were retained by the Company's securitization
subsidiary and which collateralize borrowings on a non-recourse basis. The
Company would also fund a cash reserve account that provides credit support to
the Class A Certificates. The Company's
46
<PAGE>
<PAGE>
securitization subsidiaries also retained an interest in the trust that is
subordinate to the interest of the investor certificateholders. The retained
interests entitle the Company to receive the future excess spread cash flows
from the trust after payment to investors, absorption of losses, if any, that
arise from defaults on the transferred finance contracts and payment of the
other expenses and obligations of the trust. In accounting for its
securitization transactions in 1997, the Company follows the provisions of the
recently effective SFAS 125. In these securitizations the Company will sell
pools of finance contracts to a special purpose subsidiary, which will then
issue notes under a trust indenture secured by such finance contracts. The
special purpose corporations may issue multiple classes of secured notes,
including subordinated excess spread notes. The Company will also fund a cash
reserve account that provides credit support to the senior notes. The Company's
securitization subsidiaries also will retain an interest in the finance
contracts that is subordinate to the interest of the noteholders. The retained
interests entitle the Company to receive the future excess spread cash flows
from the trust estate after payment to investors, absorption of losses, if any,
that arise from defaults on the transferred finance contracts and payment of the
other expenses and obligations of the trust estate.
Securitization transactions impact the Company's liquidity primarily in two
ways. First, the application of proceeds toward payment of the outstanding
advances on warehouse credit facilities makes additional borrowing available, to
the extent of such proceeds, under those facilities for the acquisition of
additional finance contracts. Second, additional working capital is obtained
through the Company's practice of borrowing, through the issuance of
non-recourse debt, against the value of the senior interest in the retained
excess spread. If the structure of the securitizations was changed, it could
impact the Company's ability to generate liquidity. See ' -- Recent
Developments.'
Upon each securitization, the Company recognizes the sale of finance
contracts and records a non-cash gain or loss in an amount which takes into
account the amounts expected to be received as a result of its retained
interests. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Revenues -- Gain on Sale of Finance Contracts.' At
September 30, 1997, the Company held interest-only strip receivables and Class B
Certificates totalling $18.4 million, a portion of which had been pledged to
secure notes payable of $10.3 million.
If the Company were unable to securitize contracts in a financial reporting
period, the Company would incur a significant decline in total revenues and net
income or report a loss for such period. If the Company were unable to
securitize its contracts and did not have sufficient credit available, either
under its warehouse credit facilities or from other sources, the Company would
have to sell portions of its portfolio directly to investors or curtail its
finance contract acquisition activities. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources.'
When the Company securitizes finance contracts, it repays a portion of its
outstanding warehouse indebtedness, making such portion available for future
borrowing. As finance contract volume increases, the Company expects to
securitize its assets at least quarterly, although there can be no assurance
that the Company will be able to do so.
The securitization trust agreements and the servicing agreement contain
certain events of administrator termination, the occurrence of which entitles
the trustee to terminate the Company's right to act as collection agent and
administrator. Events of administrator termination typically include: (i)
defaults in payment obligations under the trust agreements; (ii) unremedied
defaults in the performance of certain terms or covenants under the trust
agreements, the servicing agreements or related documents; (iii) the institution
of certain bankruptcy or liquidation proceedings against the Company; (iv)
material breaches by the Company of representations and warranties made by it
under the servicing agreements and the sale agreements pursuant to which it has
sold the securitized finance contracts; (v) the occurrence of a trigger event
whereby the ratio of delinquent finance contracts to total securitized finance
contracts for each transaction exceeds the percentage set forth in the servicing
agreements; (vi) a material adverse change in the consolidated financial
condition or operations of the Company, or the occurrence of any event which
materially adversely affects the collectibility of a material amount of the
securitized finance contracts or which materially adversely affects the ability
of the Company to collect a material amount of the finance contracts or to
perform in all material respects its obligations under the servicing agreements,
trust agreements and related documents; or (vii) any of the rating agencies
rating the securitization transactions determines that the Company's serving as
47
<PAGE>
<PAGE>
collection agent under the servicing agreement would prevent such agency from
maintaining the required ratings on such transactions, or would result in such
transactions being placed on negative review suspension or downgrade.
The trust agreements contain amortization events, the occurrence of any of
which may affect the Company's rights to receive payments in respect of the
future excess spread cash flows otherwise payable to it until principal and
interest payments due the holders of all investor certificates are paid in full.
Such amortization events include:
(i) defaults in certain payments or repurchase obligations under the
trust agreements; (ii) unremedied defaults in the performance of any
covenants or terms of the trust agreements by a securitization subsidiary;
(iii) the occurrence of certain bankruptcy or insolvency events of a
securitization subsidiary; (iv) unremedied material breaches of
representations or warranties of a securitization subsidiary; (v)
occurrence of an event of administrator termination; (vi) failure of a
securitization subsidiary to transfer certain required amounts of unpaid
principal balance of finance contracts to each securitization trust or to
retain the resulting shortfall in the collection accounts; (vii) failure of
any transfer under the trust agreements to create, or failure of any
investor certificates to evidence, a valid and perfected first priority
undivided ownership or security interest in the pool of securitized finance
contracts and related collateral; (viii) failure of the Company to own,
directly or indirectly, 100% of the outstanding shares of common stock of
any securitization subsidiary; (ix) entry of unpaid and unstayed judgments
aggregating in excess of $25,000 are entered against any securitization
subsidiary; or (x) occurrence of a 'change in control' with respect to the
Company.
COMPETITION
The sub-prime credit market is highly fragmented, consisting of many
national, regional and local competitors, and is characterized by relative ease
of entry and the recent arrival of a number of well capitalized publicly-held
competitors. Existing and potential competitors include well-established
financial institutions, such as banks, savings and loans, small loan companies,
industrial thrifts, leasing companies and captive finance companies owned by
automobile manufacturers and others. Many of these financial organizations do
not consistently solicit business in the sub-prime credit market. The Company
believes that captive finance companies generally focus their marketing efforts
on this market only when inventory control and/or production scheduling
requirements of their parent organizations dictate a need to enhance sales
volumes and exit the market once such sales volumes are satisfied. The Company
also believes that increased regulatory oversight and capital requirements
imposed by market conditions and governmental agencies have limited the
activities of many banks and savings and loans in the sub-prime credit market.
In many cases, those organizations electing to remain in the automobile finance
business have migrated toward higher quality customers to allow reductions in
their overhead cost structures.
As a result, the sub-prime credit market is primarily serviced by smaller
finance organizations that solicit business when and to the extent their capital
resources permit. The Company believes no one of its competitors or group of
competitors has a dominant presence in the market. The Company's strategy is
designed to capitalize on the market's relative lack of major national financing
sources. Nonetheless, several of these competitors have greater financial
resources than the Company and may have a significantly lower cost of funds.
Many of these competitors also have long-standing relationships with automobile
dealerships and may offer dealerships or their customers other forms of
financing or services not provided by the Company. Furthermore, during the past
two years, a number of automobile finance companies have completed public
offerings of common stock, the proceeds of which are being used, at least in
part, to fund expansion and finance increased purchases of finance contracts.
The Company's ability to compete successfully depends largely upon its
relationships with dealerships and the willingness of dealerships to offer
finance contracts to the Company that meet the Company's underwriting criteria.
There can be no assurance that the Company will be able to continue successfully
in the markets it serves.
Additionally, during the first half of 1997, several of the Company's
competitors have experienced serious problems ranging from allegedly fraudulent
misstatements of earnings to increasing losses and inadequate reserves. Although
the Company believes it has made adequate reserves to cover losses, the
48
<PAGE>
<PAGE>
ability of the Company to obtain funding in the future and the rates at which
such financings may be obtained could be impaired as a result of the turmoil in
the sub-prime auto finance industry. Although the Company was able to obtain
financing under the Daiwa Facility and continues to have financing available
under the Sentry Facility, there can be no assurance that the turmoil in the
sub-prime auto finance industry will not have an effect on the Company's ability
to raise funds and may result in an increased cost of funding to the Company.
See 'Recent Developments.'
REGULATION
The Company's business is subject to regulation and licensing under various
federal, state and local statues and regulations. As of December 31, 1997, the
Company was licensed to conduct business operations with dealers located in 41
states, and, accordingly, the laws and regulations of such states govern the
Company's operations. Most states where the Company operates (i) limit the
interest rates, fees and other charges that may be imposed by, or prescribe
certain other terms of, the finance contracts that the Company purchases and
(ii) define the Company's rights to repossess and sell collateral. In addition,
the Company is required to be licensed or registered to conduct its finance
operations in certain states in which the Company purchases finance 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 related 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.
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 purchaser could assert against
the seller of the goods and services. With respect to used automobiles
specifically, the FTC's Rule on Sale of Used Vehicles 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.
The Company believes that it is in substantial compliance with all
applicable material laws and regulations. Adverse changes in the laws or
regulations to which the Company's business is subject, or in the interpretation
thereof, could have a material adverse effect on the Company's business. In
addition, due to the consumer-oriented nature of the industry in which the
Company operates and the unclear application of various truth-in-lending laws
and regulations to certain products offered by companies in the industry,
industry participants are sometimes named as defendants in litigation involving
alleged violations of federal and state consumer lending or other similar laws
and regulations. A significant judgment against the Company or within the
industry in connection with any litigation could have a material adverse effect
on the Company's financial condition and results of operations.
In the event of default by a borrower under a finance contract, the Company
is entitled to exercise the remedies of a secured party under the Uniform
Commercial Code ('UCC'). The UCC remedies of a secured party include the right
to repossession by self-help means, unless such means would constitute a breach
of the peace. Unless the borrower voluntarily surrenders a vehicle, self-help
repossession by an independent repossession agent engaged by the Company is
usually employed by the Company when a borrower defaults. Self-help repossession
is accomplished by retaking possession of the vehicle. If a breach of the peace
is likely to occur, or if applicable state law so requires, the Company must
obtain a court order from the appropriate state court and repossess the vehicle
in accordance with that order. None of the states in which the Company presently
does business has any law that would require the Company, in the absence of a
probable breach of the peace, to obtain a court order before it attempts to
repossess a vehicle.
In most jurisdictions, the UCC and other state laws require a secured party
to provide an obligor with reasonable notice of the date, time and place of any
public sale or the date after which any private sale of collateral may be held.
Unless the obligor waives his rights after default, the obligor in most
circumstances has a right to redeem the collateral prior to actual sale (i) by
paying the secured party all
49
<PAGE>
<PAGE>
unpaid installments on the obligation, plus reasonable expenses for
repossessing, holding and preparing the collateral for disposition and arranging
for its sale, plus in some jurisdictions, reasonable attorneys' fees or (ii) in
some states, by paying the secured party past-due installments. Repossessed
vehicles are generally resold by the Company through wholesale auctions which
are attended principally by dealers.
EMPLOYEES
As of December 31, 1997, the Company employed 191 persons, none of whom was
covered by a collective bargaining agreement. The Company believes that its
relationship with its employees is satisfactory.
PROPERTIES AND FACILITIES
The Company's headquarters are located in approximately 18,900 square feet
of leased space at 301 Congress Avenue, Austin, Texas, for a monthly rent of
$18,390. The lease for such facility expires in June 1998. The Company's
headquarters contain the Company's executive offices as well as those related to
automobile finance contract acquisition. In addition, the Company leased
approximately 520 square feet of office space at 1010 Woodman Drive, Suite 240,
Dayton, Ohio, for its midwest regional marketing office at a rent of $550 per
month. The lease for the Ohio facility expired on February 28, 1997. The Company
does not maintain any regional office facilities, although its securitization
subsidiaries are incorporated and maintain an office in Nevada.
LEGAL PROCEEDINGS
In the normal course of its business, the Company is from time to time made
a party to litigation involving consumer-law claims. These claims typically
allege improprieties on the part of the originating Dealer and name the Company
and/or its assignees as subsequent holders of the finance contracts. To date,
none of these actions have resulted in the payment of damages, or any judgments
therefor, by the Company or its assignees, nor have any actions been certified
as eligible for class-action status.
The Company's carrier for the credit deficiency insurance obtained through
1996, Interstate Fire & Casualty Co. ('Interstate') determined in late 1996 to
no longer offer such coverage to the auto finance industry, including the
Company. In connection with Interstate's attempt to no longer offer credit
deficiency coverage for contracts originated after December 1996, the Company
commenced an action in the United States District Court for the Western District
of Texas, Austin Division, seeking a declaratory judgment that (a) the Company
was entitled to 180 days' prior notice of cancellation and (b) Interstate was
not entitled to raise premiums on finance contracts for which coverage was
obtained prior to the effectiveness of such cancellation, as well as seeking
damages for the Company's alleged deficiencies in paying claims. Prior to
receiving the Company's complaint in the Texas action, Interstate commenced a
similar action for declaratory relief in the United States Court for the
Northern District of Illinois. While settlement discussions are ongoing,
AutoBond and the Company have to date acted on the basis of a cancellation date
of May 12, 1997 (i.e., no finance contracts presented after that date will be
eligible for credit deficiency coverage by Interstate, although all existing
contracts for which coverage was obtained will continue to have the benefits of
such coverage), no additional premiums having been demanded or paid, and the
claims-paying process having been streamlined. In particular, in order to speed
the claims-paying process, Interstate has paid lump sums to the Company as an
estimate of claims payable prior to completion of processing. Pending the
Company's determination of the appropriate destination for such claims payments,
the Company will deposit such funds into a segregated account.
As set forth in the discussion of finance contracts held for sale in Note 3
to the Notes to the Company's audited financial statements, in February 1997 the
Company discovered certain breaches of representations and warranties by certain
dealers with respect to finance contracts sold into a securitization. The
Company honored its obligations to the securitization trust and repurchased
finance contracts totaling $619,520 from a trust during the three months ended
March 31, 1997. Of the total amount of these finance contracts, $190,320 were
purchased from one dealer. Although the Company has requested that this dealer
repurchase such contracts, the dealer has refused. After such dealer's refusal
to repurchase, the Company commenced an action in the 157th Judicial District
Court for Harris County, Texas against Charlie Thomas Ford, Inc. to compel such
repurchase. Discovery is proceeding but no trial date has been set.
50
<PAGE>
<PAGE>
MANAGEMENT
DIRECTORS AND OFFICERS
The directors and principal officers of the Company, their respective ages
and their present positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
William O. Winsauer(1)............................... 37 Chairman of the Board and Chief Executive Officer and
Director
Adrian Katz.......................................... 33 Vice Chairman of the Board and Chief Operating
Officer and Director
John S. Winsauer(1).................................. 35 Secretary and Director
Manuel A. Gonzalez................................... 47 President
R.T. Pigott, Jr...................................... 43 Vice President and Chief Financial Officer
Alan E. Pazdernik.................................... 58 Vice President -- Credit
Robert R. Giese...................................... 58 Vice President -- Collections
Robert S. Kapito..................................... 40 Director
Stuart A. Jones...................................... 42 Director
Thomas I. Blinten.................................... 41 Director
</TABLE>
- ------------
(1) Messrs. William and John Winsauer are brothers.
------------------------
Directors serve for annual terms. Officers are elected by the Board of
Directors and serve at the discretion of the Board.
MANAGEMENT BACKGROUND
William O. Winsauer, Chairman of the Board and Chief Executive Officer
Mr. Winsauer has been Chairman of the Board of Directors and Chief
Executive Officer of the Company since its formation in 1993. Mr. Winsauer has
been involved in arranging and developing various sources of financing for
subprime finance contracts since 1989. Mr. Winsauer was the founder of ABI in
1989 and served full time as its President and sole shareholder from 1989
through 1993, and remains its President and sole shareholder to date. ABI has no
material current operations other than to manage its and Mr. Winsauer's
investments in securitizations sponsored by Mr. Winsauer. In the late 1980s, Mr.
Winsauer began selling whole loan packages of contracts originated by the
Gillman Companies, a large dealership group based on Houston, Texas and worked
with his brother, John S. Winsauer, in certain of the transactions placed
through The Westcap Corporation in 1991 and 1992. Subsequently, Mr. Winsauer was
directly responsible for initiating, negotiating, coordinating and completing a
number of transactions involving the issuance of over $235 million of both
public and private asset-backed securities backed by subprime automobile finance
contracts, $190 million of which were sponsored by Mr. Winsauer. Mr. Winsauer
was among the first individuals to be involved in the structuring and marketing
of securitization transactions involving subprime finance contracts.
Adrian Katz, Vice Chairman, Chief Operating Officer and Director
Mr. Katz joined the Company in November 1995 and was elected Vice Chairman
of the Board of Directors and appointed Chief Operating Officer in December
1995. Immediately prior to that, from February 1995 he was employed as a
managing director at Smith Barney, Inc. (a broker/dealer), where he was
responsible for structuring asset-backed, commercial and residential
mortgage-backed securities. Form 1989 through 1994, Mr. Katz was employed by
Prudential Securities Incorporated (a broker/dealer), where he was appointed a
managing director in 1992 and where he served as a co-head of the Mortgage and
Asset Capital Division with corresponding sales, trading, banking and research
management responsibilities. From 1985 to 1989, Mr. Katz worked for The First
Boston Corporation developing software and managing the structure of new
securitizations. Mr. Katz has been involved in the sale and financing through
securitization of consumer assets since 1985.
51
<PAGE>
<PAGE>
John S. Winsauer, Secretary and Director
Mr. Winsauer has served as Secretary and a Director of the Company since
October 1995. In addition, Mr. Winsauer has been a shareholder of the Company
since June 1993. Mr. Winsauer's primary responsibilities have included the
development and implementation of the Company's computer and communications
systems. From January 1993 until present, Mr. Winsauer has been employed by
Amherst Securities Group (a broker/dealer previously known as USArbour
Financial) as a Senior Vice President, prior to which he served as a Senior Vice
President of The Westcap Corporation (a broker/dealer) from April 1989 to
January 1993. From June 1989 through August 1992, in his position as Senior Vice
President with The Westcap Corporation, Mr. Winsauer participated in the
successful marketing of whole-loan packages of finance contracts placed by the
Gillman Companies.
Manuel A. Gonzalez -- President
From November 1996 to January 1998, Mr. Gonzalez was an outside director of
the Company, and from September 1993 to December 1994, Mr. Gonzalez was
Executive Vice President of the Company and ABI. From January 1995 to January
1998, Mr. Gonzalez was Dealer Principal/Owner of NorthPoint Pontiac Buick GMC,
an automobile dealership located in Kingwood, Texas. From March 1991 to January
1998, Mr. Gonzalez was President of Equifirst Financial Services, Inc., a
consulting firm specializing in the automobile dealership industry. From 1988
through 1990, Mr. Gonzalez was Chief Financial Officer for the Gillman
Companies, prior to which he served as a Vice President at First City Bank,
Texas, where he managed the banking relationships of a large number of
automobile dealers.
R.T. Pigott, Jr., Vice President and Chief Financial Officer
Mr. Pigott joined the Company in April 1997 as its Vice President and Chief
Financial Officer. From 1988 to 1996, Mr. Pigott was Executive Vice President
and Chief Financial Officer of Franklin Federal Bancorp of Austin, Texas. Mr.
Pigott is a CPA with approximately twenty years experience in financial
services, including six years as an audit manager with a national accounting
firm.
Alan E. Pazdernik, Vice President -- Credit
Mr. Pazdernik joined the Company in September 1995 as Vice
President -- Credit. From October 1991 until he joined the Company, Mr.
Pazdernik was employed as Credit Manager by E-Z Plan, Inc., a company he created
to handle the internal financing of subprime automobile paper. Prior to October
1991, Mr. Pazdernik served over 18 years as the Director of Finance and
Insurance Operations for Red McCombs Automotive (an automobile dealership),
handling the credit, collection and finance contract administration functions
for a $70 million portfolio of automobile finance contracts. In his present
capacity with the Company, Mr. Pazdernik manages the credit and funding
departments, and has been involved in the Company's efforts to increase market
share in the San Antonio area.
Robert R. Giese, Vice President -- Collections
Mr. Giese joined the Company in April 1994 as Vice
President -- Collections. From 1984 to April 1994, he served as Vice President
in Retail Credit Administration with First Interstate Bank of Texas, with
responsibility for controlling the performance of the consumer loan portfolio in
Texas. Mr. Giese has more than 30 years experience in sales, finance and
banking, including management experience coordinating credit underwriting,
collections, asset disposal, centralized loss recovery and loan workout
functions. His experience in sales, credit and collections supports the Company
in its management of delinquency and loss performance.
Robert S. Kapito -- Director
Since May 1990, Mr. Kapito has been Vice Chairman of BlackRock Financial
Management, an investment advisory firm ('BlackRock'). Mr. Kapito is a member of
BlackRock's Management Committee and Investment Strategy Committee and Co-Head
of the Portfolio Management Group. Mr. Kapito also serves as Vice President for
BlackRock's family of mutual funds and for the Smith Barney Adjustable Rate
Government Income Fund. Mr. Kapito has also served since May 1987 as President
of the Board of Directors of Periwinkle National Theatre.
52
<PAGE>
<PAGE>
Stuart A. Jones -- Director
From March 1989 to the present, Stuart Jones has been self-employed as head
of Stuart A. Jones Finance and Investments, Dallas, Texas, a privately-owned
consultancy specializing in investment banking and real estate financing. From
January 1990 to January 1994, Mr. Jones also served as Counsel to the Brock
Group, Ltd., Washington, D.C., an international trade and investment strategies
consulting firm, where he represented clients in various real estate, energy and
environmental matters.
Thomas I. Blinten -- Director
Currently a private investor. From November 1995 to September 1997, Thomas
Blinten was a Managing Director and executive management committee member of
Nomura Capital Services, Inc., New York, New York, a majority-owned subsidiary
of Nomura Securities Company, responsible for interest rate swap and OTC
derivative sales and trading. From March 1993 to November 1995, Mr. Blinten was
a Principal and management committee member of General Re Financial Products, a
wholly-owned subsidiary of General Re Corporation. From July 1990 through March
1993, he was a manager in the Derivative Products department for Kemper
Securities Inc.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors established a Compensation Committee and an Audit
Committee comprised of outside directors. The Company's bylaws provide that each
such committee shall have three or more members, who serve at the pleasure of
the Board of Directors.
The Compensation Committee is responsible for administering incentive
grants under the Company's incentive stock option plan (the 'Option Plan') and
reviewing and making recommendations to the Board of Directors with respect to
the administration of the salaries, bonuses and other compensation of executive
officers, including the terms and conditions of their employment, and other
compensation matters.
The Audit Committee is responsible for making recommendations to the Board
concerning the engagement of the Company's independent auditors and consulting
with independent auditors concerning the audit plan and, thereafter, concerning
the auditors' report and management letter.
EXECUTIVE COMPENSATION
The following table sets forth, for the years ended December 31, 1997, 1996
and 1995, the annual and long-term compensation of the Company's highest paid
employees. These were the only employees whose annual compensation exceeded
$100,000 for the fiscal year ended December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
AWARDS
ANNUAL COMPENSATION ------------
------------------------------------------- SECURITIES
BASE OTHER ANNUAL UNDERLYING ALL OTHER
NAMES AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS(#) COMPENSATION
- ------------------------------ ---- -------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
William O. Winsauer(1) ....... 1997 $240,000 $ 0 $ 16,500 0 $ 0
Chairman of the Board and 1996 160,000 0 0 40,000 (3)
Chief Executive Officer 1995 0 0 0 0 (3)
Adrian Katz .................. 1997 150,000 0 0 0 0
Vice Chairman of the Board 1996 150,186 0 0 20,000 0
and Chief Operating Officer 1995 18,750 75,742(2)
John S. Winsauer ............. 1997 120,000 27,525 0 0 0
Director, Vice President and 1996 120,000 0 0 20,000 (3)
Secretary 1995 40,000 0 0 0 0
Ted Pigott ................... 1997 62,227(4) 18,417(4) 0 10,000 0
Vice President and Chief
Financial Officer
Jeremy Wohlblatt ............. 1997 97,708(5) 0 0 10,000 0
Vice President, Technology
</TABLE>
(footnotes on next page)
53
<PAGE>
<PAGE>
(footnotes from previous page)
(1) Amount reflects actual payments; on an annualized basis, Mr. Winsauer's 1996
base salary would have been $240,000.
(2) Stated value of compensation in the form of stock issuance.
(3) See 'Certain Transactions' for a discussion of loans to William and John
Winsauer.
(4) Amount reflects actual payments; on an annualized basis, Mr. Pigott's 1997
base salary would have been $96,000 and annualized bonus $26,000.
(5) Amount reflects actual payments; on an annualized basis, Mr. Wohlblatt's
1997 base salary would have been $100,000.
------------------------
STOCK OPTIONS
STOCK OPTION GRANTS 1996-1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------
NUMBER OF
SECURITIES % OR TOTAL EXERCISE GRANT DATE
UNDERLYING OPTIONS GRANTED PRICE EXPIRATION PRESENT
NAME OPTIONS GRANTED TO EMPLOYEES ($/SH)(1) DATE VALUE(2)
- --------------------------------------- --------------- --------------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
William O. Winsauer.................... 40,000 14.6% $ 10.50 11/14/2006 $ 4.88
John S. Winsauer....................... 20,000 7.3 10.50 11/14/2006 4.88
Adrian Katz............................ 20,000 7.3 10.50 11/14/2006 4.88
Robert S. Kapito....................... 3,000 1.1 10.50 11/14/2006 4.88
Manuel A. Gonzalez..................... 3,000 1.1 10.50 11/14/2006 4.88
Stuart A. Jones........................ 3,000 1.1 10.50 11/14/2006 4.88
Thomas I. Blinten...................... 3,000 1.1 10.50 11/14/2006 4.88
</TABLE>
- ------------
(1) The options were granted under the Company's Option Plan on November 14,
1996. The exercise price is the fair market value of the underlying stock on
the date the options were granted. The options vest 1/3 per year at the end
of each of the three years following the date of grant.
(2) Extracted from the Notes to the Company's audited financial statements.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Messrs. William Winsauer, Katz and Gonzalez have entered into employment
agreements with the Company on substantially the following terms:
William O. Winsauer. Mr. Winsauer entered into an employment agreement
with the Company dated May 1, 1996. Under the terms of this agreement, Mr.
Winsauer has agreed to serve as Chief Executive Officer of the Company for
a period of five years and, during such time, to devote his full business
time and attention to the business of the Company. The agreement provides
for compensation of Mr. Winsauer at a base salary of $240,000 per annum,
which may be increased or decreased from time to time in the sole
discretion of the Board, but in no event less than $240,000 per annum. The
agreement entitles Mr. Winsauer to receive the benefits of any cash
incentive compensation as may be granted by the Board to employees, and to
participate in any executive bonus or incentive plan established by the
Board from time to time.
The agreement provides Mr. Winsauer with additional benefits including
(i) the right to participate in the Company's medical benefit plan, (ii)
entitlement to benefits under the Company's executive disability insurance
coverage, (iii) a monthly automobile allowance of $1,500 plus fees,
maintenance and insurance, (iv) six weeks paid vacation and (v) all other
benefits granted to full-time executive employees of the Company.
The agreement automatically terminates upon (i) the death of Mr.
Winsauer, (ii) disability of Mr. Winsauer which continues for a period of
six months, following expiration of such six months,
54
<PAGE>
<PAGE>
(iii) the termination of Mr. Winsauer 'for cause' (which termination
requires the vote of a majority of the Board) or (iv) the occurrence of the
five-year expiration date, provided, however, that the agreement may be
extended for successive one-year intervals unless either party elects to
terminate the agreement in a prior written notice. Mr. Winsauer may
terminate his employment under the agreement for good reason as set forth
below. In the event of Mr. Winsauer's termination for cause, the agreement
provides that the Company shall pay Mr. Winsauer his base salary through
the date of termination and the vested portion of any incentive
compensation plan to which Mr. Winsauer may be entitled.
Mr. Winsauer may terminate his employment under the agreement for
'good reason,' including: (i) removal of, or failure to re-elect, Mr.
Winsauer as Chief Executive Officer; (ii) change in scope of
responsibilities; (iii) reduction in salary; (iv) relocation of the Company
outside Austin, Texas; (v) breach by the Company of the agreement; (vi)
certain changes to the Company's compensation plans; (vii) failure to
provide adequate insurance and pension benefits; (viii) failure to obtain
similar agreement from any successor or parent of the Company; or (ix)
termination of Mr. Winsauer other than by the procedures specified in the
agreement.
Other than following a change in control, and upon termination of Mr.
Winsauer in breach of the agreement or termination by Mr. Winsauer for good
reason, the Company must pay Mr. Winsauer: (i) his base salary through the
date of termination; (ii) a severance payment equal to the base salary
multiplied by the number of remaining years under the agreement; and (iii)
in the case of breach by the Company of the agreement, all other damages to
which Mr. Winsauer may be entitled as a result of such breach, including
lost benefits under retirement and incentive plans.
In the event of Mr. Winsauer's termination following a change in
control, the Company is required to pay Mr. Winsauer an amount equal to
three times the sum of (i) his base salary, (ii) his annual management
incentive compensation and (iii) his planned level of annual perquisites.
The agreement also provides for indemnification of Mr. Winsauer for any
costs or liability incurred by Mr. Winsauer in connection with his
employment.
Adrian Katz. Mr. Katz entered into an employment agreement with the
Company dated November 15, 1995. Under the terms of this agreement, Mr.
Katz has agreed to serve as Vice Chairman and Chief Operating Officer of
the Company for a period of three years and, during such time, to devote
his full business time and attention to the business of the Company. The
agreement grants Mr. Katz a base salary of $12,500 per full calendar month
of service, which amount may be increased from time to time at the sole
discretion of the Board. The agreement terminates upon the death of Mr.
Katz. In the event of any disability of Mr. Katz which continues for a
period of six months, the agreement may be terminated by the Company at the
expiration of such six-month period. The agreement automatically terminates
upon the discharge of Mr. Katz for cause.
Mr. Katz has agreed not to disclose certain confidential proprietary
information of the Company to unauthorized parties, except as required by
law, and to hold such information for the benefit of the Company. The
agreement contains standard non-competition covenants whereby Mr. Katz has
agreed not to conduct or solicit business with any competitors or clients
of the Company within certain restricted geographic areas for a period of
two years following the termination of his employment. The restriction also
applies to the solicitation of any current or recent employees of the
Company. The restricted areas include any territory within a 40-mile radius
of an automobile dealership with which the Company has done business during
the term of the agreement. Pursuant to the terms of the agreement, Mr. Katz
received 568,750 shares of the Company's Common Stock on January 1, 1996,
equal to 10% of the Company's outstanding shares of Common Stock following
the issuance of such shares to Mr. Katz.
Manual A. Gonzalez. Pursuant to a Consulting and Employment Agreement,
dated as of January 1, 1998 between the Company and Manual A. Gonzalez, Mr.
Gonzalez agreed to serve as a consultant to the Company until February 1,
1998, whereupon Mr. Gonzalez agreed to become President of the Company for
a period of three years and, during such time, to devote his full business
time and attention to the business of the Company. The agreement provides
for compensation of Mr. Gonzalez at a base salary of $200,000 per annum,
with a one time signing bonus of $100,000 and additional performance
bonuses of up to $25,000 per quarter, as approved by
55
<PAGE>
<PAGE>
the Chairman and the Compensation Committee. In addition, Mr. Gonzalez
received options under the Option Plan to purchase 100,000 shares of the
Company's common stock, along with an agreement to grant additional options
to purchase 50,000 of the Company's common stock on December 1, 1998. The
agreement entitles Mr. Gonzalez to participate in all employee benefit
plans and arrangements of the Company in the same manner as other executive
officers and to reimbursement for all reasonable expenses for
entertainment, and the like incurred by him in the interest of the business
of the Company.
The Agreement automatically terminates upon (i) the death of Mr.
Gonzalez, (ii) the disability of Mr. Gonzalez, which continues for a period
of six months, (iii) 'for cause,' (iv) at Mr. Gonzalez's option, or (v) at
the Company's option. Upon such termination, the Company is obligated to
pay Mr. Gonzalez his accrued base pay through the date of such termination,
unless terminated by the Company without cause, whereupon Mr. Gonzalez
would be entitled to his base pay for the remainder of the year in which
such termination occurred.
Pursuant to a separate Severance Agreement, dated as of February 1,
1998, upon the occurrence of a 'change in control' the Company must pay Mr.
Gonzalez a lump sum payment equal to the sum of the base pay plus any
incentive pay for that year, plus the Company will arrange to provide, for
a period of twelve months following the termination date, such employee
benefits as are substantially similar to those that Mr. Gonzalez was
receiving or entitled to receive immediately prior to such termination
date. Mr. Gonzalez generally is not required to mitigate payments made
under the Severance Agreement.
As with Mr. Katz, Mr. Gonzalez has agreed not to disclose certain
confidential proprietary information of the Company and has agreed to
certain noncompetition covenants whereby he has agreed not to conduct or
solicit business with any competitors of the Company within the State of
Texas for a one year period following the termination of his employment.
OPTION PLAN
The Board of Directors of the Company has adopted and the shareholders of
the Company has approved, the Company's 1996 Stock Option Plan (the 'Option
Plan'), under which stock options may be granted to directors, officers and
employees of the Company and its subsidiaries. The Option Plan permits the grant
of stock options that qualify as incentive stock options ('ISOs') under Section
422 of the Internal Revenue Code of 1986, as amended, and nonqualified stock
options ('NSOs'), which do not so qualify. The Company authorized and reserved
515,000 shares for issuance under the Option Plan. The shares may be unissued
shares or treasury shares. If an option expires or terminates for any reason
without having been exercised in full, the unpurchased shares subject to such
option will again be available for grant under the Option Plan. In the event of
certain corporate reorganizations, recapitalizations or other specified
corporate transactions affecting the Company or the Common Stock, proportionate
adjustments shall be made to the number of shares available for grant and to the
number of shares and prices under outstanding option grants made before the
event.
The Option Plan is administered by the Compensation Committee of the Board
of Directors (the 'Committee'). Subject to the limitations set forth in the
Option Plan, the Committee has the authority to determine the persons to whom
options will be granted, the time at which options will be granted, the number
of shares subject to each option, the exercise price of each option, the time or
times at which the options will become exercisable and the duration of the
exercise period. The Committee may provide for the acceleration of the exercise
period of an option at any time prior to its termination or upon the occurrence
of specified events, subject to limitations set forth in the Option Plan.
Subject to the consent of optionees, the Committee has the authority to cancel
and replace stock options previously granted with new options for the same or a
different number of shares and having a higher or lower exercise price, and may
amend the terms of any outstanding stock option to provide for an exercise price
that is higher or lower than the current exercise price.
All directors, officers and employees of the Company and its subsidiaries
are eligible to receive a grant of a stock option under the Option Plan, as
selected by the Committee. The exercise price of shares of Common Stock subject
to options granted under the Option Plan may not be less than the fair
56
<PAGE>
<PAGE>
market value of the Common Stock on the date of grant. Options granted under the
Option Plan will generally become vested and exercisable over a three-year
period in equal annual installments, unless the Committee specifies a different
vesting schedule. The maximum term of options granted under the Option Plan is
ten years from the date of grant. ISOs granted to any employee who is a 10%
shareholder of the Company are subject to special limitations relating to the
exercise price and term of the options. The value of Common Stock (determined at
the time of grant) that may be subject to ISOs that become exercisable by any
one employee in any one year is limited by the Internal Revenue Code to
$100,000. All options granted under the Option Plan are nontransferable by the
optionee, except upon the optionee's death in accordance with his will or
applicable law. In the event of an optionee's death or permanent and total
disability, outstanding options that have become exercisable will remain
exercisable for a period of one year, and the Committee will have the discretion
to determine the extent to which any unvested options shall become vested and
exercisable. In the case of any other termination of service, outstanding
options that have previously become vested will remain exercisable for a period
of 90 days, except for a termination 'for cause' (as defined), in which case all
unexercised options will be immediately forfeited. Under the Option Plan, the
exercise price of an option is payable in cash or, in the discretion of the
Committee, in Common Stock or a combination of cash and Common Stock. An
optionee must satisfy all applicable tax withholding requirements at the time of
exercise.
In the event of a 'change in control' of the Company (as defined in the
Option Plan) each option will become fully and immediately vested and the
optionee may surrender the option and receive, with respect to each share of
Common Stock issuable under such option, a payment in cash equal to the excess
of the fair market value of the Common Stock at the time of the change in
control over the exercise price of the option. However, there will be no
acceleration of vesting and cash payment if the change in control is approved by
two-thirds of the members of the Board of Directors of the Company and provision
is made for the continuation or substitution of the options on equivalent terms.
The Option Plan has a term of ten years, subject to earlier termination or
amendment by the Board of Directors, and all options granted under the Option
Plan prior to its termination remain outstanding until they have been exercised
or are terminated in accordance with their terms. The Board may amend the Option
Plan at any time.
The grant of a stock option under the Option Plan will not generally result
in taxable income for the optionee, nor in a deductible compensation expense for
the Company, at the time of grant. The optionee will have no taxable income upon
exercising an ISO (except that the alternative minimum tax may apply), and the
Company will receive no deduction when an ISO is exercised. Upon exercising an
NSO, the optionee will recognize ordinary income in the amount by which the fair
market value of the Common Stock on the date of exercise exceeds the exercise
price, and the Company will generally be entitled to a corresponding deduction.
The treatment of an optionee's disposition of shares of Common Stock acquired
upon the exercise of an option is dependent upon the length of time the shares
have been held and whether such shares were acquired by exercising an ISO or an
NSO. Generally, there will be no tax consequence to the Company in connection
with the disposition of shares acquired under an option except that the Company
may be entitled to a deduction in the case of a disposition of shares acquired
upon exercise of an ISO before the applicable ISO holding period has been
satisfied.
The Committee made initial grants of stock options under the Option Plan to
certain of the Company's directors, executive officers and other employees to
purchase an aggregate of 286,500 shares of Common Stock at a per share exercise
price equal to the Offering Price. Under this initial phase of the Option Plan,
William O. Winsauer was granted options to purchase a total of 40,000 shares,
and John S. Winsauer, and Adrian Katz have each been granted options to purchase
20,000 shares. The remaining options to purchase 206,500 shares were granted to
other employees and non-employee directors. The employee options become vested
and exercisable over a three-year period in equal annual installments beginning
on the first anniversary of the grant date. The non-employee director options to
purchase 12,000 shares are described below under 'Director Compensation.' The
number of shares of Common Stock that may be subject to options granted in the
future under the Option Plan to executive officers and other employees of the
Company is not determinable at this time.
57
<PAGE>
<PAGE>
DIRECTOR COMPENSATION
In return for their services to the Company, each of the non-employee
directors are compensated in the following manner: (i) an annual payment of
$5,000 cash; (ii) payment of $500 per meeting of the Board of Directors attended
and $500 for each committee meeting attended (plus reimbursement of
out-of-pocket expenses); and (iii) an option granted under the Option Plan to
purchase 3,000 shares of the Company's Common Stock.
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles of Incorporation provide that, pursuant to Texas
law, no director of the Company shall be liable to the Company or its
shareholders for monetary damages for an act or omission in such director's
capacity as a director except for (i) any breach of the director's duty of
loyalty to the Company or its shareholders, (ii) any act or omission not in good
faith or that involves intentional misconduct or a knowing violation of law,
(iii) any transaction from which the director derived an improper benefit,
whether or not the benefit resulted from an action taken within the scope of the
director's office or (iv) any act or omission for which the liability of a
director is expressly provided for by statute. The effect of this provision in
the Articles of Incorporation is to eliminate the right of the Company and its
shareholders (through shareholders' derivative suits on behalf of the Company)
to recover monetary damages against a director for breach of fiduciary duty as a
director (including breaches resulting from negligent or grossly negligent
behavior) except in the situations described in clauses (i) through (iv) above.
These provisions will not affect the liability of directors under other laws,
such as federal securities laws.
Under Section 2.02-1 of the Texas Business Corporation Act, the Company can
indemnify its directors and officers against liabilities they may incur in such
capacities, subject to certain limitations. The Company's Articles of
Incorporation provide that the Company will indemnify its directors and officers
to the fullest extent permitted by law.
CERTAIN TRANSACTIONS
The following is a summary of certain transactions to which the Company was
or is a party and in which certain executive officers, directors or shareholders
of the Company had or have a direct or indirect material interest.
William O. Winsauer entered into a Secured Working Capital Loan Agreement
dated as of July 31, 1995 (the 'Sentry Working Capital Line') with Sentry, which
provides for a line of credit of up to $2.25 million. Proceeds from the Sentry
Working Capital Line were contributed to the Company as paid-in capital. The
obligations of Mr. Winsauer under the Sentry Working Capital Line, including all
payment obligations, are guaranteed by the Company and its affiliate, ABI, whose
sole shareholder is William O. Winsauer, pursuant to a Working Capital Guarantee
and Waiver dated as of July 31, 1995. All amounts outstanding under the Sentry
Working Capital Line, and reimbursement of a payment of $89,000 made by the
Company to Sentry in April 1996 on behalf of Mr. Winsauer, were paid from the
sale of shares by William Winsauer as part of the Offering. Effective September
26, 1996 the Company was released from its guarantee of the shareholder's debt.
During 1995, the Company made loans to William O. Winsauer and John S.
Winsauer in the amount of $132,359 and $21,000, respectively. As of December 31,
1996, the outstanding amounts of these loans increased to $201,000 and $34,000,
respectively. Such loans bear no interest and have no repayment terms. As of
March 20, 1997, these advances were repaid in full. See Note 12 to Notes to
Consolidated Financial Statements.
Historically, the Company and ABI, which is wholly-owned by William O.
Winsauer, have provided services for each other on a regular basis. In this
regard, the Company had net advances due from ABI of $132,213 as of September
30, 1997, which funds were utilized by ABI prior to 1996 to cover expenses
incurred in connection with the management of ABI's investments in
securitization trusts. The Company and ABI entered into a management agreement
dated as of January 1, 1996 (the 'ABI Management Agreement') which provides for
repayment of such advances on or before May 31, 1998, the reimbursement of
expenses incurred on behalf of ABI and for an annual fee payable by ABI to the
58
<PAGE>
<PAGE>
Company for services rendered by it or the Company's employees on behalf of ABI.
The ABI Management Agreement states that the Company shall provide the following
management services for ABI on an ongoing basis: (i) day-to-day management of
ABI's portfolio of partnership interests in the securitization trusts sponsored
by ABI between 1992 and 1994, including various monitoring and reporting
functions; (ii) certain cash management services, including the advancing of
funds to pay ABI's ordinary business expenses and (iii) providing advice as to
regulatory compliance. The ABI Management Agreement also provides that the
Company will perform certain accounting functions on behalf of ABI including (i)
maintenance of financial books and records, (ii) monitoring of cash management
functions, (iii) preparation of financial statements and tax returns and (iv)
providing advice in connection with retention of independent accountants. As
compensation for services rendered thereunder, the ABI Management Agreement
provides that ABI shall pay the Company an annual fee of $50,000, payable
quarterly. In addition, the agreement provides for the quarterly reimbursement
of advances made by the Company of out-of-pocket costs and expenses on behalf of
ABI. Amounts due to the Company under the ABI Management Agreement amounted to
$132,213 at September 30, 1997.
Since July 1994, ABI has also provided certain administrative services to
Intercontinental Brokerage Inc. ('Intercontinental'), an independent insurance
broker in connection with Intercontinental's obligations as administrator of
pools of finance contracts subject to the Interstate Policy. ABI received fees
from Intercontinental totalling approximately $752,000 for the period from July
1994 to March 1997, including with respect to finance contracts as to which the
Company has paid administrative fees to Intercontinental. Since March 1997 the
Company has elected not to insure finance contracts under the Interstate Policy
and ABI will not receive any future fees from Intercontinental with respect to
such finance contracts.
The Board of Directors has adopted a policy that any future transactions
with affiliates of the Company will be on terms no less favorable to the Company
than are reasonably available from unrelated third parties and shall have been
approved by a majority of the Company's directors who do not have a material
interest in the transactions.
59
<PAGE>
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON SHARES
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of January 30, 1998 by (i) each
person who is known by the Company to own beneficially more than 5% of its
outstanding Common Stock, (ii) each director and nominee for director, (iii)
each named executive officer, and (iv) all executive officers and directors as a
group.
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------
AMOUNT OF
NAME AND ADDRESS OF BENEFICIAL PERCENTAGE
BENEFICIAL OWNER OWNERSHIP OWNED
- -------------------------------------------------------------------------------------- --------- ----------
<S> <C> <C>
William O. Winsauer .................................................................. 3,648,062 55.9%
AutoBond Acceptance Corporation
301 Congress Avenue
Austin, Texas 78701
John S. Winsauer ..................................................................... 1,240,688 19.0
AutoBond Acceptance Corporation
301 Congress Avenue
Austin, Texas 78701
Adrian Katz .......................................................................... 578,750 8.9
AutoBond Acceptance Corporation
301 Congress Avenue
Austin, Texas 78701
Robert S. Kapito ..................................................................... 16,000 *
Manuel A. Gonzalez ................................................................... 33,833 *
Thomas I. Blinten .................................................................... 12,000 *
Stuart A. Jones ...................................................................... 7,000 *
--------- -----
Total (all executive officers and directors as a group)(1)............................ 5,536,333 84.8%
--------- -----
--------- -----
</TABLE>
- ------------
(1) Does not include out-of-the-money options. See 'Management -- Stock
Options.'
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 25,000,000 shares of
Common Stock, no par value, and 5,000,000 shares of Preferred Stock.
Common Stock. As of January 30, 1998, there were 6,531,311 shares of Common
Stock outstanding. Holders of Common Stock are not entitled to any preemptive
rights. The Common Stock is neither redeemable nor convertible into any other
securities. All outstanding shares of Common Stock are fully paid and
nonassessable. All shares of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor.
Each holder of Common Stock is entitled to one vote for each share of
Common Stock held of record on all matters submitted to a vote of shareholders,
including the election of directors. Shares of Common Stock do not have
cumulative voting rights.
In the event of a liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to share equally and ratably in all of the
assets remaining, if any, after satisfaction of all debts and liabilities of the
Company.
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company.
Preferred Stock. The Board of Directors, without further shareholder
action, is authorized to issue shares of preferred stock in one or more series
and to fix the terms and provisions of each series, including dividend rights
and preferences over dividends on the Common Stock, conversion rights, voting
rights (in addition to those provided by law), redemption rights and the terms
of any sinking fund therefor, and rights upon liquidation, including preferences
over the Common Stock. Under certain circumstances, the issuance of a series of
preferred stock could have the effect of delaying, deferring or
60
<PAGE>
<PAGE>
preventing a change of control of the Company and could adversely affect the
rights of the holders of the Common Stock.
15% Series A Cumulative Preferred Stock. Prior to completion of this
offering of Preferred Stock, the Board will adopt an amendment to the Articles
of Incorporation designating the terms of the Preferred Stock, consisting of up
to 1,150,000 shares, no par value.
When issued, the Preferred Stock will be validly issued, fully paid and
nonassessable. The holders of the Preferred Stock will have no preemptive rights
with respect to any shares of capital stock of the Company or any other
securities of the Company convertible into or carrying rights or options to
purchase any such shares. The Preferred Stock will not be subject to any sinking
fund or other obligation of the Company to redeem or retire the Preferred Stock.
Unless converted into shares of Common Stock or redeemed by the Company at its
option, the Preferred Stock will have a perpetual term, with no maturity. The
Preferred Stock has been approved for listing on the AMEX under the symbol
'ABD.Pr.A.'
Ranking. The Preferred Stock will rank senior to the Common Stock with
respect to payment of dividends and amounts upon liquidation, dissolution or
winding up of the Company.
While any shares of the Preferred Stock are outstanding, the Company may
not authorize, create or increase the authorized amount of any class or series
of stock that ranks prior or senior to the Preferred Stock with respect to the
payment of dividends or amounts upon liquidation, dissolution or winding up
without the consent of the holders of two-thirds of the outstanding shares of
the Preferred Stock. However, the Company may create additional classes of
stock, increase the authorized number of shares of preferred stock or issue
series of preferred stock which rank on a parity with the Preferred Stock with
respect, in each case, to the payment of dividends and amounts upon liquidation,
dissolution or winding up of the Company (a 'Parity Stock') without the consent
of any holder of the Preferred Stock. See ' -- Voting Rights.'
Dividends. Holders of shares of Preferred Stock will be entitled to
receive, when, as and if declared by the Board of Directors out of funds at the
time legally available therefor, dividends at a rate of 15% per annum, payable
in cash quarterly in arrears on March 31, June 30, September 30 and December 31
of each year beginning June 30, 1998. Dividends will accrue and are cumulative
from the date of first issuance of the Preferred Stock and will be payable to
holders of record as they appear on the stock books of the Company on such
record dates as are fixed by the Board of Directors. Under Texas law, dividends
are generally payable if the Company is not otherwise insolvent to the extent
its net assets exceed its stated capital. Accumulated dividends on shares of
Preferred Stock will not bear interest. Dividends payable on the Preferred Stock
for any period less than a full dividend period will be computed on the basis of
twelve 30-day months and a 360-day year.
Except as provided in the next sentence, no dividend will be declared or
paid or other distribution of cash or other property declared or made directly
by the Company or any affiliate or any person acting on behalf of the Company or
any of its affiliates on any Parity Stock unless full cumulative dividends have
been declared and paid or are contemporaneously declared and funds sufficient
for payment set aside on the Preferred Stock for all prior and contemporaneous
dividend periods. If accumulated and accrued dividends on the Preferred Stock
for all prior and contemporaneous dividend periods have not been paid in full,
then any dividend declared on the Preferred Stock for any dividend period and on
any Parity Stock will be declared ratably in proportion to accumulated, accrued
and unpaid dividends on the Preferred Stock and the Parity Stock.
Neither the Company nor any affiliate nor any person acting on behalf of
the Company or any of its affiliates will (i) declare, pay or set apart funds
for the payment of any dividend or other distribution of cash or other property
declared or made directly or indirectly by the Company or any such affiliate or
person with respect to any Junior Stock (as defined below) or (ii) redeem,
purchase or otherwise acquire for consideration any Junior Stock through a
sinking fund or otherwise (other than a redemption or purchase or other
acquisition of shares of Common Stock made for purposes of an employee incentive
or benefit plan of the Company or any subsidiary) or (iii) pay or distribute any
cash or other property for the benefit of any holder of Junior Stock in respect
thereof, directly or indirectly, unless (A) all cumulative dividends with
respect to the Preferred Stock and any Parity Stock at the time
61
<PAGE>
<PAGE>
such dividends are payable have been paid or such dividends have been declared
and funds have been set apart for payment of such dividends and (B) sufficient
funds have been paid or set apart for the payment of the dividend for the
current dividend period with respect to the Preferred Stock and any Parity
Stock. The foregoing limitations do not restrict the Company's ability to take
the foregoing actions with respect to any Parity Stock.
As used herein, (i) the term 'dividend' does not include dividends payable
solely in shares of Junior Stock on Junior Stock, or in options, warrants or
rights to holders of Junior Stock to subscribe for or purchase any Junior Stock,
and (ii) the term 'Junior Stock' means the Common Stock, and any other class of
capital stock of the Company now or hereafter issued and outstanding that ranks
junior to the Preferred Stock as to the payment of dividends or amounts upon
liquidation, dissolution or winding up of the Company.
Redemption. The Preferred Stock is not redeemable or convertible at the
option of the holder. The Preferred Stock may not be redeemed by the Company
until three years from the issuance date. One-sixth of the shares of outstanding
Preferred Stock is redeemable each year thereafter at the option of the Company,
for cash at the liquidation preference per share, plus accrued and unpaid
dividends, or in Common Stock as follows:
For each share of Preferred Stock redeemed, the Company may issue to
the holder X number of shares of Common Stock, where
$10/preferred share
X = --------------------
.85($Y/common share),
where Y equals the average of the closing sale price per share of the Common
Stock on NASDAQ for the 5 trading days prior to the redemption date.
Notice of redemption will be given by mail or by publication (with
subsequent prompt notice by mail) to the holders of record of the Preferred
Stock not more than four business days after the Company issues a press release,
in the case of a redemption for Common Stock, or not less than 30 nor more than
60 days prior to the date of redemption, in the case of a redemption for cash.
The redemption date will be a date selected by the Company not less than 30 nor
more than 60 days after the date on which the Company gives the notice of
redemption or issues the press release announcing its intention to redeem the
Preferred Stock, as the case may be. If fewer than all of the shares of
Preferred Stock are to be redeemed, the shares to be redeemed shall be selected
by lot or pro rata or in some other equitable manner determined by the Company.
On the redemption date, the Company must pay in cash on each share of
Preferred Stock to be redeemed any accumulated, accrued and unpaid dividends, if
any, on the redemption date, whether or not earned or declared. In the case of a
redemption date falling after a dividend record date and prior to the related
dividend payment date, the holders of the Preferred Stock at the close of
business on such record date will be entitled to receive the dividend payable on
such shares on the corresponding dividend payment date, notwithstanding the
redemption of such shares following such dividend record date. Except as
provided for in the preceding sentences, no payment or allowance will be made
for accumulated or accrued dividends on any shares of Preferred Stock called for
redemption or on the shares of Common Stock issuable upon such redemption.
In the event that full cumulative dividends on the Preferred Stock have not
been paid or declared and set apart for payment, the Preferred Stock may not be
redeemed in part and the Company may not purchase or acquire shares of Preferred
Stock otherwise than pursuant to a purchase or exchange offer made on the same
terms to all holders of Preferred Stock.
On and after the date fixed for redemption, provided that the Company has
made available at the office of the registrar and transfer agent a sufficient
number of shares of Common Stock and/or an amount of cash to effect the
redemption, dividends will cease to accumulate or accrue on the Preferred Stock
called for redemption (except that, in the case of a redemption date after a
dividend record date and prior to the related dividend payment date, holders of
Preferred Stock on the dividend record date will be entitled on such dividend
payment date to receive the dividend payable on such shares), such shares shall
no longer be deemed to be outstanding and all rights of the holders of such
shares of
62
<PAGE>
<PAGE>
Preferred Stock shall cease except the right to receive the shares of Common
Stock upon such redemption and/or any cash payable upon such redemption, without
interest from the date of such redemption. At the close of business on the
redemption date, each holder of Preferred Stock to be redeemed (unless the
Company defaults in the delivery of the Common Stock or cash) will be, without
any further action, deemed a holder of the number of shares of Common Stock
and/or the amount of cash for which such Preferred Stock is redeemable.
Fractional shares of Common Stock will not be issued upon redemption of the
Preferred Stock, but, in lieu thereof, the Company will pay an amount in cash
based on the current market price of the Common Stock on the day prior to the
redemption date.
Liquidation Rights. In the event of any liquidation, dissolution or winding
up of the Company, holders of shares of Preferred Stock are entitled to receive,
out of legally available assets, a liquidation preference of $10.00 per share,
plus an amount equal to any accrued and unpaid dividends to the payment date,
and no more, before any payment or distribution is made to the holders of Common
Stock or any series or class of the Company's stock hereafter issued that ranks
junior as to the liquidation rights to the Preferred Stock, but the holders of
the shares of the Preferred Stock will not be entitled to receive the
liquidation preference on such shares until the liquidation preference of any
other series or class of the Company's stock previously or hereafter issued that
ranks senior as to liquidation rights to the Preferred Stock has been paid in
full.
Voting Rights. Except as indicated below, or except as otherwise from time
to time required by applicable law, the holders of Preferred Stock will have no
voting rights.
If two quarterly dividends payable on the Preferred Stock or any other
Parity Stock are in arrears, whether or not earned or declared, the number of
directors then constituting the Board will be increased by three and the holders
of Preferred Stock, will have the right to elect three additional directors to
serve on the Board at an annual meeting of stockholders or special meeting held
in place thereof, or at a properly called special meeting of the holders of the
Preferred Stock and at each subsequent annual meeting of stockholders or special
meeting held in place thereof, until all such dividends in arrears and dividends
for the current quarterly period on the Preferred Stock have been paid or
declared and set aside for payment. Notwithstanding the foregoing, the total
number of directors elected by the holders of the Preferred Stock and the
Representative will not exceed three.
The approval of the holders of two-thirds of the outstanding shares of
Preferred Stock will be required in order to amend the Articles of Incorporation
or Bylaws to affect materially and adversely the rights, preferences or voting
power of the holders of the Preferred Stock or to authorize, create, or increase
the authorized amount of, any class of stock having rights prior or senior to
the Preferred Stock with respect to the payment of dividends or amounts upon
liquidation, dissolution or winding up or change any provision of the Articles
of Incorporation or Bylaws that relate to the Board of Directors or the election
of directors or approve any merger or consolidation involving the Company or a
sale of all or substantially all of the assets of the Company. However, the
Company may create additional classes, shares or series of Parity Stock with the
consent of the holders of a majority of the outstanding shares of Preferred
Stock, and may create classes of Junior Stock, increase the authorized number of
shares of Junior Stock and issue additional series of Junior Stock without the
consent of any holder of Preferred Stock.
It is not possible to state the actual effect of any other authorization of
Preferred Stock upon the rights of holders of Common Stock until the Board
determines the specific rights of the holders of any other series of Preferred
Stock. The Board's authority to issue Preferred Stock also provides a convenient
vehicle in connection with possible acquisitions and other corporate purposes,
but could have the effect of making it more difficult for a third party to
aqcuire a majority of the outstanding voting stock. Accordingly, the issuance of
Preferred Stock may be used as an 'anti-takeover' device without further action
on the part of the stockholders of the Company, and may adversely affect the
holders of the Common Stock.
The Transfer Agent and Registrar for the Preferred Stock will be American
Stock Transfer and Trust.
63
<PAGE>
<PAGE>
WARRANTS AND CONVERTIBLE NOTES
See 'Underwriting' for a description of the Representatives' Warrants.
The Company has outstanding warrants (the 'IPO Warrants') which were issued
in favor of The Boston Group, L.P. (the 'Boston Group') in connection with the
Company's initial public offering and warrants with respect to its Common Stock
which were issued on June 30, 1997 in connection with the issuance of the
convertible notes.
The Company agreed to sell to the Boston Group, for $50, IPO Warrants to
purchase up to 100,000 shares of Common Stock at an exercise price per share
equal to 120% of the actual public offering price per share ($12/share). The IPO
Warrants are exercisable for a period of four years beginning November 1997. The
IPO Warrants may not be sold, transferred, assigned or hypothecated except to
the officers or partners of the Boston Group or, beginning November 1997, to the
employees of the Representative. The IPO Warrants include a net exercise
provision permitting the holder, upon consent of the Company, to pay the
exercise price by cancellation of a number of share with a fair market value
equal to the exercise price of the IPO Warrants. As of the date hereof, none of
the IPO Warrants have been exercised.
The IPO Warrants provide certain rights with respect to the registration
under the Securities Act of up to 100,000 shares of Common Stock issuable upon
exercise thereof. The holders of the shares issuable upon exercise of the IPO
Warrants may require the Company to file a registration statement under the
Securities Act with respect to such shares for a period of four years beginning
November 1997. In addition, if the Company registers any of its Common Stock for
its own account during the four year period beginning November 1997, the holders
of the shares issuable upon exercise of the IPO Warrants are entitled to include
their shares of Common Stock in the registration.
In June 1997, the Company issued $2,000,000 in aggregate principal amount
of its 18% Senior Secured Promissory Notes (the '18% Notes') and Common Stock
Purchase Warrants, dated June 30, 1997 (the 'June 1997 Warrants'). The 18% Notes
are convertible into 800,000 shares of Common Stock upon the earlier to occur of
(i) an event of default on the 18% Notes and (ii) June 30, 1998, through the
close of business on June 30, 2000, subject to prior redemption, into shares of
Common Stock of the Company at a price equal to the outstanding principal amount
of the Note being converted divided by the lesser of (x) $5.00 (or the price as
adjusted by the terms of the Securities Purchase Agreement) and (y) 85% of the
average of the five (5) lowest closing bid prices of the Company's Common Stock
on the Nasdaq National Market, or such other exchange or market where the Common
Stock is then traded during each of the sixty (60) Trading Days immediately
preceding the date the Note is converted or the applicable date or repayment
(subject to adjustment under certain circumstances). As of the date of this
Prospectus, the aggregate principal amount of Notes outstanding is $2,000,000,
which may be converted into 851,651 shares of Common Stock.
Pursuant to a Registration Rights Agreement dated as of June 30, 1997 (the
'Registration Rights Agreement') between the Company and the initial purchasers
named therein entered into in connection with the Note and the Warrant
Placement, the Company has filed with the Commission under the Securities Act a
Registration Statement with respect to the resale of the underlying shares from
time to time and has agreed to keep such registration statement effective and to
comply with the provisions of the Securities Act with respect to the disposition
of all registrable securities covered by such registration statement until the
earlier to occur of (i) with respect to the first Registration Statement, six
(6) years after the date of the Registration Rights Agreement, (ii) with respect
to any subsequent Registration Statement, two (2) years after the issuance of
the additional shares covered thereby and (iii) in each case, such time as all
of the securities which are the subject of such registration statement cease to
be registrable securities (such period, in each case, the 'Registration
Maintenance Period') subject, however, to the right of the Company to suspend
effectiveness of the registration statement for not more than 30 consecutive
days or an aggregate of 90 days during such Registration Maintenance Period,
provided the reference to 30 consecutive days shall be 60 consecutive days in
the event the Company has publicly announced a transaction and, in connection
therewith, the Company's independent certified public accountants have delivered
a certificate to the Holders stating that it is not practicable to prepare and
file with the Commission all necessary information associated with such
transaction to cause the registration statement to be reinstated during such 30
day period.
64
<PAGE>
<PAGE>
As of the date of this Prospectus, none of the 18% Notes have been
converted and none of the June 1997 Warrants have been exercised.
The June 1997 Warrants entitle the holders of such Warrants, upon exercise
of a Warrant, to purchase from the Company 200,000 shares of its Common Stock
(the 'Warrant Shares') at $4.225 per share. The exercise price per share may be
adjusted over time due to certain adjustments that are to be made to the number
of shares constituting a Warrant Share in the event of Common Stock dividends,
stock splits, dilutive issuances of additional Common Stock, consolidation of
outstanding Common Stock shares, issuance of additional warrants or other
rights, or issuance of securities convertible into Common Stock of the Company.
The Company is obligated to register the shares of Common Stock issuable upon
exercise of the Warrants in accordance with the terms of a Registration Rights
Agreement between the Company and the Warrant Holders (the 'Registration Rights
Agreement'). Under the terms of such Registration Rights Agreement, the Company
will at all times reserve and keep available, solely for issuance and delivery
on the exercise of the Warrants, all shares of Common Stock issuable under the
Warrants.
The Subordinated Note Warrant entitles the holder, upon exercise of the
Warrant, to purchase from the Company that number of shares of Common Stock, up
to 368,462 (subject to increase up to 490,000), which were available for
conversion at the maturity of the Subordinated Notes. The Subordinated Note
Warrant contains customary anti-dilution provisions, as well as certain demand
and 'piggyback' registration rights. In addition, if certain major corporate
events (such as a change in control or major stock offering) do not occur prior
to February 1, 2001, then the holder will have the right to put the Warrant to
the Company at the difference between the current market price and the warrant
exercise price. The Company has the option to redeem the Subordinated Note
Warrant under certain circumstances.
In connection with the placement of the Subordinated Notes and the
Subordinated Note Warrant, the Company, William O. Winsauer and John S.
Winsauer, as principals (the 'Principals') entered into a Stockholders Agreement
with BancBoston pursuant to which the Principals granted to BancBoston certain
'tag-along rights' in connection with sales of Common Stock by the Principals.
Also, the Company paid a placement fee of 5% of the principal amount of the
Subordinated Notes to Dresdner Investments Services, Inc., and issued to the
placement agent a warrant to purchase 65,313 shares of Common Stock, at an
exercise price of $6.30 per share.
In addition, in connection with the 1997-B and 1997-C securitizations, $5.8
million in Class B Notes are exchangeable (at a rate of 117.5% of the principal
amount of Class B Notes exchanged) for the Company's 17% Convertible Notes,
solely upon the occurrence of a delinquency ratio trigger relating to the
securitized pools.
UNDERWRITING
The Underwriters named below, represented by Tejas Securities Group, Inc.
and Neidiger, Tucker, Bruner, Inc. (together, the 'Representatives'), have
severally agreed, subject to the terms and conditions contained in the
Underwriting Agreement, to purchase from the Company the number of shares of
Preferred Stock indicated below opposite their respective names at the initial
public offering price less the underwriting discounts and commissions set forth
on the cover page of this Prospectus.
65
<PAGE>
<PAGE>
The Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions and that the Underwriters are committed to
purchase all of such shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- --------------------------------------------------------------------------------- ---------
<S> <C>
Tejas Securities Group, Inc......................................................
Neidiger, Tucker, Bruner, Inc....................................................
---------
Total.......................................................................
---------
---------
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer shares to the public at the initial offering price set forth on
the cover page of this Prospectus, and to certain securities dealers at such
price less a concession of not more than $ per share. The Underwriters may
allow, and such dealers may reallow, a discount not in excess of $ per share
of Preferred Stock to certain other brokers and dealers. After the initial
public offering, the public offering price and concessions and discounts may be
changed by the Underwriters. No reduction in such terms shall change the amount
of proceeds to be received by the Company as set forth on the cover page of this
Prospectus.
The Company has granted the Underwriters an option, exercisable within
forty-five days after the date of this Prospectus, to purchase up to an
aggregate of an additional 15% of the aggregate number of Preferred Shares
offered in connection with the Offering, to cover over-allotments, at the same
price per share of Preferred Stock being paid by the Underwriters for the other
shares of Preferred Stock offered hereby.
The Representatives have informed the Company that they do not expect any
sales of the shares of Preferred Stock offered hereby to be made by the
Underwriters to any accounts over which they exercise discretionary authority.
The Company has agreed to pay the Representatives a non-accountable expense
allowance of 2% of the amount of the Offering. To date, the Company has not paid
any of the non-accountable expense allowance to the Representatives. The
Representatives' expenses in excess of the non-accountable expense allowance,
including their legal expenses, will be borne by the Representatives. To the
extent that the expenses of the Representatives are less that the
non-accountable expense allowance, the excess shall be deemed to be compensation
to the Representatives.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities under the Securities Act or will
contribute payments the Underwriters may be required to make in respect thereof,
the Company has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
The Underwriters have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in this offering may
engage in transactions, including stabilizing bids and syndicate covering
transactions, which may have the effect of stabilizing or maintaining the market
price of any class of the Preferred Stock at levels above those that might
otherwise prevail in the open market. A 'stabilizing bid' is a bid for or the
purchase of any Preferred Stock on behalf of the Underwriters for the purpose of
fixing or maintaining the price of such shares. A 'syndicate covering
transaction' is the bid for or the purchase of Preferred Stock on behalf of the
Underwriters to reduce a short position incurred by the Underwriters in
connection with this offering.
66
<PAGE>
<PAGE>
Stabilizing bids and syndicate covering transactions may have the effect of
causing the price of the Preferred Stock of any class to be higher than it might
be in the absence thereof. Neither the Company nor the Underwriters makes any
representation or prediction as to the direction or magnitude of any such effect
on the prices for the Preferred Stock. Neither the Company nor Underwriters
makes any representation that the Underwriters will engage in any such
transactions or that, once commenced, any such transactions will not be
discontinued without notice.
The Company has agreed to sell to the Representatives, for $100,
Representatives' Warrants to purchase up to 100,000 shares of Common Stock at an
exercise price per share equal to 105% of the average closing bid price per
share for the five days prior to the Offering being effective. The
Representatives' Warrants are exercisable for a period of four years commencing
one year after the date of this Prospectus. The Representatives' Warrants may
not be sold, transferred, pledged or hypothecated for a period of one year from
the date of this offering, except to the officers, or partners of or employees
of the Representatives and dealers participating in the offering and their
respective partners and officers. The Representatives' Warrants include a net
exercise provision permitting the holder, upon consent of the Company, to pay
the exercise price by cancellation of a number of shares with a fair market
value equal to the exercise price of such Representative's Warrant.
The Representatives shall have the right to designate a member of the
Company's board of directors until the next annual meeting at which time
management will cause such designee to be nominated for election to the board of
directors and such nomination shall be supported by management. Such designee
shall continue to be nominated and supported by management until such time as
the Representatives' Warrants either expire or are exercised in full by the
Representatives. Alternatively, the Representatives may designate an observer to
attend meetings of the Board of Directors.
The Representatives' Warrants provide certain rights with respect to the
registration under the Securities Act of up to 100,000 shares of Common Stock
issuable upon exercise thereof. The holders of the shares issuable upon exercise
of the Representatives' Warrants may require the Company to file a registration
statement under the Securities Act with respect to such shares. In addition, if
the Company registers any of its Common Stock for its own account, the holders
of the shares issuable upon exercise of the Representatives' Warrants are
entitled to include their shares of Common Stock in the registration.
The Preferred Stock will be traded on AMEX under the symbol 'ABD.Pr.A.'
The Common Stock of the Company is traded on Nasdaq National Market under
the symbol 'ABND.'
LEGAL MATTERS
Certain legal matters with respect to the securities offered hereby will be
passed upon for the Company by Jones, Day, Reavis & Pogue, Dallas, Texas and for
the Underwriters by Wolin, Ridley & Miller LLP, Dallas, Texas.
EXPERTS
The consolidated balance sheets as of December 31, 1995 and 1996, and the
consolidated statements of operations, changes in shareholders' equity, and cash
flows, for the period from August 1, 1994 (inception) through December 31, 1994
and for the years ended December 31, 1995 and 1996, included in this prospectus,
have been included herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
67
<PAGE>
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets, December 31, 1996 and September 30, 1997 (unaudited).......................... F-2
Consolidated Statements of Operations for the Three and Nine Month Periods ended September 30, 1996
(unaudited) and September 30, 1997 (unaudited)........................................................... F-3
Consolidated Statements of Shareholders Equity for the nine months ended September 30, 1997 (unaudited).... F-4
Consolidated Statements of Cash Flows for the Nine Month Periods ended September 30, 1996 (unaudited) and
September 30, 1997 (unaudited)........................................................................... F-5
Notes to Consolidated Financial Statements (unaudited)..................................................... F-6
Report of Independent Accountants.......................................................................... F-10
Consolidated Balance Sheets, December 31, 1995 and 1996.................................................... F-11
Consolidated Statements of Operations for the Period From August 1, 1994 (Inception) to December 31, 1994,
and the Years Ended December 31, 1995 and 1996........................................................... F-12
Consolidated Statements of Shareholders' Equity for the Period From August 1, 1994 (Inception) to December
31, 1994, and the Years Ended December 31, 1995 and 1996................................................. F-13
Consolidated Statements of Cash Flows for the Period From August 1, 1994 (Inception) to December 31, 1994,
and the Years Ended December 31, 1995 and 1996........................................................... F-14
Notes to Consolidated Financial Statements................................................................. F-15
</TABLE>
F-1
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents.......................................................... $ 4,121,342 $ 173,582
Restricted funds................................................................... 2,981,449 6,164,785
Finance contracts held for sale, net............................................... 228,429 999,538
Collateral acquired, net........................................................... 152,580 427,026
Class B certificates............................................................... 10,465,294 8,467,246
Interest-only strip receivable..................................................... 4,247,274 9,978,785
Debt issuance cost................................................................. 997,338 751,280
Trust receivable................................................................... 2,230,003 4,726,996
Due from affiliate................................................................. 168,847 132,213
Other assets....................................................................... 683,955 5,564,082
------------ -------------
Total assets............................................................. $ 26,276,511 $37,385,533
------------ -------------
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Revolving credit facilities................................................... $ -- $ 4,240,208
Notes payable................................................................. 10,174,633 10,279,888
Accounts payable and accrued liabilities...................................... 1,474,586 3,071,275
Bank overdraft................................................................ -- 445,137
Payable to affiliate.......................................................... 265,998 190,852
Deferred income taxes......................................................... 2,075,553 3,623,405
------------ -------------
Total liabilities........................................................ 13,990,770 21,850,765
------------ -------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized; no shares issued
Common stock, no par value; 25,000,000 shares authorized, 6,512,500 shares
issued and outstanding....................................................... 1,000 1,000
Additional paid-in capital.................................................... 8,617,466 8,704,466
Deferred compensation......................................................... (11,422) (1,142)
Loans to shareholders......................................................... (235,071) (7,006)
Unrealized appreciation on interest-only strip receivable..................... -- 1,265,971
Retained earnings............................................................. 3,913,768 5,571,479
------------ -------------
Total shareholders' equity............................................... 12,285,741 15,534,768
------------ -------------
Total liabilities and shareholders' equity.......................... $ 26,276,511 $37,385,533
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ --------------------------
1996 1997 1996 1997
---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Interest income................................... $ 600,558 $1,313,670 $ 2,070,909 $ 3,107,402
Gain on sale of finance contracts................. 3,679,081 4,840,621 9,423,067 13,532,765
Servicing fee income.............................. 197,597 225,389 474,805 659,791
Other income (loss)............................... -- (9,461) -- (530,249)
---------- ---------- ----------- -----------
Total revenues............................... 4,477,236 6,370,219 11,968,781 16,769,709
---------- ---------- ----------- -----------
Expenses:
Provision for credit losses....................... 49,750 125,000 113,234 125,000
Interest expense.................................. 669,815 1,102,195 1,807,335 2,930,592
Salaries and benefits............................. 1,236,352 2,140,420 3,082,399 5,413,045
General and administrative........................ 433,163 1,722,689 1,317,511 4,481,846
Other operating expenses.......................... 190,638 483,141 842,019 1,265,830
---------- ---------- ----------- -----------
Total expenses............................... 2,579,718 5,573,445 7,162,498 14,216,313
---------- ---------- ----------- -----------
Income before income taxes and extraordinary loss...... 1,897,518 796,774 4,806,283 2,553,396
Provision for income taxes............................. 614,136 284,960 1,634,136 895,685
---------- ---------- ----------- -----------
Income before extraordinary loss....................... 1,283,382 511,814 3,172,147 1,657,711
Extraordinary loss, net of tax benefits of $50,000..... -- -- (100,000) --
---------- ---------- ----------- -----------
Net income................................... $1,283,382 $ 511,814 $ 3,072,147 $ 1,657,711
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Income per common share:
Income before extraordinary loss.................. $ 0.23 $ 0.08 $ 0.56 $ 0.25
Extraordinary loss................................ -- -- (0.02) --
---------- ---------- ----------- -----------
Net income................................... $ 0.23 $ 0.08 $ 0.54 $ 0.25
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Weighted average shares outstanding.................... 5,701,086 6,537,129 5,701,086 6,537,129
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997
-------------------
(UNAUDITED)
<S> <C>
Common stock:
Balance, December 31, 1996.............................................................. $ 1,000
-----------
Balance, September 30, 1997............................................................. 1,000
-----------
Additional paid-in capital:
Balance, December 31, 1996.............................................................. 8,617,466
Issuance of common stock warrants....................................................... 87,000
-----------
Balance, September 30, 1997............................................................. 8,704,466
-----------
Deferred compensation:
Balance, December 31, 1996.............................................................. (11,422)
Amortization of deferred compensation................................................... 10,280
-----------
Balance, September 30, 1997............................................................. (1,142)
-----------
Loans to shareholders:
Balance, December 31, 1996.............................................................. (235,071)
Net payments received................................................................... 228,065
-----------
Balance, September 30, 1997............................................................. (7,006)
-----------
Unrealized appreciation on interest-only strip receivable:
Balance, December 31, 1996.............................................................. --
Increase in unrealized appreciation on interest-only strip receivable................... 1,265,971
-----------
Balance, September 30, 1997............................................................. 1,265,971
-----------
Retained earnings:
Balance, December 31, 1996.............................................................. 3,913,768
Net income.............................................................................. 1,657,711
-----------
Balance, September 30, 1997............................................................. 5,571,479
-----------
Total shareholders' equity......................................................... $15,534,768
-----------
-----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................................... $ 3,072,146 $ 1,657,711
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of finance contract acquisition discount and insurance..... (1,161,132) (11,472)
Amortization of deferred compensation................................... 38,552 10,280
Amortization of debt issuance costs..................................... 242,071 634,033
Depreciation and amortization........................................... -- 197,203
Provision for credit losses............................................. 113,234 125,000
Deferred income taxes................................................... 1,584,136 895,685
Accretion of interest-only strip receivable............................. 894,795 (339,266)
Unrealized loss on Class B certificates................................. -- 80,325
Changes in operating assets and liabilities:
Restricted funds........................................................ 127,332 (3,183,336)
Other assets............................................................ (1,218,255) (5,077,330)
Class B certificates.................................................... (5,503,658) 1,917,723
Interest-only strip receivable.......................................... (1,500,502) (3,474,107)
Accounts payable and accrued liabilities................................ (358,159) 1,596,689
Due to/due from affiliate............................................... (389,144) (38,512)
Purchases of finance contracts............................................... (57,729,995) (99,211,259)
Sales of finance contracts................................................... 59,014,035 96,719,843
Repayments of finance contracts.............................................. 603,595 1,199,737
------------ ------------
Net cash used in operating activities.............................. (2,170,949) (6,301,053)
------------ ------------
Cash flows from investing activities:
Advances to AutoBond Receivables Trusts...................................... (2,223,918) (2,496,993)
Loan payments from (to) shareholders......................................... (297,004) 228,065
Disposal proceeds from collateral acquired................................... 1,095,470 132,596
------------ ------------
Net cash used in investing activities.............................. (1,425,452) (2,136,332)
------------ ------------
Cash flows from financing activities:
Net borrowings (payments) under revolving credit facilities.................. (1,150,424) 4,240,208
Debt issuance costs.......................................................... (675,887) (387,975)
Repayments of borrowings under repurchase agreement.......................... (1,061,392) --
Proceeds from notes payable.................................................. 9,137,333 2,015,150
Payments on notes payable.................................................... (3,840,234) (1,909,895)
Proceeds from subordinated debt borrowings................................... 300,000 --
Increase in bank overdraft................................................... 1,129,949 445,137
Issuance of common stock warrants............................................ -- 87,000
------------ ------------
Net cash provided by financing activities.......................... 3,839,345 4,489,625
------------ ------------
Net increase (decrease) in cash and cash equivalents.............................. 242,944 (3,947,760)
Cash and cash equivalents at beginning of period.................................. 92,660 4,121,342
------------ ------------
Cash and cash equivalents at end of period........................................ $ 335,604 $ 173,582
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements of AutoBond Acceptance Corporation
(the 'Company') included herein are unaudited and have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and Securities and Exchange Commission regulations. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to regulations. In the opinion of management, the
financial statements reflect all adjustments (of a normal and recurring nature)
which are necessary to present fairly the financial position, results of
operations and cash flows for the interim periods. Results for interim periods
are not necessarily indicative of the results for a full year. For further
information, refer to the audited financial statements and footnotes thereto
included in the Company's Form 10-K for the year ended December 31, 1996 (Number
000-21673).
Certain data from the prior year has been reclassified to conform to 1997
presentation.
2. EARNINGS PER SHARE
Earnings per share is calculated using the weighted average number of
common shares and common share equivalents outstanding during the year. Fully
diluted earnings per share are not presented because the relevant potentially
dilutive securities are not significant. Effective May 30, 1996, the Board of
Directors of the Company voted to effect a 767.8125-for-1 stock split. All share
information and earnings per share calculations for the periods presented in the
financial statements herein, and the notes hereto, have been retroactively
restated for such stock split.
The weighted average number of common and common equivalent shares
outstanding for the purposes of computing net income per share were 6,537,129
for periods ended September 30, 1997.
3. FINANCE CONTRACTS HELD FOR SALE
The following amounts are included in finance contracts held for sale as
of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Unpaid principal balance................................................. $266,450 $ 1,090,592
Prepaid insurance........................................................ 18,733 42,437
Contract acquisition discounts........................................... (31,554) (88,465)
Allowance for credit losses.............................................. (25,200) (45,026)
------------ -------------
$228,429 $ 999,538
------------ -------------
------------ -------------
</TABLE>
4. INTEREST-ONLY STRIP RECEIVABLE
The Company adopted Statement of Financial Accounting Standards No. 125
'Transfer and Servicing of Financial Assets and Extinguishment of Liabilities'
(SFAS No. 125) as of January 1, 1997.
SFAS No. 125 provides new accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities. This statement
also provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings and requires
that liabilities and derivatives incurred or obtained by transferors as part of
a transfer of financial assets be initially measured at fair value.
As a result of adopting SFAS No. 125, the excess servicing receivable
previously shown on the consolidated balance sheet as of December 31, 1996 has
been reclassified as interest-only strip receivable, and accounted for as an
investment security classified similar to those classified as 'available
F-6
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
for sale' under Statement of Financial Accounting Standards No. 115, 'Accounting
for Certain Investments in Debt and Equity Securities' (SFAS No. 115).
Accordingly, any unrealized gain or loss in the fair value is included as a
component of equity, net of the income tax effect. Any impairment deemed
permanent is recorded as a charge against earnings.
The fair value of interest-only strip receivable is calculated based upon
the present value of the estimated future interest income after considering the
effects or estimated prepayments, defaults and delinquencies. The discount rate
utilized is based upon assumptions that market participants would use for
similar financial instruments subject to prepayments, defaults, collateral value
and interest rate risks.
The changes in the interest-only strip receivable follow:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1997
-------------
(UNAUDITED)
<S> <C>
Beginning balance.................................................... $ 4,247,274
Unrealized appreciation.............................................. 1,918,138
Additions............................................................ 3,942,033
Accretion............................................................ 339,266
Impairment charge.................................................... (467,926)
-------------
Ending balance....................................................... $ 9,978,785
-------------
-------------
</TABLE>
The Company periodically reviews the fair value of the interest-only strip
receivable. Changes in the fair value of securities available for sale are
recognized as an adjustment to stockholders' equity. This adjustment amounted to
a net unrealized gain of $1,265,971, net of related tax effect of $652,167, on
the valuation of the interest-only strip receivable for the nine months ended
September 30, 1997. Additionally, the Company recorded a charge against earnings
for permanent impairment of the interest-only strip receivable, determined on a
disaggregated basis, of $467,926 for the nine months ended September 30, 1997.
5. REVOLVING CREDIT FACILITIES
At September 30, 1997, the Company had no outstanding balance on a $10.0
million revolving credit facility (the 'Sentry Facility') with Sentry Financial
Corporation ('Sentry'), which expires on December 31, 2000. The proceeds from
borrowings under the Sentry Facility are used to acquire finance contracts, to
pay applicable credit default insurance premiums and to make deposits to a
reserve account with Sentry. The Company pays a utilization fee of up to 0.21%
per month on the average outstanding balance under the Sentry Facility. The
Sentry Facility also requires the Company to pay up to 0.62% per quarter on the
average unused balance. Interest is payable monthly and accrues at a per annum
rate of prime plus 1.75% (10.25% at September 30, 1997).
The Sentry Facility contains certain conditions and imposes certain
requirements, including, among other things, minimum net worth and cash and cash
equivalent balances in the reserve accounts. Under the Sentry Facility, the
Company incurred interest expense of $358,174 for the nine months ended
September 30, 1997.
The Company and its wholly owned subsidiary, AutoBond Funding Corporation
II, entered into a $50 million revolving warehouse facility (the 'Daiwa
Facility') with Daiwa Finance Corporation ('Daiwa') effective as of February 1,
1997. Advances under the Daiwa Facility mature on the earlier of 120 days
following the date of the advance or March 31, 1998. The proceeds from the
borrowings under the Daiwa Facility are to be used to acquire finance contracts
and to make deposits to a reserve account. The Daiwa Facility is collateralized
by the finance contracts acquired with the outstanding advances. The Daiwa
Facility does not require that the loans funded be covered by default deficiency
F-7
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
insurance. Interest is payable upon maturity of the advances and accrues at the
lesser of (x) 30 day LIBOR plus 1.15% (6.81% at September 30, 1997) or (y) 11%
per annum. The Company also pays a non-utilization fee of .25% per annum on the
unused amount of the line of credit. Pursuant to the Daiwa Facility, the Company
paid a $243,750 commitment fee. The debt issuance cost is being amortized as
interest expense on a straight line basis through March 1998. The Daiwa Facility
contains certain covenants and representations similar to those in the
agreements governing the Company's existing securitizations including, among
other things, delinquency and repossession triggers. At September 30, 1997,
advances under the Daiwa Facility totaled $4,240,208 and remaining availability
was $13,431,123. The Company incurred interest expense under the Daiwa Facility
of approximately $816,396 during the nine months ended September 30, 1997.
On June 30, 1997, the Daiwa Facility was amended to allow the Company, at
its election, to transfer finance contracts into a qualified unconsolidated
special purpose subsidiary, AutoBond Master Funding Corporation. In conjunction
with these transfers, this special purpose subsidiary issues variable funding
warehouse notes which are convertible into term notes at the option of the
holder of such notes. Transfers of finance contracts to the special purpose
entity have been recognized as sales under SFAS No. 125.
6. NOTES PAYABLE
The following amounts are included in notes payable as of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Notes payable, collateralized by Class B certificates.................... $ 10,050,781 $ 8,159,296
Convertible notes payable................................................ -- 2,000,000
Other notes payable...................................................... 123,852 120,592
------------ -------------
$ 10,174,633 $10,279,888
------------ -------------
------------ -------------
</TABLE>
Pursuant to the an agreement (the 'Securities Purchase Agreement') entered
into on June 30, 1997, the Company issued by private placement $2,000,000 in
aggregate principal amount of senior secured convertible notes ('Convertible
Notes'). Interest is payable quarterly at a rate of 18% per annum until maturity
on June 30, 2000. If the Company pays down the Convertible Notes in full prior
to June 30, 1998, the holders will have no conversion rights. The Convertible
Notes, collateralized by the interest-only strip receivables from the Company's
first four securitizations, are convertible into shares of common stock of the
Company upon the earlier to occur of (i) an event of default on the Convertible
Notes and (ii) June 30, 1998, through the close of business on June 30, 2000,
subject to prior redemption. The conversion price is equal to the outstanding
principal amount of the Convertible Note being converted divided by the lesser
of (x) $5.00 (as adjusted by the terms of the Securities Purchase Agreement) and
(y) 85% of the average of the five lowest closing bid prices of the Company's
common stock on the Nasdaq Stock Market, or such other exchange or market where
the common stock is then traded during the 60 trading days immediately preceding
the date the Convertible Note is converted or the applicable date of repayment
(subject to adjustment under certain circumstances specified in the Securities
Purchase Agreement). The Company also paid certain debt issuance costs to the
purchaser totaling $25,000, which is being amortized as interest expense on a
straight line basis through June 30, 2000.
Also pursuant to the Securities Purchase Agreement, the Company issued
warrants which upon exercise allow the holders to purchase up to 200,000 shares
of common stock at $4.225 per share. The warrants are exercisable to the extent
the holders thereof purchase up to $10,000,000 of the Company's subordinated
asset-backed securities before June 30, 1998. To date, the holders have
purchased $2,900,000 of subordinated asset-backed securities.
F-8
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES
The Company is required to represent and warrant certain matters with
respect to the finance contracts sold to the Trusts, which generally duplicate
the substance of the representations and warranties made by the dealers in
connection with the Company's purchase of the finance contracts. In the event of
a breach by the Company of any representation or warranty, the Company is
obligated to repurchase the finance contracts from the Trust at a price equal to
the remaining principal plus accrued interest. The Company repurchased finance
contracts totaling $619,520 from a Trust during the three months ended March 31,
1997. Of the total amount of these finance contracts, $190,320 were purchased
from one dealer. Although the Company has requested that this dealer repurchase
such contracts, the dealer has refused. The Company has commenced litigation
against such dealer. See 'Legal Proceedings.'
F-9
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of AutoBond
Acceptance Corporation and Subsidiaries as of December 31, 1995 and 1996 and the
related consolidated statements of operations, shareholders' equity and cash
flows for the period from August 1, 1994 (Inception) through December 31, 1994
and for the years ended December 31, 1995 and 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of AutoBond
Acceptance Corporation and Subsidiaries as of December 31, 1995 and 1996, and
the consolidated results of their operations and their cash flows for the period
from August 1, 1994 (Inception) through December 31, 1994 and for the years
ended December 31, 1995 and 1996, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Austin, Texas
March 26, 1997
F-10
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents.......................................................... $ 92,660 $ 4,121,342
Restricted cash.................................................................... 360,266 318,515
Cash held in escrow................................................................ 1,322,571 2,662,934
Finance contracts held for sale, net............................................... 3,354,821 228,429
Repossessed assets held for sale, net.............................................. 673,746 152,580
Class B Certificates............................................................... 2,834,502 10,465,294
Excess servicing receivable........................................................ 846,526 4,247,274
Debt issuance cost................................................................. 700,000 997,338
Trust receivable................................................................... 525,220 2,230,003
Due from affiliate................................................................. 168,847
Prepaid expenses and other assets.................................................. 354,208 383,573
Software development costs......................................................... 300,382
----------- -----------
Total assets............................................................. $11,064,520 $26,276,511
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Revolving credit agreements................................................... $ 1,150,421
Notes payable................................................................. 2,674,597 $10,174,633
Repurchase agreement.......................................................... 1,061,392
Accounts payable and accrued liabilities...................................... 1,836,082 1,474,586
Bank overdraft................................................................ 861,063
Payable to affiliate.......................................................... 255,597 265,998
Deferred income taxes......................................................... 199,000 2,075,553
----------- -----------
Total liabilities........................................................ 8,038,152 13,990,770
----------- -----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized; no shares issued
Common stock, no par value; 25,000,000 shares authorized; 5,118,753 and
6,512,500 shares issued and outstanding...................................... 1,000 1,000
Additional paid-in capital.................................................... 2,912,603 8,617,466
Deferred compensation......................................................... (62,758) (11,422)
Loans to shareholders......................................................... (153,359) (235,071)
Retained earnings............................................................. 328,882 3,913,768
----------- -----------
Total shareholders' equity............................................... 3,026,368 12,285,741
----------- -----------
Total liabilities and shareholders' equity............................... $11,064,520 $26,276,511
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-11
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 1, 1994 YEAR ENDED
(INCEPTION) DECEMBER 31,
THROUGH --------------------------
DECEMBER 31, 1994 1995 1996
----------------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Interest income........................................... $ 38,197 $ 2,880,961 $ 2,519,612
Interest expense.......................................... (19,196) (2,099,867) (2,382,818)
-------------- ----------- -----------
Net interest income.................................. 19,001 781,094 136,794
Gain on sale of finance contracts......................... 4,085,952 12,820,700
Servicing fee income...................................... 657,950
Unrealized gain on Class B Certificates................... 388,278
-------------- ----------- -----------
Total revenues....................................... 19,001 4,867,046 14,003,722
-------------- ----------- -----------
Expenses:
Provision for credit losses............................... 45,000 48,702 412,387
Salaries and benefits..................................... 225,351 1,320,100 4,529,006
General and administrative................................ 244,974 1,462,740 2,331,246
Other operating expenses.................................. 48,281 963,017 1,119,644
-------------- ----------- -----------
Total expenses....................................... 563,606 3,794,559 8,392,283
-------------- ----------- -----------
Income (loss) before income taxes and extraordinary item....... (544,605) 1,072,487 5,611,439
Provision for income taxes..................................... 199,000 1,926,553
-------------- ----------- -----------
Income (loss) before extraordinary item........................ (544,605) 873,487 3,684,886
Extraordinary loss, net of tax benefit of $50,000.............. (100,000)
-------------- ----------- -----------
Net income (loss).................................... $ (544,605) $ 873,487 $ 3,584,886
-------------- ----------- -----------
-------------- ----------- -----------
Income (loss) per common share:
Income (loss) before extraordinary item................... $ (0.11) $ 0.17 $ 0.64
Extraordinary loss........................................ (0.02)
-------------- ----------- -----------
Net income (loss).................................... $ (0.11) $ 0.17 $ 0.62
-------------- ----------- -----------
-------------- ----------- -----------
Weighted average shares outstanding............................ 5,118,753 5,190,159 5,811,377
-------------- ----------- -----------
-------------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-12
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN DEFERRED LOANS TO RETAINED
SHARES AMOUNT CAPITAL COMPENSATION SHAREHOLDERS EARNINGS TOTAL
--------- ------ ---------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Capital contributions at
inception................... 5,118,753 $1,000 $ 451,000 $ 452,000
Loans to shareholders......... $ (16,000) (16,000)
Net loss...................... $ (544,605) (544,605)
--------- ------ ---------- ------------ ------------ ---------- -----------
Balance, December 31, 1994.... 5,118,753 1,000 451,000 (16,000) (544,605) (108,605)
Capital contributions......... 2,323,103 2,323,103
Loans to shareholders......... (137,359) (137,359)
Deferred compensation pursuant
to employee contract........ 138,500 $ (138,500)
Amortization of deferred
compensation................ 75,742 75,742
Net income.................... 873,487 873,487
--------- ------ ---------- ------------ ------------ ---------- -----------
Balance, December 31, 1995.... 5,118,753 1,000 2,912,603 (62,758) (153,359) 328,882 3,026,368
Stock issued pursuant to
employee contract........... 568,747
Loans to shareholders......... (81,712) (81,712)
Amortization of deferred
compensation................ 51,336 51,336
Issuance of common stock in
public offering............. 825,000 5,704,863 5,704,863
Net income.................... 3,584,886 3,584,886
--------- ------ ---------- ------------ ------------ ---------- -----------
Balance, December 31, 1996.... 6,512,500 $1,000 $8,617,466 $ (11,422) $ (235,071) $3,913,768 $12,285,741
--------- ------ ---------- ------------ ------------ ---------- -----------
--------- ------ ---------- ------------ ------------ ---------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-13
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 1, 1994
(INCEPTION) YEAR ENDED
THROUGH DECEMBER 31,
DECEMBER 31, ----------------------------
1994 1995 1996
-------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $ (544,605) $ 873,487 $ 3,584,886
Adjustments to reconcile net income to net cash used in
operating activities:
Amortization of finance contract acquisition discount
and insurance........................................ (4,513) (795,579) (358,949)
Amortization of deferred compensation.................. 75,742 51,336
Amortization of debt issuance costs.................... 497,496
Provision for credit losses............................ 45,000 48,702 412,387
Deferred income taxes.................................. 199,000 1,876,553
Accretion of excess servicing receivable............... (154,029)
Unrealized gain on Class B Certificates................ (388,278)
Changes in operating assets and liabilities:
Restricted cash................................... (138,176) (222,090) 41,751
Cash held in escrow............................... (1,322,571) (1,340,363)
Prepaid expenses and other assets................. (354,208) (329,747)
Class B Certificates.............................. (2,834,502) (7,242,514)
Excess servicing receivable....................... (846,526) (3,246,719)
Accounts payable and accrued liabilities.......... 25,636 1,110,446 (361,496)
Due to/due from affiliate......................... 504,534 (248,937) (158,446)
Purchases of finance contracts.............................. (2,453,604) (31,200,131) (83,672,335)
Sales of finance contracts.................................. 27,399,543 85,014,394
Repayments of finance contracts............................. 51,638 2,660,018 1,605,461
-------------- ------------ ------------
Net cash used in operating activities........ (2,514,090) (5,457,606) (4,168,612)
-------------- ------------ ------------
Cash flows from investing activities:
Advances to AutoBond Receivables Trusts..................... (525,220) (1,704,783)
Loans to shareholders....................................... (16,000) (137,359) (81,712)
Disposal proceeds from repossessions........................ 220,359 646,600
-------------- ------------ ------------
Net cash used in investing activities........ (16,000) (442,220) (1,139,895)
-------------- ------------ ------------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit
agreements................................................ 2,054,776 (904,355) (1,150,421)
Debt issuance costs......................................... (794,834)
Proceeds (repayments) from borrowings under repurchase
agreement................................................. 1,061,392 (1,061,392)
Proceeds from notes payable................................. 2,674,597 12,575,248
Payments on notes payable................................... (5,075,212)
Shareholder contributions................................... 452,000 2,323,103
Increase (decrease) in bank overdraft....................... 23,314 837,749 (861,063)
Proceeds from public offering of common stock, net.......... 5,704,863
-------------- ------------ ------------
Net cash provided by financing activities.... 2,530,090 5,992,486 9,337,189
-------------- ------------ ------------
Net increase in cash and cash equivalents........................ 0 92,660 4,028,682
Cash and cash equivalents at beginning of period................. 0 0 92,660
-------------- ------------ ------------
Cash and cash equivalents at end of period....................... $ 0 $ 92,660 $ 4,121,342
-------------- ------------ ------------
-------------- ------------ ------------
Non-cash investing and financing activities:
Accrual of debt issuance cost............................... $ $ 700,000 $
-------------- ------------ ------------
-------------- ------------ ------------
Repossession of automobiles................................. $ $ 849,756 $ 291,086
-------------- ------------ ------------
-------------- ------------ ------------
Deferred compensation....................................... $ $ 138,500 $
-------------- ------------ ------------
-------------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-14
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
AutoBond Acceptance Corporation ('AAC') was incorporated in June 1993 and
commenced operations August 1, 1994. AAC and its wholly-owned subsidiaries,
AutoBond Funding Corp I ('ABF I'), AutoBond Funding Corp II ('ABF II'), and
AutoBond Funding Corp III ('ABF III') (collectively, the 'Company'), engage
primarily in the business of acquiring, securitizing and servicing automobile
installment sale contracts originated by franchised automobile dealers (the
'Contracts'). The Company specializes in Contracts to consumers who generally
have limited access to traditional financing, such as that provided by
commercial banks or captive finance companies of automobile manufacturers. The
Company purchases Contracts directly from automobile dealers or from other
originators, with the intent to resell them to institution investors in
securitization structures.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of AAC and its
wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain reclassifications
have been made to prior years' financial statements to conform with the current
year's presentation.
PERVASIVENESS OF ESTIMATES
The preparation of consolidated 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.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with original maturities of
three months or less to be cash equivalents.
RESTRICTED CASH
In accordance with the Company's revolving credit facilities, the Company
is required to maintain a cash reserve with its lenders of 1% to 6% of the
proceeds received from the lender for the origination of the Finance Contracts.
Access to these funds is restricted by the lender; however, such funds may be
released in part upon the occurrence of certain events including payoffs of
Finance Contracts.
CASH HELD IN ESCROW
Upon closing of a securitization transaction, certain funds due to the
various parties, including the Company and its warehouse lenders, frequently
remain in escrow pending disbursement by the Trustee one to eleven days
subsequent to closing.
TRUST RECEIVABLE
At the time a securitization closes, the Company is required to establish a
cash reserve within the trust for future credit losses. Additionally, depending
on each securitization structure, a portion of the Company's future servicing
cash flow is required to be deposited as additional reserves for credit losses.
The December 1995, March 1996, June 1996, September 1996 and December 1996
securitization transactions resulted in initial cash reserves of approximately
$525,000, $331,000, $357,000, $446,000,
F-15
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and $500,000, respectively, which approximates 2% of the Finance Contracts sold
to the respective trusts. The trust reserves are increased monthly from excess
cash flows until such time as they attain a level of 6% of the outstanding
principal balance.
FINANCE CONTRACTS HELD FOR SALE
Finance Contracts held for sale are stated at the lower of aggregated
amortized cost, or market value. Market value is determined based on the
estimated value of the Finance Contracts if securitized and sold.
The Company generally acquires Finance Contracts at a discount, and has
purchased loss default and vender single interest physical damage insurance on
the Finance Contracts. The purchase discount and insurance are amortized as an
adjustment to the related Finance Contract's yield and operating expense,
respectively, utilizing the same basis as that used to record income on the
Finance Contracts, over the contractual life of the related loans. At the time
of sale, any remaining unamortized amounts are netted against the Finance
Contract's principal amounts outstanding to determine the resultant gain or loss
on sale.
Allowance for credit losses on the Finance Contracts is based on the
Company's historical default rate, the liquidation value of the underlying
collateral in the existing portfolio, estimates of repossession costs and
probable recoveries from insurance proceeds. The allowance is increased by
provisions for estimated future credit losses which are charged against income.
The allowance account is reduced for direct charge-offs using the specific
identification method, and for estimated losses upon repossession of automobiles
which is netted against the related Finance Contracts and transferred to
Repossessed assets held for sale.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event that facts and circumstances indicate that the cost of
long-lived assets other than financial instruments, excess servicing receivables
and deferred tax assets may be impaired, an evaluation of recoverability would
be performed. If an evaluation of impairment is required, the estimated future
undiscounted cash flows associated with the asset would be compared to the
asset's carrying amount to determine if a write-down to market value or
discounted cash flow value is required. No such write-downs were recorded in
1995 or 1996.
REPOSSESSED ASSETS HELD FOR SALE
Automobiles repossessed and held for sale are initially recorded at the
recorded investment in the Finance Contracts on the date of repossession less an
allowance. This value approximates the expected cash proceeds from the sale of
the assets and applicable insurance payments, net of all disposition costs. Due
to the relatively short time period between acquisition and disposal of the
assets, discounting of the expected net cash proceeds to determine fair value is
not utilized.
Subsequent impairment reviews are performed quarterly on a disaggregated
basis. A valuation allowance is established if the carrying amount is greater
than the fair value of the assets. Subsequent increases and decreases in fair
value result in adjustment of the valuation allowance which is recorded in
earnings during the period of adjustment. Adjustments for subsequent increases
in fair value are limited to the existing valuation allowance amount, if any.
During each of the periods presented, no valuation allowance was established. An
adjustment of approximately $300,000 was made in the fourth quarter of 1996 to
adjust for the differences between actual proceeds from sale to the carrying
amounts recorded for repossessed assets, some portion of which may relate to
prior quarters.
F-16
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CLASS B CERTIFICATES
Pursuant to the securitization transactions, the related Trusts have issued
Class B Certificates to the Company which are subordinate to the Class A
Certificates and senior to the excess servicing receivable with respect to cash
distributions from the Trust. The Company accounts for the Class B Certificates
as trading securities in accordance with Statement of Financial Accounting
Standards ('SFAS') No. 115, 'Accounting for Certain Investments in Debt and
Equity Securities.' SFAS No. 115 requires fair value accounting for these
certificates with the resultant unrealized gain or loss recorded in the
statements of operations in the period of the change in fair value. The company
determines fair value on a disaggregated basis utilizing quotes from outside
dealers who utilize discounted cash flow analyses similar to that described
below for determining market value of the excess servicing receivable, as well
as other unique characteristics such as the remaining principal balance in
relation to estimated future cash flows and the expected remaining terms of the
certificates. Estimated transaction costs associated with a sale of the Class B
Certificates are not deducted from the fair value determination. During 1996, an
unrealized gain of $388,278 was recognized on the Class B Certificates. During
1996, the Company's Class B Certificate from their 1995 securitization was
upgraded by Fitch Investors Service from BB to BB+. The Class B Certificates
accrue interest at 15%.
EXCESS SERVICING RECEIVABLE
Excess servicing receivable includes the estimated present value of future
net cash flows from securitized receivables over the amounts due to the Class A
and Class B Certificate holders in the securitization and certain expenses paid
by the entity established in connection with the securitization transaction. The
Finance Contracts sold in conjunction with the securitization transactions are
treated as sale transactions in accordance with SFAS No. 77, 'Reporting by
Transferors for Transfers of Receivables with Recourse.' Gain or loss is
recognized on the date the Company surrenders its control of the future economic
benefits relating to the receivables and the investor has placed its cash in the
securitization trust. Accordingly, all outstanding debt related to the Finance
Contracts sold to the securitization trust is deemed to be simultaneously
extinguished. The Company sells 100% of the Finance Contracts and retains a
participation in the future cash flows released by the securitization Trustee.
The Company also retains the servicing rights, and contracts with third parties
to perform certain aspects of the servicing function.
The discount rate utilized to determine the excess servicing receivable is
based on assumptions that market participants would use for similar financial
instruments subject to prepayment, default, collateral value and interest rate
risks. The future net cash flows are estimated based on many factors including
contractual principal and interest to be received, as adjusted for expected
prepayments, defaults, collateral sales proceeds, insurance proceeds, payments
to investors on the pass-through securities, servicing fees and other costs
associated with the securitization transaction and related loans. The gain from
securitization transactions include the excess servicing receivable and Class B
Certificates plus the difference between net proceeds received on the
transaction date and the net carrying value of Finance Contracts held for sale.
The carrying value of the excess servicing receivable is amortized in
proportion to and over the period of estimated net future excess servicing fee
income, for which the amortization is recorded as a charge against servicing fee
income. The excess servicing receivable is reviewed to determine if the present
value of the estimated remaining future excess servicing fee income is less than
the carrying amount using the discount factor applied in the original
determination of the excess servicing receivable. The Company does not increase
the carrying value of the excess servicing receivable for favorable variances
from original estimates, but to the extent that actual results exceed the
Company's prepayment or loss estimates, any required decrease adjustment is
reflected as a write down of the receivable and a related charge against current
period earnings. Write downs of excess servicing receivables due to modification
of future estimates as a result of the impairment review are determined
F-17
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on a disaggregated basis consistent with the risk characteristics of the
underlying loans consisting principally of origination date and originating
dealership. There were no adjustments for impairment to the carrying value of
the excess servicing receivable during 1995 or 1996.
The receipt of the servicing fee income related to the excess servicing
asset is subordinate to the Class A and Class B Certificates. As a result, the
Company recognizes income for the accretion of the discount associated with the
present value effect on the carrying value of the excess servicing asset. Such
accretion amounted to approximately $154,000 in 1996.
The value of the excess servicing reflects management's estimate of the net
future servicing income on the finance contracts held in each securitization
trust. Such estimate is affected by assumptions such as repossession rates,
uninsured loss amounts, delinquencies, prepayment rates and timing of cash
receipts. If actual results are significantly different than those assumptions
presumed by management in such a manner as to reduce the amount of excess spread
cash flows available than originally estimated, the excess servicing asset will
be impaired. Given the valuation of the excess servicing asset is affected by a
significant number of assumptions and that changes in such assumptions affect
the amount of cash flows available to the Company, it is at least reasonably
possible that decreases to the value of the excess servicing receivable will
occur in the near term and that the decreases could materially affect the
amounts reported in the income statement.
SOFTWARE DEVELOPMENT COSTS
Software development costs recorded include external costs incurred to
modify the related software from a state of technical feasibility to its
operational form and will be amortized over 5 years, which is its estimated
useful life. No amortization was recorded in 1996, as the software was not
available for use during 1996.
DEBT ISSUANCE COSTS
The costs related to the issuance of debt are capitalized and amortized in
interest expense over the lives of the related debt.
Debt issuance costs related to the issuance of notes payable collateralized
by Class B Certificates, are amortized on a dissaggregated basis over the term
of the related note using the interest method. Debt issuance costs related to
warehouse credit facilities are amortized using the straight-line method.
INCOME TAXES
The Company uses the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. The provision for income taxes represents the tax
payable for the period and the change during the year in deferred tax assets and
liabilities. The Company files a consolidated federal income tax return.
EXTRAORDINARY ITEM
The extraordinary loss recorded in 1996 relates to a $150,000 prepayment
fee on a $2,684,000 term loan that was repaid during 1996. The term loan carried
a stated interest rate of 20% (see Note 6).
F-18
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER SHARE
Earnings per share is calculated using the weighted average number of
common shares and common share equivalents outstanding during the year. Common
share equivalents of 71,406 and 19,489 were used in the calculation of earnings
per share in 1995 and 1996, respectively. Fully diluted earnings per share are
not presented because the relevant stock options and warrants are not
significant. There were no common share equivalents in 1994. Effective May 30,
1996, the Board of Directors of the Company voted to effect a 767.8125-for-1
stock split. All share information and earnings per share calculations for the
periods presented in the financial statements herein, and the notes hereto, have
been retroactively restated for such stock split.
INTEREST INCOME
Generally, interest income on Finance Contracts acquired prior to December
31, 1995 is determined on a monthly basis using the Rule of 78s method which
approximates the simple interest method. Subsequent to December 31, 1995, the
Company generally uses the simple interest method to determine interest income
on Finance Contracts acquired. The Company discontinues accrual of interest on
loans past due for more than 90 days. The Company accrues interest income on the
Class B Certificates monthly at 15% using the interest method.
CONCENTRATION OF CREDIT RISK
The Company generally acquires Finance Contracts from a network of
automobile dealers located in thirty-six states, including among others Texas,
Arizona, Oklahoma, New Mexico, Connecticut, Georgia and Utah. For the years
ended December 31, 1995 and 1996, the Company had a significant concentration of
Finance Contracts with borrowers in Texas, which approximated 91% and 63.7% of
total Finance Contracts, respectively. For the years ended December 31, 1995 and
1996, one dealer accounted for 8.8% and 8.9%, respectively, of the Finance
Contracts purchased by the Company. No other dealer accounted for more than 10%
of the Finance Contracts purchased.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
'Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities.' SFAS No. 125 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. The statement is effective for transfers of financial assets and
extinguishments of liabilities occurring after December 31, 1996 and is to be
applied prospectively.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, 'Earnings Per Share.' SFAS No. 128
specifies the computation, presentation, and disclosure requirements for
earnings per share. The Company believes the implementation of SFAS No. 128 will
not have an effect on earnings per share calculation.
F-19
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. FINANCE CONTRACTS HELD FOR SALE
The following amounts are included in Finance Contracts held for sale as
of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
---------- --------
<S> <C> <C>
Principal balance of Finance Contracts held for sale.......................... $3,539,195 $266,450
Prepaid insurance............................................................. 260,155 18,733
Contract acquisition discounts................................................ (350,827) (31,554)
Allowance for credit losses................................................... (93,702) (25,200)
---------- --------
$3,354,821 $228,429
---------- --------
---------- --------
</TABLE>
4. EXCESS SERVICING RECEIVABLE AND SECURITIZATIONS
The Company has completed the following securitization transactions
(rounded to thousands):
<TABLE>
<CAPTION>
DECEMBER MARCH JUNE SEPTEMBER DECEMBER
1995 1996 1996 1996 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Principal of loans sold.... $26,200,000 $16,500,000 $17,800,000 $22,300,000 $25,000,000
A Certificate.............. 26,200,000 16,500,000 17,800,000 22,300,000 25,000,000
A Certificate rate......... 7.23% 7.15% 7.73% 7.45% 7.37%
B Certificate.............. $ 2,800,000 $ 2,000,000 $ 2,000,000 $ 2,400,000 $ 2,800,000
B Certificate rate......... 15% 15% 15% 15% 15%
Excess servicing asset..... $ 846,000 $ 597,000 $ 650,000 $ 1,000,000 $ 1,000,000
Gain on sale............... 4,100,000 2,800,000 2,900,000 3,320,000 3,800,000
</TABLE>
The changes in the excess servicing asset are as follows:
<TABLE>
<S> <C>
Balance, January 1, 1996........................................................ $ 846,526
Additions from securitization transactions...................................... 3,246,719
Accretion of discount........................................................... 154,029
-----------
Balance, December 31, 1996...................................................... $ 4,247,274
-----------
-----------
</TABLE>
The Company is required to represent and warrant certain matters with
respect to the Finance Contracts sold to the Trusts, which generally duplicate
the substance of the representations and warranties made by the dealers in
connection with the Company's purchase of the Finance Contracts. In the event of
a breach by the Company of any representation or warranty, the Company is
obligated to repurchase the Finance Contracts from the Trust at a price equal to
the remaining principal plus accrued interest. The Company has not recorded any
liability and has not been obligated to purchase Finance Contracts under the
recourse provisions during any of the reporting periods, however, the Company
repurchased loans with principal balances of $420,000 in total from a Trust in
February 1997. The Company expects that it will recover, under dealer
representations and warranty provisions, the amounts due on the repurchased
loans from the dealership who sold the Company the loans.
5. REVOLVING CREDIT AGREEMENTS
Effective August 1, 1994, the Company entered into a Secured Revolving
Credit Agreement with Sentry Financial Corporation ('Sentry') which was amended
and restated on July 31, 1995. The amended agreement ('Revolving Credit
Agreement') provides for a $10,000,000 warehouse line of credit which terminates
December 31, 2000, unless terminated earlier by the Company or Sentry upon
meeting certain defined conditions. The proceeds of the Revolving Credit
Agreement are to be used to originate and acquire Finance Contracts, to pay for
loss default insurance premiums, to make deposits to a reserve account with
Sentry, and to pay for fees associated with the origination of Finance
Contracts. The Revolving Credit Agreement is collateralized by the Finance
Contracts acquired with
F-20
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the outstanding borrowings. Interest is payable monthly and accrues at a rate of
prime plus 1.75% (10.25% and 10% at December 31, 1995 and 1996, respectively).
The Revolving Credit Agreement contains certain restrictive covenants, including
requirements to maintain a certain minimum net worth, and cash and cash
equivalent balances. Under the Revolving Credit Agreement, the Company paid
interest of $411,915 and $220,674 for the years ended December 31, 1995 and
1996, respectively. Pursuant to the Revolving Credit Agreement, the Company is
required to pay a $700,000 warehouse facility fee payable upon the successful
securitization of Finance Contracts. The $700,000 was payable in varying amounts
after each of the first three securitizations. The Company accrued the $700,000
debt issuance cost upon the first securitization in December 1995, the date the
Company determined the liability to be probable in accordance with SFAS No. 5.
The $700,000 debt issuance cost is being amortized as interest expense on a
straight line basis through December 31, 2000, the termination date of the
Revolving Credit Agreement. The Company pays a utilization fee of up to 0.21%
per month on the average outstanding balance of the Revolving Credit Agreement.
The Revolving Credit Agreement also requires the Company to pay up to 0.62% per
quarter on the average unused balance. At December 31, 1996, $10,000,000 was
available for borrowings under the credit line as there were no amounts
outstanding at that date.
Effective June 16, 1995, the Company entered into a $25,000,000 Credit
Agreement with Nomura Asset Capital Corporation ('Nomura') which allowed for
advances to the Company through June 2000 with all outstanding amounts to mature
June 2005. Advances outstanding under the facility accrued interest at the three
month LIBOR rate plus 6.75% which approximated 12.59% at December 31, 1995. The
warehouse facility allowed Nomura to terminate the agreement upon 120 days
notice. On October 6, 1995, the Company received notice of Nomura's intent to
terminate, and all outstanding advance amounts together with accrued interest
were paid by the Company prior to March 31, 1996. No advances under the Nomura
credit facility were outstanding at December 31, 1996.
Effective May 21, 1996 the Company, through its wholly-owned subsidiary
AutoBond Funding Corporation II, entered into a $20 million revolving warehouse
facility (the 'Revolving Warehouse Facility'), with Peoples Security Life
Insurance Company (an affiliate of Providian Capital Management), which expired
December 15, 1996. The proceeds from the borrowings under the Revolving
Warehouse Facility were used to acquire Finance Contracts, to pay credit default
insurance premiums and to make deposits to a reserve account. Interest was
payable monthly at a per annum rate of LIBOR plus 2.60%. The Revolving Warehouse
Facility also required the Company to pay a monthly fee on the average unused
balance of 0.25% per annum. The Revolving Warehouse Facility was collateralized
by the Finance Contracts acquired with the outstanding borrowings. The Revolving
Warehouse Facility contains certain covenants and representations similar to
those in the agreements governing the Company's existing securitizations. No
advances under the Revolving Warehouse Facility were outstanding at December 31,
1996.
The interest rate on borrowings under revolving credit agreements ranged
from 8% to 10% for the year ended December 31, 1996.
6. NOTES PAYABLE
Pursuant to the securitization completed in December 1995, the Company
entered into a term loan agreement with a finance company to borrow
approximately $2,684,000. The loan was collateralized by the Company's Class B
Certificates from its 1995 securitization as well as the excess servicing
receivable from the cash flows of the related Trust (see Note 4). The loan
accrued interest at 20% per annum payable monthly and principal payments were
made based on principal payments received on the Class B Certificates.
Effective April 8, 1996, the outstanding balance of $2,585,757 was
refinanced through a non-recourse term loan entered into with a new finance
company. The term loan is collateralized by the Company's Class B Certificates,
and matures April 8, 2002. The term loan bears interest at 15% per
F-21
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
annum payable monthly. Principal and interest payments on the term loan are paid
directly by the Trustee to the finance company and are based on payments
required to be made to the Class B Certificate holders pursuant to the Trust.
The Company can prepay the term loan in whole or part at any time if the holder
seeks to transfer such loan to a third party.
Effective March 28, 1996, the Company obtained another non-recourse term
loan in the amount of $2,059,214 from an institutional investor under similar
terms as described in the preceding paragraph. The loan is collateralized by the
Class B Certificates issued to the Company pursuant to the March 29, 1996
securitization transaction. The Company may prepay the loan in whole or in part
at any time subsequent to March 28, 1997, or any time after receiving notice by
the investor of its intent to transfer the loan to a third party. The maturity
date of the loan is the earlier of March 28, 2002 or the date that all
outstanding principal and accrued interest has been paid by the Trustee or the
Company.
Effective June 27, 1996, the Company obtained a third non-recourse term
loan in the amount of $2,066,410 from an institutional investor under similar
terms as described in the preceding two paragraphs. The loan is collateralized
by the Class B Certificates issued to the Company pursuant to the June 27, 1996
securitization transaction. The Company may prepay the loan in whole or in part
at any time subsequent to June 27, 1997, or any time after receiving notice by
the investor of its intent to transfer the loan to a third party. The maturity
date of the loan is the earlier of June 26, 2002 or the date that all
outstanding principal and accrued interest has been paid by the Trustee or the
Company.
Effective September 30, 1996 and December 27, 1996, the Company obtained
non-recourse term loans for $2,403,027 and $2,802,891, respectively, from
institutional investors under similar terms as described above. The loans are
collateralized by the Class B Certificates issued to the Company pursuant to the
September 30, 1996 and December 27, 1996 securitization transactions. The
Company may prepay the loans in whole or in part at any time subsequent to
September 30, 1997, or any time after receiving notice by the investor of its
intent to transfer the loan to a third party. The maturity date for the loans is
September 30, 2002 and December 31, 2002, respectively.
During July 1996, a private investment management company entered into a
commitment agreement to provide the Company financing collateralized by the
senior excess spread interests to be created in the Company's next five proposed
securitization transactions. Timing and amount of payments of interest and
principal on the loans will correspond to distributions from the securitization
trusts on the Class B Certificates. The interest rate on such loans will be 15%
per annum, payable monthly and the borrowings will include a 3% origination fee.
The commitment is subject to the Company's ability to continue meeting several
provisions, including: (1) similarly structured securitization transactions; (2)
the absence of rating downgrades and defaults from previous securitization; and
(3) satisfactory performance reports.
7. REPURCHASE AGREEMENT
On December 20, 1995, the Company entered into an agreement to sell certain
Finance Contracts totaling $1,061,392 to a finance company, and repurchase such
Finance Contracts in January 1996 for an amount equal to the remaining unpaid
principal balance plus interest accruing at an annual rate of 19%.
The Company repurchased such Finance Contracts during January 1996 in
accordance with the terms of the agreement.
8. INITIAL PUBLIC OFFERING
On November 14, 1996, the Company and Selling Shareholders sold 750,000 and
250,000, respectively, of shares of common stock in an initial public offering
at a price of $10 per share. The net proceeds from the issuance and sale of
common stock amounted to approximately $5,000,000 after deducting underwriter
discounts and issuer expenses. Portions of the net proceeds were used (i) to
prepay outstanding subordinated debt of approximately $300,000 plus accrued
interest, (ii) to repay
F-22
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
advances under Revolving Credit Facilities, and (iii) for general corporate and
working capital purposes.
The underwriters of the Company's initial public offering purchased an
additional 75,000 shares of the Company's common stock at $10 per share by
exercising half of their over-allotment option. The net proceeds from the
issuance and sale of these shares amounted to approximately $700,000 after
deducting underwriter's discounts.
9. INCOME TAXES
The provision for income taxes for 1996 consists of a deferred tax
provision of $1,926,553 and no current liability. The provision for income taxes
for 1995 consists of a deferred tax provision of $199,000 and no current
liability. Due to net losses incurred from inception through December 31, 1994,
the Company has no provision in 1994. The reconciliation between the provision
for income taxes and the amounts that would result from applying the Federal
statutory rate is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 1, 1994 YEAR ENDED
(INCEPTION) DECEMBER 31,
DECEMBER 31, -----------------------
1994 1995 1996
-------------- --------- ----------
<S> <C> <C> <C>
Federal tax at statutory rate of 34%........................ $ (185,166) $ 364,646 $1,907,889
Nondeductible expenses...................................... 2,166 17,354 18,664
Change in valuation allowance............................... 183,000 (183,000) --
-------------- --------- ----------
Provision for income taxes.................................. $ -- $ 199,000 $1,926,553
-------------- --------- ----------
-------------- --------- ----------
</TABLE>
Deferred income tax assets and liabilities reflect the tax effect of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and income tax purposes Significant components of
the Company's net deferred tax liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Deferred Tax Assets:
Allowance for credit losses............................................ $ 31,859 $ 16,728
Costs related to securitizations....................................... 19,664 491,935
Other.................................................................. 106,424 3,883
Net operating loss carryforwards....................................... 1,032,396 2,792,067
---------- ----------
Gross deferred tax assets......................................... 1,190,343 3,304,613
---------- ----------
Deferred Tax Liabilities:
Gain on securitization................................................. 1,389,343 5,242,372
Other.................................................................. -- 137,794
---------- ----------
Gross deferred tax liabilities.................................... 1,389,343 5,380,166
---------- ----------
Net deferred tax liabilities................................................ $ 199,000 $2,075,553
---------- ----------
---------- ----------
</TABLE>
At December 31, 1996, the Company had tax net operating loss carryforwards
of approximately $8,212,000 which will expire in fiscal years 2009 through 2011.
10. STOCKHOLDERS' EQUITY
Effective May 30, 1996, the Board of Directors adopted Restated Articles of
Incorporation which authorized 25,000,000 shares of no par value common stock
and 5,000,000 shares of no par value preferred stock.
F-23
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK BASED COMPENSATION PLAN
The Company grants stock options under a stock-based incentive compensation
plan (the 'Plan'). The Company applies Accounting Principles Board Opinion 25
and related Interpretations in accounting for the Plan. In 1995, SFAS No. 123
'Accounting for Stock-Based Compensation' ('SFAS 123') was issued, which, if
fully adopted by the Company, would change the methods the Company applies in
recognizing the cost of the Plan. Adoption of the cost recognition provisions of
SFAS 123 is optional and the Company has decided not to elect these provisions
of SFAS 123. However, pro forma disclosures as if the Company adopted the
expense recognition provisions of SFAS 123 for 1996 are required by SFAS 123 and
are presented below.
Under the Plan, the Company is authorized to issue shares of Common Stock
pursuant to 'Awards' granted in various forms, including incentive stock options
(intended to qualify under Section 422 of the Internal Revenue Code of 1986, as
amended), non-qualified stock options, and other similar stock-based Awards. The
Company granted stock options in 1996 under the Plan in the form of
non-qualified stock options.
STOCK OPTIONS
The Company granted stock options in 1996 to employees and directors. The
stock options granted in 1996 have contractual terms of 10 years. All options
granted to the employees and directors have an exercise price no less than the
fair market value of the stock at grant date. The options granted in 1996 vest,
33.33% per year, beginning on the first anniversary of the date of grant. The
Company granted 274,500 options in 1996 and 1 warrant for 100,000 shares of
stock (collectively, 'stock options'). The warrant is fully exercisable after 1
year.
In accordance with APB 25, the Company has not recognized any compensation
cost for these stock options granted in 1996.
A summary of the status of the Company's stock options as of December 31,
1996 and the changes during the year ended is presented below:
STOCK OPTIONS
<TABLE>
<CAPTION>
1996
----------------------
# SHARES WEIGHTED
OF AVERAGE
UNDERLYING EXERCISE
OPTIONS PRICES
---------- --------
<S> <C> <C>
Outstanding at beginning of the year............................................ 0 n/a
Granted at-the-money....................................................... 274,500 $10.06
Granted at a premium....................................................... 100,000 $12.00
---------- --------
Total granted......................................................... 374,500 $10.58
---------- --------
---------- --------
Outstanding at end of year...................................................... 374,500 $10.58
---------- --------
---------- --------
Exercisable at end of year...................................................... 0 n/a
Weighted-average FV of options granted at-the-money............................. $ 4.88
Weighted-average FV of warrants granted at a premium............................ $ 4.65
Weighted-average FV of options granted during the year.......................... $ 4.82
</TABLE>
The fair value of each stock option and warrant granted is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 1996: dividend yield of 0.00% for
both years; risk-free interest rates are different for each grant and range from
5.89% to 6.06%; the expected lives of options are estimated to be 5 years; and a
volatility of 46.46% for all grants.
F-24
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1996, 374,500 options are outstanding with none bearing
exercisable and a weighted-average contractual life of all stock options being
9.93 years.
PRO FORMA NET INCOME AND NET INCOME PER COMMON SHARE
Had the compensation cost for the Company's stock-based compensation plan
been determined consistent with SFAS 123, the Company's net income and net
income per common share for 1996 would approximate the pro forma amounts below:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
DECEMBER 31, 1996 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
SFAS 123 Charge, pre-tax........................................ -- $ 1,804,560
APB 25 Charge................................................... -- --
Net income...................................................... $ 3,584,886 $ 2,393,876
Net income per common share..................................... $.62 $.41
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995.
WARRANTS
The Company issued to its underwriters of their initial public offering a
warrant to purchase up to 100,000 common shares of the Company's common stock at
a price per share equal to $12.00. The warrant is exercisable after one year
from November 14, 1996, or earlier if the Company effects certain registrations
of its common stock.
In addition to subordinated debt issued March 12, 1996, which was not
outstanding at December 31, 1996, a detachable warrant was issued to an
individual for the purchase of 18,811 shares of common stock at an exercise
price equal to the fair market value as of March 12, 1996, the date of grant.
The warrant is exercisable in full or in part during the period commencing six
months after the effective date of the Company's initial public offering and
ending 1.5 years thereafter. Management has determined that the fair value of
the warrant at its issuance date was de minimus.
PREFERRED STOCK
Pursuant to the Company's Amended Articles of Incorporation, the Company is
authorized to issue from time to time up to 5,000,000 shares of Preferred Stock,
in one or more series. The Board of Directors is authorized to fix the dividend
rights, dividend rates, any conversion rights or right of exchange, any voting
right, any rights and terms of redemption (including sinking fund provisions),
the redemption rights or prices, the liquidation preferences and any other
rights, preferences, privileges and restrictions of any series of Preferred
Stock and the number of shares constituting such series and the designation
thereof. There were no shares of Preferred Stock issued or outstanding during
1995 or 1996.
11. RELATED PARTY TRANSACTIONS
Prior to January 1, 1996 the Company shared certain general and
administrative expenses with AutoBond, Inc. ('ABI'), which was founded and is
100% owned by the Chief Executive Officer ('CEO') of the Company. The CEO owns
56.59% of the Company. Each entity was allocated expenses based on a
proportional cost method, whereby payroll costs were allocated based on
management's review of each individual's responsibilities, and costs related to
office space and equipment rentals were based on management's best estimate of
usage during the year. Miscellaneous expenses were allocated based on the
specific purposes for which each expense related. Management believes the
methods used to allocate the general and administrative expenses shared with ABI
were reasonable, and that the expenses reported in the financial statements
after the ABI allocations approximate the expenses that
F-25
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
would have been incurred on a stand-alone entity basis. Total expenses allocated
to the Company from ABI amounted to approximately $441,000 for the period from
August 1, 1994 (inception) to December 31, 1994 and $2,163,000 for the year
ended December 31, 1995. Additionally, neither the Company nor any of its
affiliates had paid any compensation to its CEO during 1994 or 1995; however,
management of the Company commenced compensation payments to the CEO during the
latter half of 1996 (see Note 12). The Company estimated that a reasonable
amount of compensation to pay the CEO on a stand-alone entity basis would
approximate $40,000 and $100,000 for the five months ended December 31, 1994 and
the year ended December 31, 1995.
The Company advanced approximately $132,000 and $201,000 as of December 31,
1995 and December 31, 1996, respectively, to William Winsauer, CEO and majority
shareholder of the Company, and approximately $21,000 and $34,000 as of December
31, 1995 and December 31, 1996, respectively, to John Winsauer, a significant
shareholder of the Company. The advances are non-interest bearing amounts that
have no repayment terms and are shown as a reduction of shareholders' equity. As
of March 20, 1997, these loans were repaid in full.
The Company and ABI entered into a management agreement dated as of January
1, 1996 (the 'ABI Management Agreement') which requires ABI to pay an annual fee
of $50,000 to the Company for services rendered by it or the Company's employees
on behalf of ABI as follows: (i) monitoring the performance of certain
partnership interests owned by ABI and its sole shareholder, (ii) certain cash
management services, including the advancing of funds to pay ABI's ordinary
business expenses and (iii) providing advice as to regulatory compliance. The
ABI Management Agreement also provides that the Company will perform certain
accounting functions on behalf of ABI including (i) maintenance of financial
books and records, (ii) monitoring of cash management functions, (iii)
preparation of financial statements and tax returns and (iv) providing advice in
connection with retention of independent accountants. The ABI Management
Agreement further provides for the reimbursement of advances made by the Company
for out-of-pocket costs and expenses incurred on behalf of ABI. Amounts due to
the Company under the ABI Management Agreement amounted to $143,547 at December
31, 1996.
12. EMPLOYMENT AGREEMENTS
During 1995 and 1996, the Company entered into three-year employment
agreements with two officers of the Company. One employment agreement is dated
November 15, 1995 and is effective from such date through November 15, 1998.
This agreement is automatically extended unless the Company gives six months
notice of its intent not to extend the terms of the agreement. This agreement
provides for a minimum monthly salary of $12,500, together with shares of the
Company's common stock, issued January 1, 1996, equal to 10% of the outstanding
shares after giving effect to the shares issued to the employee. Half of such
issued shares are not subject to forfeiture whereas the remaining 50% are
subject to forfeiture. Equal amounts of the forfeitable shares bear no risk of
forfeiture upon the officer remaining employed as of November 15, 1996 and
November 15, 1997, respectively.
The Company valued the shares issued January 1, 1996 based on an
independent appraisal of the Company as of November 15, 1995, the measurement
date, and recorded an increase to additional paid-in capital and deferred
compensation of $138,500. Deferred compensation is amortized on a straight-line
basis over the two forfeiture periods ending November 15, 1997 resulting in
compensation expense of $75,742 and $51,336 for the years ended December 31,
1995 and 1996, respectively.
The second employment agreement is dated May 31, 1996, and is effective
from such date for five years. The agreement provides for compensation at a base
salary of $240,000 per annum, which may be increased and may be decreased to an
amount of not less than $240,000, at the discretion of the Board of Directors.
The agreement entitles the chief executive officer to receive the benefits of
any cash incentive compensation as may be granted by the Board to employees, and
to participate in any executive bonus or incentive plan established by the Board
of Directors. The agreement also provides the officer with certain additional
benefits.
F-26
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The agreement automatically terminates upon (i) the death of the officer,
(ii) disability of the officer for six continuous months together with the
likelihood that the officer will be unable to perform his duties for the
following continuous six months, as determined by the Board of Directors, (iii)
termination of the officer 'for cause' (which termination requires the vote of a
majority of the Board) or (iv) the occurrence of the five-year expiration date
provided, however, the agreement may be extended for successive one-year
intervals unless either party elects to terminate the agreement in a prior
written notice. The officer may terminate his employment for 'good reason' as
defined in the agreement. In the event of the officer's termination for cause,
the agreement provides that the Company shall pay the officer his base salary
through the date of termination and the vested portion of any incentive
compensation plan to which the officer may be entitled.
Other than following a change in control, if the Company terminates the
officer in breach of the agreement, or if the officer terminates his employment
for good reason, the Company must pay the officer: (i) his base salary through
the date of termination; (ii) a severance payment equal to the base salary
multiplied by the number of years remaining under the agreement; and (iii) in
the case of breach by the Company of the agreement, all other damages to which
the officer may be entitled as a result of such breach, including lost benefits
under retirement and incentive plans.
In the event of the officer's termination following a change in control,
the Company is required to pay the officer an amount equal to three times the
sum of (i) his base salary, (ii) his annual management incentive compensation
and (iii) his planned level of annual perquisites. The agreement also provides
for indemnification of the officer for any costs or liabilities incurred by the
officer in connection with his employment.
13. COMMITMENTS AND CONTINGENCIES
An affiliate of the Company leases office space, furniture, fixtures and
equipment under operating leases and during 1995 allocated a significant portion
of such costs to the Company based on estimated usage (see Note 11).
Future minimum lease payments (which reflect leases having noncancelable
lease terms in excess of one year) are as follows for the year ended December
31:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1997.............................................................................. $ 542,580
1998.............................................................................. 305,697
1999.............................................................................. 91,847
2000.............................................................................. 16,567
2001.............................................................................. --
Thereafter........................................................................ --
---------
$ 956,691
---------
---------
</TABLE>
Rental expense under operating leases for the years ended December 31,
1996, 1995 and 1994 were approximately $524,000, $351,000, and $61,000,
respectively.
The Company guaranteed a working capital line entered into by the Company's
majority shareholder. Total borrowings of $2,250,000 under such line of credit
were contributed to the Company as additional paid-in capital during the year
ended December 31, 1995. The indebtedness of the majority shareholder is repaid
from and collateralized by a portion of cash flows from Finance Contracts
underlying certain securitization transactions completed by the majority
shareholder and affiliates owned by the majority shareholder. The outstanding
balance guaranteed by the Company at December 31, 1995 was approximately
$2,000,000. All amounts outstanding under the working capital line, if any, are
expected to be repaid from the sale of a portion of the majority shareholder's
common stock upon
F-27
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
successful completion by the Company of an initial public offering. In April
1996, the Company made a payment of $89,000 as a principal reduction in the
working capital line to bring the outstanding balance to the maximum permitted
outstanding amount as of March 31, 1996. Effective September 26, 1996 the
Company was released from its guarantee of the shareholder's debt for a release
fee of $125,000.
The Company is the plaintiff or the defendant in several legal proceedings
that its management considers to be the normal kinds of actions to which an
enterprise of its size and nature might be subject, and not to be material to
the Company's overall business or financial condition, results of operations or
cash flows.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Company, using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required in interpreting market data to
develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative
of the amounts that the Company would realize in a current market exchange. The
use of different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts. The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value.
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short maturity
of those investments.
NOTE PAYABLE, REVOLVING CREDIT BORROWINGS AND REPURCHASE AGREEMENT
The fair value of the Company's debt is estimated based upon the quoted
market prices for the same or similar issues or on the current rates offered to
the Company for debt of the same remaining maturities and characteristics. The
revolving credit lines are variable rate loans, resulting in a fair value that
approximates carrying cost at December 31, 1996. Additionally, due to the
December borrowing date, the note payable and repurchase agreement fair values
approximated cost at December 31, 1995.
FINANCE CONTRACTS HELD FOR SALE
The fair value of Finance Contracts held for sale is based on the estimated
proceeds expected on securitization of the Finance Contracts held for sale.
EXCESS SERVICING RECEIVABLE
The fair value is determined based on discounted future net cash flows
utilizing a discount rate that market participants would use for financial
instruments with similar risks. Due to the nature of this financial instrument
and the relative recency of the securitization transaction date, the carrying
amount approximates fair value.
The estimated fair values of the Company's financial instruments at
December 31, 1995 and 1996 are as follows:
F-28
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1995 1996
------------------------ --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents.............................. $ 92,660 $ 92,660 $ 4,121,342 $ 4,121,342
Finance Contracts held for sale, net................... 3,354,821 3,854,821 228,428 228,428
Class B Certificates................................... 2,834,502 2,834,502 10,465,294 10,465,294
Excess servicing receivable............................ 846,526 846,526 4,247,274 4,247,274
Note payable........................................... 2,674,597 2,674,597 10,174,633 10,174,633
Revolving credit borrowings............................ 1,150,421 1,150,421 -- --
Repurchase agreement................................... 1,061,392 1,061,392 -- --
</TABLE>
15. SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental cash flow information with respect to payments of interest is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
------- ---------- ----------
<S> <C> <C> <C>
Interest paid.................................................... $19,196 $2,099,867 $1,885,322
</TABLE>
No income taxes were paid during fiscal 1994, 1995 or 1996.
16. SUBSEQUENT EVENTS
Effective February 5, 1997, the Company through its wholly owned subsidiary
AutoBond Funding II, obtained a warehouse line of credit of $50,000,000 with
Daiwa Finance Corporation for a fourteen month period. This line of credit does
not require that the loans funded be covered by default deficiency insurance.
The interest rate applied to this line of credit is the lesser of (x) 30 day
LIBOR plus 1.15% or (y) 11% per annum. The agreement requires the Company pay a
non-utilization fee of .25% per annum on the amount of the line unused. Pursuant
to this line of credit, the Company paid a $243,750 commitment fee. The Debt
issuance costs will be amortized as interest expense through April 1998,
utilizing the effective interest method.
In January 1997, the Company granted 40,000 options to officers and
employees.
F-29
<PAGE>
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
<PAGE>
_____________________________ _____________________________
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY ANY
UNDERWRITER OR THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR SOLICITATION OF AN OFFER TO BUY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE AS TO WHICH INFORMATION IS FURNISHED.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................................................................................... 3
Risk Factors................................................................................................................ 7
Use of Proceeds............................................................................................................. 15
Dividend Policy............................................................................................................. 15
Price Range of Common Stock................................................................................................. 15
Capitalization.............................................................................................................. 16
Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends................................................... 17
Selected Financial Data..................................................................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 19
Business.................................................................................................................... 36
Management.................................................................................................................. 51
Certain Transactions........................................................................................................ 58
Beneficial Ownership of Common Shares....................................................................................... 60
Description of Capital Stock................................................................................................ 60
Underwriting................................................................................................................ 65
Legal Matters............................................................................................................... 67
Experts..................................................................................................................... 67
Index to Consolidated Financial Statements.................................................................................. F-1
</TABLE>
1,000,000 SHARES
[LOGO]
15% SERIES A
CUMULATIVE
PREFERRED STOCK
($10 LIQUIDATION PREFERENCE)
--------------------------
PROSPECTUS
--------------------------
TEJAS SECURITIES GROUP, INC.
NEIDIGER, TUCKER,
BRUNER, INC.
FEBRUARY , 1998
_____________________________ _____________________________
<PAGE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Registrant estimates that expenses in connection with the offering
described in this registration statement will be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............................... $ 3,485
--------
NASD filing fee................................................................... 1,650
AMEX listing fee.................................................................. 15,000
Accounting fees and expenses...................................................... 100,000
Legal fees and expenses........................................................... 150,000
Printing Fees..................................................................... 100,000
Miscellaneous..................................................................... 29,865
--------
Total........................................................................ $400,000
--------
--------
</TABLE>
All amounts except the Securities and Exchange Commission registration fee,
the NASD fee and the AMEX fee are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 2.02-1 of the Texas Business Corporation Act provides:
13. A corporation may indemnify any officer or director from and
against any judgments, penalties, fines, settlements, and reasonable
expenses actually incurred by him in an action, suit, investigation or
other proceeding to which he is, was, or is threatened to be a party;
provided that it is determined by the Board of Directors, a committee
thereof, special legal counsel, or a majority of the stockholders that such
officer or director: (a) conducted himself in good faith; (b)(i) in the
case of his conduct as a director of the corporation, reasonably believed
that his conduct was in the best interest of the corporation or (ii) in all
other cases, that his conduct was at least not opposed to the corporation's
interest; and (c) in a criminal case, had no reasonable cause to believe
his conduct was unlawful. In matters as to which the officer or director is
found liable for willful or intentional misconduct in the performance of
his duty to the corporation.
14. A corporation shall indemnify an officer or director against
reasonable expenses incurred by him in connection with an action, suit,
investigation, or other proceeding to which he is, was, or was threatened
to be a party if he has been wholly successful in its defense.
15. A corporation may advance an officer or director the reasonable
costs of defending an action suit, investigation or other proceeding in
certain cases.
16. A corporation shall have power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise against
any liability asserted against him and incurred by him in any such capacity
or arising out of his status as such, whether or not the corporation would
have the power to indemnify him against such liability under the provisions
of this Article.
The Company's Articles of Incorporation provide that the Company will
indemnify its directors and officers to the fullest extent permitted by law.
The Company has procured directors' and officers' liability insurance in
the amount of $5 million.
See 'Item 17. Undertakings' for a description of the Securities and
Exchange Commission's position regarding such indemnification provisions.
II-1
<PAGE>
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In December 1995, March 1996, June 1996, September 1996 and December 1996,
Company's five securitization subsidiaries issued approximately $26.2 million,
$16.6 million, $17.8 million, $22.3 million and $25.0 million, respectively, in
Class A Investor Certificates, in each case evidencing an undivided interest in
a pool of finance contracts with an initial aggregate unpaid principal balance
equal to the initial principal balance of such Class A Certificates. The
certificates issued in the December 1995, March 1996, June 1996, September 1996
and December securitizations have final maturity dates of October 15, 2001,
January 15, 2002, April 15, 2002, July 15, 2002 and November 15, 2002,
respectively. In March 1997, the Company's 1997-A securitization subsidiary
issued approximately $25.8 million in Class A Notes, $1.4 million in Class B
Notes and $1.6 million in Class C Notes and in its 1997B securitization in
August 1997 and 1997C securitization in October 1997, Autobond Master Funding
Corporation issued approximately $34.7 million and $34.4 million in Class A
Notes and $2.9 million and $2.9 million in Class B Notes, respectively
(together, the 'Notes'), secured on a non-recourse basis by a pool of finance
contracts and with final maturities of five years. In each case, the Class A
Certificates and the Notes were privately placed with sophisticated
institutional investors pursuant to Section 4(2) of the Securities Act of 1933,
as amended (the 'Securities Act'). The Company has financed on a non-recourse
basis approximately 80% of the retained excess spread from both the 1995 and
1996 securitizations with sophisticated institutional investors.
In June 1997, the Company issued $2,000,000 in aggregate principal amount
of its 18% convertible promissory notes and warrants to purchase 200,000 shares
of the Company's Common Stock, in each case to institutional investors pursuant
to Section 4(2) of the Securities Act.
In March 1996, the Company issued to a private investor, pursuant to
Section 4(2) of the Securities Act, a Subordinated Note (the 'Subordinated
Note') in the amount of $300,000 and a Warrant (the 'Warrant') for the purchase
of 18,811 shares of Common Stock. The payment obligations of the Company under
the Subordinated Note are subordinated to all other indebtedness of the Company
that is not specifically designated as subordinate to the Subordinated Note. The
Subordinated Note has been repaid in full and the Warrant has been exercised.
In November 1995, the Company agreed to issue, pursuant to Section 4(2) of
the Securities Act, to Adrian Katz 568,750 shares of Common Stock in
consideration for current and future services. Such shares were issued in
January 1996.
In January 1998, the Company issued $7,500,000 in aggregate principal
amount of its 15% Senior Subordinated Convertible Notes, a Warrant to purchase
368,462 shares of Common Stock, a warrant to purchase 65,313 shares of Common
Stock and a warrant to purchase 7,500 shares of Common Stock, in each case to
institutional investors pursuant to Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The following reflects all applicable Exhibits required under Item 601 of
Regulation S-K;
<TABLE>
<S> <C>
1.1 -- Underwriting Agreement
1.2 -- Form of Representative's Warrant
3.1* -- Restated Articles of Incorporation of the Company
3.2* -- Amended and Restated Bylaws of the Company
3.3 -- Certificate of Designation
4.1 -- Specimen Preferred Stock Certificate
4.2* -- Specimen Common Stock Certificate
5.1 -- Opinion of Jones, Day, Reavis & Pogue (to be filed by amendment)
10.1* -- Amended and Restated Loan Origination, Sale and Contribution Agreement dated as of December 15, 1995
between the Company and AutoBond Funding Corporation I
10.2* -- Security Agreement dated as of May 21, 1996 among AutoBond Funding Corporation II, the Company and
Norwest Bank Minnesota, National Association
10.3* -- Credit Agreement and Side Agreement, dated as of May 21, 1996 among AutoBond Funding Corporation II,
the Company and Peoples Life Insurance Company
</TABLE>
II-2
<PAGE>
<PAGE>
<TABLE>
<C> <S>
10.4* -- Servicing Agreement dated as of May 21, 1996 among AutoBond Funding Corporation II, CSC Logic/MSA
L.L.P., doing business as 'Loan Servicing Enterprise,' the Company and Norwest Bank Minnesota, National
Association
10.5* -- Loan Acquisition Sale and Contribution Agreement dated as of May 21, 1996 by and between the Company
and AutoBond Funding Corporation II
10.6* -- Second Amended and Restated Secured Revolving Credit Agreement dated as of July 31, 1995 between
Sentry Financial Corporation and the Company
10.7* -- Management Administration and Services Agreement dated as of January 1, 1996 between the Company and
AutoBond, Inc.
10.8* -- Employment Agreement dated November 15, 1995 between Adrian Katz and the Company
10.9* -- Employment Agreement effective as of May 1, 1996 between William O. Winsauer and the Company
10.10 -- Consulting and Employment Agreement, dated as of January 1, 1998 between Manuel A. Gonzalez and the
Company.
10.11 -- Severance Agreement, dated as of February 1, 1998 between Manuel A. Gonzalez and the Company.
10.12* -- Employee Stock Option Plan
10.13* -- Dealer Agreement, dated November 9, 1994, between the Company and Charlie Thomas Ford, Inc.
10.14* -- Automobile Loan Sale Agreement, dated as of September 30, 1996, among the Company, First Fidelity
Acceptance Corp., and Greenwich Capital Financial Products, Inc.
10.15'D' -- Servicing Agreement, dated January 29, 1997, of the Company
10.16'D' -- Credit Agreement, dated as of February 1, 1997, among AutoBond Funding Corporation II, the Company and
Daiwa Finance Corporation
10.17'D' -- Security Agreement, dated as of February 1, 1997, among AutoBond Funding Corporation II, the Company
and Norwest Bank Minnesota, National Association
10.18'D' -- Automobile Loan Sale Agreement, dated as of March 19, 1997, by and between Credit Suisse First Boston
Mortgage Capital L.L.C., a Delaware limited liability company and the Company
10.19x -- Automobile Loan Sale Agreement, dated March 26, 1997, between Credit Suisse First Boston Mortgage
Capital L.L.C. and the Company.
10.20** -- Credit Agreement, dated as of June 30, 1997, by and among AutoBond Master Funding Corporation,
AutoBond Acceptance Corporation and Daiwa Finance Corporation.
10.21** -- Amended and Restated Trust Indenture, dated as of June 30, 1997, among AutoBond Master Funding
Corporation, AutoBond Acceptance Corporation and Norwest Bank Minnesota, National Association.
10.22** -- Securities Purchase Agreement, dated as of June 30, 1997, by and among AutoBond Acceptance
Corporation, Lion Capital Partners, L.P. and Infinity Emerging Opportunities Limited.
10.23 -- Credit Agreement, dated as of December 31, 1997, among the Company, AutoBond Master Funding
Corporation II and Credit Suisse First Boston Mortgage Capital LLC. (previously filed)
10.24 -- Trust Indenture, dated as of December 31, 1997, among the Company, AutoBond Master Funding Corporation
II and Manufacturers & Traders Trust Company (previously filed).
10.25 -- Receivables Purchase Agreement, dated as of December 31, 1997, between Credit Suisse First Boston
Mortgage Capital LLC and the Company (previously filed).
10.26 -- Servicing Agreement, dated as of December 31, 1997, among the Company, AutoBond Master Funding
Corporation II and Manufacturers & Traders Trust Company (previously filed).
10.27 -- Indenture and Note, dated January 30, 1998, between the Company and Bank Boston, N.A.
10.28 -- Warrant, dated January 30, 1998, issued to BancBoston Investments, Inc.
10.29 -- Purchase Agreement, dated January 30, 1998, between the Company and BancBoston Investments, Inc.
21.1** -- Subsidiaries of the Company
21.2 -- Additional subsidiaries of the Company
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consent of Jones, Day, Reavis & Pogue (contained in Exhibit 5.1)
27.1'D'*** -- Financial Data Schedule
</TABLE>
(footnotes on next page)
II-3
<PAGE>
<PAGE>
(footnotes from previous page)
* Incorporated by reference from the Company's Registration Statement on Form
S-1 (Registration No. 333-05359).
'D' Incorporated by reference from the Company's 1996 Annual Report on Form
10-K.
x Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997.
** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997.
*** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997.
(b) Financial Statement Schedules:
The following schedules are filed as part of this Registration Statement
and are filed herewith:
Schedule II Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
1. The Undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment hereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement;
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement.
(b) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
2. The undersigned registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
<PAGE>
3. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, office or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-5
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Austin, State of Texas, on February 6, 1998.
AUTOBOND ACCEPTANCE CORPORATION
By: /S/ WILLIAM O. WINSAUER
...................................
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the capacity
indicated on February 6, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------ ---------------------------------------------------------------------
<C> <S>
/S/ WILLIAM O. WINSAUER Chairman of the Board, Chief
......................................... Executive Officer and Director
(WILLIAM O. WINSAUER) (Principal Executive Officer)
/S/ ADRIAN KATZ Vice Chairman of the Board, Chief Operating Officer and Director
.........................................
(ADRIAN KATZ)
/S/ JOHN S. WINSAUER Vice President and Director
.........................................
(JOHN S. WINSAUER)
/S/ R. T. PIGOTT, JR. Vice President and Chief Financial Officer (Principal Accounting
......................................... Officer)
(R. T. PIGOTT, JR.)
/S/ * Director
.........................................
(ROBERT S. KAPITO)
/S/ * Director
.........................................
(MANUEL A. GONZALEZ)
/S/ * Director
.........................................
(STUART A. JONES)
/S/ * Director
.........................................
(THOMAS I. BLINTEN)
* /S/ ADRIAN KATZ Attorney-in-fact
.........................................
(ADRIAN KATZ)
</TABLE>
II-6
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
In connection with our audits of the consolidated financial statements of
Autobond Acceptance Corporation and Subsidiaries as of December 31, 1995 and
1996 and for the period from August 1, 1994 (inception) through December 31,
1994 and for the years ended December 31, 1995 and 1996, which consolidated
financial statements are included in the Prospectus, we have also audited the
financial schedule included herein.
In our opinion, the financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Austin, Texas
March 26, 1997
S-1
<PAGE>
<PAGE>
SCHEDULE II
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED BALANCE
AT BEGINNING COST AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(A) OF PERIOD
- ------------------------------------------------------------ ------------ --------- ------------- ---------
<S> <C> <C> <C> <C>
Allowance for Credit Losses:
Period from August 1, 1994 (Inception) to December 31,
1994................................................. $ -- $ 45,000 $ -- $45,000
Year ended December 31, 1995........................... $ 45,000 $ 48,702 $ -- $93,702
Year ended December 31, 1996........................... $ 93,702 $ 412,387 $(480,889) $25,200
</TABLE>
- ------------
(A) Deductions in 1996 were write-offs of uncollectible finance contracts.
S-2
<PAGE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------- --------------------------------------------------------------------------------------------------- ----
<S> <C> <C>
1.1 -- Underwriting Agreement
1.2 -- Form of Representative's Warrant
3.1* -- Restated Articles of Incorporation of the Company
3.2* -- Amended and Restated Bylaws of the Company
3.3 -- Certificate of Designation
4.1 -- Specimen Preferred Stock Certificate
4.2* -- Specimen Common Stock Certificate
5.1 -- Opinion of Jones, Day, Reavis & Pogue (to be filed by amendment)
10.1* -- Amended and Restated Loan Origination, Sale and Contribution Agreement dated as of December 15, 1995
between the Company and AutoBond Funding Corporation I
10.2* -- Security Agreement dated as of May 21, 1996 among AutoBond Funding Corporation II, the Company and
Norwest Bank Minnesota, National Association
10.3* -- Credit Agreement and Side Agreement, dated as of May 21, 1996 among AutoBond Funding Corporation II,
the Company and Peoples Life Insurance Company
10.4* -- Servicing Agreement dated as of May 21, 1996 among AutoBond Funding Corporation II, CSC Logic/MSA
L.L.P., doing business as 'Loan Servicing Enterprise,' the Company and Norwest Bank Minnesota, National
Association
10.5* -- Loan Acquisition Sale and Contribution Agreement dated as of May 21, 1996 by and between the Company
and AutoBond Funding Corporation II
10.6* -- Second Amended and Restated Secured Revolving Credit Agreement dated as of July 31, 1995 between
Sentry Financial Corporation and the Company
10.7* -- Management Administration and Services Agreement dated as of January 1, 1996 between the Company and
AutoBond, Inc.
10.8* -- Employment Agreement dated November 15, 1995 between Adrian Katz and the Company
10.9* -- Employment Agreement effective as of May 1, 1996 between William O. Winsauer and the Company
10.10 -- Consulting and Employment Agreement, dated as of January 1, 1998 between Manuel A. Gonzalez and the
Company.
10.11 -- Severance Agreement, dated as of February 1, 1998 between Manuel A. Gonzalez and the Company.
10.12* -- Employee Stock Option Plan
10.13* -- Dealer Agreement, dated November 9, 1994, between the Company and Charlie Thomas Ford, Inc.
10.14* -- Automobile Loan Sale Agreement, dated as of September 30, 1996, among the Company, First Fidelity
Acceptance Corp., and Greenwich Capital Financial Products, Inc.
10.15'D' -- Servicing Agreement, dated January 29, 1997, of the Company
10.16'D' -- Credit Agreement, dated as of February 1, 1997, among AutoBond Funding Corporation II, the Company and
Daiwa Finance Corporation
10.17'D' -- Security Agreement, dated as of February 1, 1997, among AutoBond Funding Corporation II, the Company
and Norwest Bank Minnesota, National Association
10.18'D' -- Automobile Loan Sale Agreement, dated as of March 19, 1997, by and between Credit Suisse First Boston
Mortgage Capital L.L.C., a Delaware limited liability company and the Company
10.19x -- Automobile Loan Sale Agreement, dated March 26, 1997, between Credit Suisse First Boston Mortgage
Capital L.L.C. and the Company.
10.20** -- Credit Agreement, dated as of June 30, 1997, by and among AutoBond Master Funding Corporation,
AutoBond Acceptance Corporation and Daiwa Finance Corporation.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------- --------------------------------------------------------------------------------------------------- ----
<S> <C> <C>
10.21** -- Amended and Restated Trust Indenture, dated as of June 30, 1997, among AutoBond Master Funding
Corporation, AutoBond Acceptance Corporation and Norwest Bank Minnesota, National Association.
10.22** -- Securities Purchase Agreement, dated as of June 30, 1997, by and among AutoBond Acceptance
Corporation, Lion Capital Partners, L.P. and Infinity Emerging Opportunities Limited.
10.23 -- Credit Agreement, dated as of December 31, 1997, among the Company, AutoBond Master Funding
Corporation II and Credit Suisse First Boston Mortgage Capital LLC. (previously filed)
10.24 -- Trust Indenture, dated as of December 31, 1997, among the Company, AutoBond Master Funding Corporation
II and Manufacturers & Traders Trust Company (previously filed).
10.25 -- Receivables Purchase Agreement, dated as of December 31, 1997, between Credit Suisse First Boston
Mortgage Capital LLC and the Company (previously filed).
10.26 -- Servicing Agreement, dated as of December 31, 1997, among the Company, AutoBond Master Funding
Corporation II and Manufacturers & Traders Trust Company (previously filed).
10.27 -- Indenture and Note, dated January 30, 1998, between the Company and Bank Boston, N.A.
10.28 -- Warrant, dated January 30, 1998, issued to BancBoston Investments, Inc.
10.29 -- Purchase Agreement, dated January 30, 1998, between the Company and BancBoston Investments, Inc.
21.1** -- Subsidiaries of the Company
21.2 -- Additional subsidiaries of the Company
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consent of Jones, Day, Reavis & Pogue (contained in Exhibit 5.1)
27.1'D'*** -- Financial Data Schedule
</TABLE>
- ------------
* Incorporated by reference from the Company's Registration Statement on
Form S-1 (Registration No. 333-05359).
'D' Incorporated by reference from the Company's 1996 Annual Report on Form
10-K.
x Incorporated by Reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997.
** Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997.
*** Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997.
STATEMENT OF DIFFERENCES
------------------------
The dagger symbol shall be expressed as .................................... 'D'
<PAGE>
<PAGE>
1,000,000 Shares
AUTOBOND ACCEPTANCE CORPORATION
___% Series A Cumulative Preferred Stock
, 1998
UNDERWRITING AGREEMENT
TEJAS SECURITIES GROUP, INC.
As Representative of the Several Underwriters
c/o: Tejas Securities Group, Inc.
1250 Capital of Texas Hwy. South Building Two
Suite 500
Austin, Texas 78746
Dear Sirs:
AutoBond Acceptance Corporation, a Texas Corporation (the "Company"),
proposes to sell to you and the other underwriters named in Schedule I hereto
(collectively, the "Underwriters"), for whom Tejas Securities Group, Inc. is
acting as managing underwriter and representative (the "Representative"), in the
respective amounts set forth opposite each Underwriter's name in Schedule I
hereto, an aggregate of 1,000,000 shares of ___% Series A Cumulative Preferred
Stock, no par value (the "Series A Preferred"), of the Company (such shares are
hereinafter collectively referred to as the "Underwritten Securities"). The
Company also proposes to grant to the Underwriters (i) the Underwriters' Option
(described in Section 2(b) hereof) to purchase up to an aggregate of 150,000
additional shares of Series A Preferred solely to cover over-allotments in the
sale of the Underwritten Securities (such additional shares are collectively
referred to herein as the "Option Securities"); and (ii) the Underwriters'
Warrants (defined in Section 7 hereof) to purchase shares of Common Stock of the
Company, no par value (the "Common Stock") (such Underwriters' Warrants and
shares of Common Stock, are collectively referred to herein as the "Warrant
Securities"). The Underwritten Securities, the Option Securities and the Warrant
Securities are collectively referred to herein as the "Securities."
The terms which follow, when used in this Agreement, shall have the
meanings indicated. The term "Effective Date" shall mean each date that the
Registration Statement (as defined below) and any post-effective amendment or
amendments thereto became or become effective. "Execution Time" shall mean the
date and time that this Agreement is executed and delivered by the parties
hereto. The term "Preliminary Prospectus" shall mean any preliminary prospectus
referred to in Section 1(a) below with respect to the offering of the
Securities, and any preliminary prospectus included in the Registration
Statement at the Effective Date that omits Rule 430A Information (as defined
below). Capitalized terms not otherwise defined herein shall have the meanings
ascribed to them in the most recent Preliminary Prospectus which predates or
coincides with the Execution Time. "Prospectus" shall mean the final prospectus
with respect to the offering of the Securities that contains the Rule 430A
Information. "Registration Statement" shall mean (a) the registration statement
referred to in Section 1(a) below, including Exhibits and Financial Statements,
in the form in which it has or shall become effective, (b) in the event any
post-effective amendment thereto becomes effective prior to the Closing Date (as
hereinafter defined) or any settlement date pursuant to Section 3(c) hereof,
such registration statement as so amended on such date, and (c) in the event of
the filing of any abbreviated registration statement increasing the size of the
offering (a "Rule 462 Registration Statement"), pursuant to Rule 462(b) (as
defined below), which registration statement became effective upon filing the
Rule 462 Registration Statement. Such term shall include Rule 430A Information
(as defined below) deemed to be included therein at the Effective Date as
provided by Rule 430A. "Rule 424," "Rule 462(b)" and "Rule 430A" refer to such
rules promulgated under the Securities Act of 1933, as amended (the "Act").
"Rule 430A Information" means information with respect to the Securities and the
offering thereof permitted to be omitted from the Registration Statement when it
becomes effective pursuant to Rule 430A.
1
<PAGE>
<PAGE>
1. Representations and Warranties of the Company.
The Company represents and warrant to, and agrees with, each Underwriter
that:
(a) The Company meets the requirements for the use of Form S-1 under
the Act and has filed with the Securities and Exchange Commission (the
"Commission") a registration statement, including a related preliminary
prospectus ("Preliminary Prospectus"), on Form S-1 (Commission File No.
333-41257) (the "Registration Statement") for the registration under the
Act of the Securities. The Company may have filed one or more amendments
thereto, including related Preliminary Prospectuses, each of which has
previously been furnished to you. The Company will next file with the
Commission either prior to effectiveness of such Registration Statement, a
further amendment thereto (including the form of Prospectus) or, after
effectiveness of such Registration Statement, a Prospectus in accordance
with Rules 430A and 424(b)(1) or (4). As filed, such amendment and form of
Prospectus, or such Prospectus, shall include all Rule 430A Information
and, except to the extent the Representative shall agree in writing to a
modification, shall be in all substantive respects in the form furnished to
you prior to the Execution Time or, to the extent not completed at the
Execution Time, shall contain only such specific additional information and
other changes (beyond that contained in the latest Preliminary Prospectus)
as the Company has advised you in writing, prior to the Execution Time,
will be included or made therein.
(b) Each Preliminary Prospectus, at the time of filing thereof,
conformed in all material respects with the applicable requirements of the
Act and the rules and regulations thereunder and did not include any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary in order to make the statements therein not
misleading. If the Effective Date is prior to or simultaneous with the
Execution Time, (i) on the Effective Date, the Registration Statement
conformed in all material respects to the requirements of the Act and the
rules and regulations thereunder and did not contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading, and (ii) at the Execution Time, the Registration Statement
conforms, and at the time of filing of the Prospectus pursuant to Rule
424(b), the Registration Statement and the Prospectus will conform, in all
material respects to the requirements of the Act and the rules and
regulations thereunder, and neither of such documents includes, or will
include, any untrue statement of a material fact or omits, or will omit, to
state a material fact required to be stated therein or necessary in order
to make the statements therein (and, in the case of the Prospectus, in the
light of the circumstances under which they were made) not misleading. If
the Effective Date is subsequent to the Execution Time, on the Effective
Date, the Registration Statement and the Prospectus will conform in all
material respects to the requirements of the Act and the rules and
regulations thereunder, and neither of such documents will contain any
untrue statement of any material fact or will omit to state any material
fact required to be stated therein or necessary to make the statements
therein (and, in the case of the Prospectus, in the light of the
circumstances under which they were made) not misleading. The two preceding
sentences do not apply to statements in or omissions from the Registration
Statement or the Prospectus (or any supplements thereto) based upon and in
conformity with information furnished in writing to the Company by or on
behalf of any Underwriter through the Representative specifically for use
in connection with the preparation of the Registration Statement or the
Prospectus (or any supplements thereto).
(c) The Company has no subsidiaries other than those listed in Exhibit
21.1 the Registration Statement as of the Effective Date.
(d) Each Company and each of its subsidiaries set forth in Exhibit
21.1 of the Registration Statement (the "Subsidiaries") has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction in which it is chartered or organized,
with full corporate power and corporate authority to own its properties and
conduct its business as described in the Prospectus, and is duly qualified
to do business as a foreign corporation and is in good standing under the
laws of each jurisdiction in which it conducts its business or owns
property and in which the failure, individually or in the aggregate, to be
so qualified would have a material adverse effect on the properties,
assets, operations, business, condition (financial or otherwise) or
prospects of the Company and the Subsidiaries, taken as a whole ("Material
Adverse Effect"). Each of the Company and each Subsidiary has all necessary
authorizations, approvals, orders, licenses, certificates and permits of
and from all government regulatory officials and bodies, to own its
properties and conduct its business as described in the Prospectus except
where the absence of any such authorization, approval, order, license,
certificate or permit would
2
<PAGE>
<PAGE>
not have a Material Adverse Effect.
(e) The Company does not own any shares of capital stock or any other
securities of any corporation or any equity interest in any firm,
partnership, association or other entity other than the Subsidiaries.
(f) The Company's equity capitalization is as set forth in the
Prospectus; the capital stock of the Company conforms in all material
respects to the description thereof contained in the Prospectus; all
outstanding shares of Common Stock have been duly and validly authorized
and issued and are fully paid and nonassessable, and the certificates
therefor are in valid and sufficient form; there are, and, on the Effective
Date, the Closing Date (as defined in Section 3(a) hereof) and any
settlement date pursuant to Section 3(b) hereof, there will be, no other
classes of stock outstanding except Common Stock; all outstanding options
to purchase shares of Common Stock have been duly and validly authorized
and issued; except as described in the Prospectus, there are, and, on the
Closing Date and any settlement date pursuant to Section 3(b) hereof, there
will be, no options, warrant or rights to acquire, or debt instruments
convertible into or exchangeable for, or other agreements or understandings
to which the Company is a party, outstanding or in existence, entitling any
person to purchase or otherwise acquire shares of capital stock of the
Company; the issuance and sale of the Securities have been duly and validly
authorized and, when issued and delivered and paid for, the Securities will
be fully paid and nonassessable and free from preemptive rights, and will
conform in all respects to the description thereof contained in the
Prospectus; the Underwriters' Warrants will, when issued, constitute valid
and binding obligations of the Company enforceable in accordance with their
terms and the Company has reserved a sufficient number of shares of Common
Stock for issuance upon exercise thereunder; the Securities will, when
issued, possess the rights, privileges and characteristics as described in
the Prospectus; the certificates for the Securities are in valid and
sufficient form; the Company has reserved a sufficient number of shares of
Common Stock for issuance upon redemption of the Series A Preferred; and
any Common Stock issued upon redemption of the Series A Preferred will be,
when so issued, duly and validly authorized and issued, fully paid and
nonassessable, and freely tradeable under Rule 144 of the Act and shall not
bear a restrictive legend. Each offer and sale of securities of the Company
referred to in Item 15 of Part II of the Registration Statement was
effected in compliance with the Act and the rules and regulations
thereunder, and with all applicable blue sky ("Blue Sky") laws.
(g) The Securities (other than the Warrant Securities) have been
approved for listing on the American Stock Exchange ("AMEX"), upon notice
of issuance thereof; the Company's Common Stock is registered pursuant to
Section 12(g) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and is listed on the Nasdaq National Market, and the
Company has taken no action designed to, or likely to, have the effect of
terminating the registration of the Common Stock under the Exchange Act or
delisting the Common Stock from the Nasdaq National Market, nor has the
Company received any notification that the Commission or the National
Association of Securities Dealers, Inc. (the "NASD") is contemplating
terminating such registration or listing.
(h) Other than as described in the Prospectus, there is no pending or,
to the best knowledge of the Company, threatened action, suit or proceeding
before any court or governmental agency, authority or body, domestic or
foreign, or any arbitrator involving the Company or any Subsidiary of a
character required to be disclosed in the Registration Statement or the
Prospectus. There is no contract or other document of a character required
to be described in the Registration Statement or Prospectus or to be filed
as an exhibit that is not described or filed as required.
(i) This Agreement has been duly authorized, executed and delivered by
the Company and constitutes the legal, valid and binding agreement of the
Company, enforceable against the Company in accordance with its terms,
except as rights of indemnity and contribution hereunder may be limited by
public policy and except as the enforceability hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally and general principles of equity.
(j) The Company has full corporate power and corporate authority to
enter into and perform its obligations under this Agreement and to issue,
sell and deliver the Securities in the manner provided in this Agreement.
The Company has taken all necessary corporate action to authorize the
execution and delivery of, and the performance of its obligations under,
this Agreement.
3
<PAGE>
<PAGE>
(k) Neither the offering, issue and sale of the Securities, nor the
consummation of any other of the transactions contemplated herein, nor the
fulfillment of the terms hereof, will conflict with or result in a breach
or violation of, or constitute a default under, or result in the imposition
of a lien on any properties of the Company or any Subsidiary or an
acceleration of indebtedness pursuant to, the Articles of Incorporation or
bylaws of the Company, or any Subsidiary, as currently in effect, or any of
the terms of any indenture or other agreement or instrument to which the
Company or any Subsidiary is a party or by which the Company or any of its
properties are bound, or any law, order, judgment, decree, rule or
regulation applicable to the Company or any Subsidiary of any court,
regulatory body, administrative agency, governmental body, stock exchange
or arbitrator having jurisdiction over the Company or any Subsidiary. None
of the Company nor any Subsidiary is in violation of its Articles of
Incorporation or similar charter document or bylaws, as currently in
effect, or in breach of or default under any of the terms of any indenture
or other agreement or instrument to which it is a party or by which it or
its properties are bound, which breach or default would, individually or in
the aggregate, have a Material Adverse Effect.
(l) Except as disclosed in the Prospectus, no person has the right,
contractual or otherwise, to cause the Company to issue to it any shares of
capital stock in consequence of the issue and sale of the Securities, nor
does any person have preemptive rights, or rights of first refusal or other
rights to purchase any of the Securities. Except as referred to in the
Prospectus, no person holds a right to require or participate in a
registration under the Act of Common Stock, Preferred Stock or any other
equity securities of the Company.
(m) The Company has not (i) taken and will not take, directly or
indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to cause or result in,
under the Exchange Act, or otherwise, stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of
the Securities (other than those actions permitted by applicable law)or
(ii) effected any sales of shares of securities that are required to be
disclosed in response to Item 15 of Part II of the Registration Statement
(other than transactions disclosed in the Registration Statement or the
Prospectus).
(n) No consent, approval, authorization or order of, or declaration or
filing with, any court or governmental agency or body is required to be
obtained or filed by or on behalf of the Company in connection with the
transactions contemplated herein, except such as may have been obtained or
made and registration of the Securities under the Act, and such as may be
required under the Blue Sky laws of any jurisdiction in connection with the
purchase and distribution of the Securities by the Underwriters.
(o) The accountants who have certified the Consolidated Financial
Statements filed or to be filed with the Commission as part of the
Registration Statement are independent accountants as required by the Act.
(p) No stop order preventing or suspending the use of any Preliminary
Prospectus has been issued, and no proceedings for that purpose are pending
or, to the best knowledge of the Company, threatened or contemplated by the
Commission; no stop order suspending the sale of the Securities in any
jurisdiction has been issued and no proceedings for that purpose have been
instituted or, to the best knowledge of the Company, threatened or are
contemplated; and any request of the Commission for additional information
(to be included in the Registration Statement or the Prospectus or
otherwise) has been complied with.
(q) None of the Company nor any Subsidiary has sustained since
September 30, 1997, any material loss or interference with its business
from fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action, order
or decree, and, since the respective dates as of which information is given
in the Registration Statement and the Prospectus, there have not been any
changes in the capital stock or long-term debt of the Company, or any
material adverse change, or a development known to the Company that could
reasonably be expected to cause or result in a material adverse change, in
the general affairs, management, financial position, stockholders' equity,
results of operations or prospects of the Company and the Subsidiaries,
taken as a whole, otherwise than as set forth in the Prospectus. Except as
set forth in the Prospectus, there exists no present condition or state of
facts or circumstances known to the Company involving its or any
Subsidiary's customers which the Company can now reasonably foresee would
have a Material Adverse Effect or which would result in a termination or
cancellation of any agreement with any customer whose purchases,
individually or in the aggregate, are material to the business of the
Company and the Subsidiaries, taken as a whole,
4
<PAGE>
<PAGE>
or which would result in any material decrease in sales to any such
customer or purchases from any supplier, or which would prevent the Company
or any Subsidiary from conducting its business as described in the
Prospectus in essentially the same manner in which it has heretofore been
conducted.
(r) The Consolidated Financial Statements and the related notes of the
Company, including without limitation transactions with unconsolidated
Subsidiaries, included in the Registration Statement and the Prospectus
present fairly the financial position, results of operations, cash flow and
changes in shareholders' equity of the Company and the Subsidiaries at the
dates and for the periods indicated, subject in the case of the
Consolidated Financial Statements for interim periods, to normal and
recurring year-end adjustments. The Consolidated Financial Statement
schedules included in the Registration Statement present fairly the
information required to be stated therein. Such Consolidated Financial
Statements and schedules were prepared in conformity with the Commission's
rules and regulations and in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods involved,
except as stated therein. The financial information of the Company and the
Subsidiaries set forth in the Prospectus under the captions
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" fairly present, on the basis stated in
the Prospectus, the information included therein.
(s) Each of the Company and each Subsidiary owns or possesses, or has
the right to use pursuant to licenses, sublicenses, agreements, permissions
or otherwise, adequate patents, copyrights, trade names, trademarks,
service marks, licenses and other intellectual property rights necessary to
carry on its business as described in the Prospectus, and, except as set
forth in the Prospectus, none of the Company nor any Subsidiary has
received any notice of either (i) default under any of the foregoing or
(ii) infringement of or conflict with asserted rights of others with
respect to, or challenge to the validity of, any of the foregoing which, in
the aggregate, if the subject of an unfavorable decision, ruling or
finding, could have a Material Adverse Effect, and the Company knows of no
fact which could reasonably be anticipated to serve as the basis for any
such notice.
(t) Subject to such exceptions as are not likely to result in a
Material Adverse Effect, (A) each of the Company and each Subsidiary owns
all properties and assets described in the Registration Statement and the
Prospectus as being owned by it and (B) each of the Company and each
Subsidiary has good title to all properties and assets owned by it, free
and clear of all liens, charges, encumbrances and restrictions, except as
otherwise disclosed in the Prospectus and except for (i) liens for taxes
not yet due, (ii) mortgages and liens securing debt reflected on the
Consolidated Financial Statements included in the Prospectus, (iii)
materialmen's, workmen's, vendor's and other similar liens incurred in the
ordinary course of business that are not delinquent, individually or in the
aggregate, and do not have a material adverse effect on the value of such
properties or assets of the Company or a Subsidiary, or on the use of such
properties or assets by the Company or any Subsidiary, in its respective
business, and (iv) any other liens that, individually or in the aggregate,
are not likely to result in a Material Adverse Effect. All leases to which
the Company or a Subsidiary is a party and which are material to the
conduct of the business of the Company and the Subsidiaries are valid and
binding and no material default by the Company or the Subsidiary a party
thereto has occurred and is continuing thereunder; and each of the Company
and each Subsidiary enjoys peaceful and undisturbed possession under all
such material leases to which it is a party as lessee.
(u) The books, records and accounts of the Company accurately and
fairly reflect, in reasonable detail, the transactions in and dispositions
of the assets of the Company and the Subsidiaries. The system of internal
accounting controls maintained by the Company is sufficient to provide
reasonable assurances that (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv)
the recorded accountability for assets is compared with the existing assets
at reasonable intervals and appropriate action is taken with respect to any
differences.
(v) Except as set forth in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration
Statement and the Prospectus, none of the Company or any Subsidiary has
incurred any liabilities or obligations, direct or contingent, or entered
into any transactions, in each case, which are likely to result in a
Material Adverse Effect, and there has not been any payment of or
declaration to pay any dividends or any other distribution with respect to
the shares of the capital stock of the Company.
5
<PAGE>
<PAGE>
(w) Each of the Company and each Subsidiary is in compliance in all
material respects with all applicable laws, rules and regulations,
including, without limitation, employment and employment practices,
immigration, terms and conditions of employment, health and safety of
workers, customs and wages and hours, and is not engaged in any unfair
labor practice. No property of the Company or any Subsidiary has been
seized by any governmental agency or authority as a result of any violation
by the Company or any Subsidiary or any independent contractor of the
Company or any Subsidiary of any provisions of law. There is no pending
unfair labor practice complaint or charge filed with any governmental
agency against the Company or any Subsidiary. There is no labor strike,
material dispute, slow down or work stoppage actually pending or, to the
best knowledge of the Company or any Subsidiary, threatened against or
affecting the Company or any Subsidiary; no grievance or arbitration
arising out of or under any collective bargaining agreements is pending
against the Company or any Subsidiary; no collective bargaining agreement
which is binding on the Company or any Subsidiary restricts the Company or
such Subsidiary from relocating or closing any of its operations and none
of the Company or any Subsidiary has experienced any work stoppage or other
labor dispute at any time.
(x) The Company has accurately, properly and timely (giving effect to
any valid extensions of time) filed all federal, state, local and foreign
tax returns (including all schedules thereto) that are required to be
filed, and has paid all taxes and assessments shown thereon. All tax
deficiencies asserted or assessed against the Company by the Internal
Revenue Service ("IRS") or any other foreign or domestic taxing authority
have been paid or finally settled with no remaining amounts owed. Neither
the IRS nor any other foreign or domestic taxing authority has examined any
tax returns of the Company nor has the IRS or any foreign or domestic
taxing authority asserted a position which conflicts with any tax position
taken by the Company. The charges, accruals and reserves shown in the
Consolidated Financial Statements included in the Prospectus in respect of
taxes for all fiscal periods to date are adequate, and nothing has occurred
subsequent to the date of such Consolidated Financial Statements that makes
such charges, accruals or reserves inadequate. The Company is not aware of
any proposal (whether oral or written) by any taxing authority to adjust
any tax return filed by the Company.
(y) With such exceptions as are not likely to result in a Material
Adverse Effect, each of the Company and each Subsidiary is in compliance
with all Federal, state, foreign and local laws and regulations relating to
pollution or protection of human health or the environment ("Environmental
Laws"), there are no circumstances that may prevent or interfere with such
compliance other than as set forth in the Prospectus, and none of the
Company nor any Subsidiary has received any notice or other communication
alleging a currently pending violation of any Environmental Laws. With such
exceptions as are not likely to result in a Material Adverse Effect, other
than as set forth in the Prospectus, there are no past or present actions,
activities, circumstances, conditions, events or incidents, including,
without limitation, the release, emission, discharge or disposal of any
chemicals, pollutants, contaminants, wastes, toxic substances, petroleum
and petroleum products, that may result in the imposition of liability on
the Company or any Subsidiary or any claim against the Company or any
Subsidiary or, to the Company's best knowledge, against any person or
entity whose liability for any claim the Company or any Subsidiary has or
may have assumed either contractually or by operation of law, and none of
the Company nor any Subsidiary has received any notice or other
communication concerning any such claim against the Company or any
Subsidiary or such person or entity.
(z) Except as set forth in the Prospectus, there are no outstanding
loans, advances or guaranties of indebtedness by the Company to or for the
benefit of its affiliates, or any of its officers or directors, or any of
the members of the families of any of them, which are required to be
disclosed in the Registration Statement or the Prospectus.
(aa) The Company is not an investment company subject to registration
under the Investment Company Act of 1940, as amended.
(bb) Except as set forth in the Prospectus, each of the Company and
each Subsidiary has insurance of the types and in the amounts that it
reasonably believes is adequate for its business, including, but not
limited to, casualty and general liability insurance covering all real and
personal property owned or leased by the Company or such Subsidiary, as
applicable, against theft, damage, destruction, acts of vandalism and all
other risks customarily insured against.
6
<PAGE>
<PAGE>
(cc) None of the Company nor any Subsidiary has at any time (i) made
any contributions to any candidate for political office, or failed to
disclose fully any such contribution, in violation of law; (ii) made any
payment to any state, federal or foreign governmental officer or official,
or other person charged with similar public or quasi-public duties, other
than payments required or allowed by all applicable laws; or (iii)
violated, nor is it in violation of, any provision of the Foreign Corrupt
Practices Act of 1977.
(dd) The preparation and the filing of the Registration Statement with
the Commission have been duly authorized by and on behalf of the Company,
and the Registration Statement has been duly executed pursuant to such
authorization by and on behalf of the Company.
(ee) All documents delivered or to be delivered by the Company or any
of its directors or officers to the Underwriters, the Commission or any
state securities law administrator in connection with the issuance and sale
of the Securities were, on the dates on which they were delivered, and will
be, on the dates on which they are to be delivered, true, complete and
correct in all material respects.
(ff) Except as described in the Prospectus, none of the Company or any
Subsidiary maintains, nor does any other person maintain on behalf of the
Company or any Subsidiary, any retirement, pension (whether deferred or
non-deferred, defined contribution or defined benefit) or money purchase
plan or trust. There are no unfunded liabilities of the Company or any
Subsidiary with respect to any such plans or trusts that are not accrued or
otherwise reserved for on the Consolidated Financial Statements.
(gg) Any certificates signed by an officer of the Company and
delivered to the Representative or the Underwriters or to counsel for the
Underwriters shall also be deemed a representation and warranty of the
Company to the Underwriters as to the matters covered thereby. Any
certificate delivered by the Company to its counsel for purposes of
enabling such counsel to render the opinions referred to in Section 6(b)
will also be furnished to the Representative and counsel for the
Underwriters and shall be deemed to be additional representations and
warranties by the Company to the Underwriters as to the matters covered
thereby.
2. Purchase and Sale.
(a) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company agrees to issue and
sell to the Underwriters an aggregate of 100,000 shares of Series A Preferred.
Each of the Underwriters agrees, severally and not jointly, to purchase from the
Company the number of Underwritten Securities set forth opposite its name in
Schedule I hereto. The purchase price per Underwritten Security to be paid by
the several Underwriters to the Company shall be $___ per share.
(b) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company hereby grants an
option (the "Underwriters' Option") to the several Underwriters to purchase,
severally and not jointly, up to an aggregate of 150,000 shares of Series A
Preferred, at the purchase price of $____ per share for use solely in covering
any over-allotments made by the Representative for the account of the
Underwriters in the sale and distribution of the Underwritten Securities. Said
Underwriters' Option may be exercised in whole or in part at any time on or
before the 45th day after the Effective Date upon written or telegraphic notice
by the Representative to the Company setting forth the number of Option
Securities which the several Underwriters are electing to purchase pursuant to
the Underwriters' Option and the settlement date. Delivery of certificates for
such Option Securities by the Company and payment therefor to the Company shall
be made as provided in Section 3 hereof. The number of Option Securities to be
so purchased by each Underwriter pursuant to the Underwriters' Option shall be
determined by multiplying the number of Option Securities to be sold by the
Company pursuant to the Underwriters' Option, as exercised, by a fraction, the
numerator of which is the number of Underwritten Securities to be purchased by
such Underwriter as set forth opposite its name in Schedule I and the
denominator of which is the total number of Underwritten Securities to be
purchased by all of the Underwriters as set forth on Schedule I (subject to such
adjustments to eliminate any fractional share purchases as the Representative in
its discretion may make).
3. Delivery and Payment.
7
<PAGE>
<PAGE>
(a) If the Underwriters' Option described in Section 2(b) hereof is
exercised on or before the third business day prior to the Closing Date (as
defined below), delivery of the certificates for the Shares described in
Sections 2(a) and 2(b) hereof shall be made by the Company through the
facilities of the Depository Trust Company ("DTC"), and payment therefor, shall
be made at the office of the Company at _____a.m. _______ time, on______, 1998
or such later date (but not later than_____, 1998) as the Representative shall
designate, which date and time may be postponed by agreement among the
Representative and the Company or as provided in Section 9 hereof (such date,
time of delivery and payment for such Securities being herein called the
("Closing Date"). Delivery of the certificates for such Securities to be
purchased on the Closing Date shall be made as provided in the preceding
sentence for the respective accounts of the several Underwriters against payment
by the several Underwriters through Tejas Securities Group, Inc. of the
aggregate purchase price of such Securities being sold by the Company, to or
upon the order of the Company, by certified or official bank check or checks
drawn on or by a Dallas Clearing House bank and payable in next day funds.
Certificates for such Securities shall be registered in such names and in such
denominations as the Representative may request not less than one full business
day in advance of the Closing Date. The Company agrees to have the certificates
for the Securities to be purchased on the Closing Date available at the office
of the DTC, not later than ____ a.m. _____ time at least one business day prior
to the Closing Date.
(b) If the Underwriters' Option is exercised after the third business day
prior to the Closing Date, (i) delivery of the certificates for the Shares
described in Section 2(a) hereof and payment therefor will be governed by the
provisions of Section 3(a) hereof and (ii) the Company will deliver (at the
expense of the Company) on the date specified by the Representative (which shall
not be less than one nor more than five business days after exercise of the
Underwriters' Option), certificates for the Shares described in Section 2(b)
hereof in such names and denominations as the Representative shall have
requested against payment at the office of Tejas Securities Group, Inc. of the
purchase price therefor, to or upon the order of the Company, by certified or
official bank check or checks drawn on or by a Dallas Clearing House bank and
payable in next day funds. If settlement for such Securities occurs after the
Closing Date, the Company will deliver to the Representative on the settlement
date for such Securities, and the obligation of the Underwriters to purchase
such Securities shall be conditioned upon receipt of, supplemental opinions,
certificates and letters confirming as of such date the opinions, certificates
and letters delivered on the Closing Date pursuant to Section 6 hereof. The
Company agrees to have the certificates for the Securities to be purchased after
the Closing Date available at the office of the DTC not later than ____a.m.
_____ time at least one business day prior to the settlement date.
4. Offering by Underwriters. It is understood that the several Underwriters
propose to offer the Securities for sale to the public as set forth in the
Prospectus.
5. Agreements. The Company agrees with the several Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, and any amendment thereof, if not effective at the Execution Time, to
become effective as promptly as possible. If the Registration Statement has
become or becomes effective pursuant to Rule 430A, or filing of the Prospectus
is otherwise required under Rule 424(b), the Company will file the Prospectus,
properly completed, pursuant to Rule 424(b) within the time period prescribed
and will provide evidence satisfactory to the Representative of such timely
filing. The Company will promptly advise the Representative (i) when the
Registration Statement shall have become effective, (ii) when any post-effective
amendment thereto shall have become effective, (iii) of any request by the
Commission for any amendment or supplement of the Registration Statement or the
Prospectus or for any additional information with respect thereto, (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the receipt by the Company of any notification with
respect to the institution or threatening of any proceeding for that purpose and
(v) of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Securities for sale in any jurisdiction
or the initiation or threatening of any proceeding for such purpose. The Company
will use its best efforts to prevent the issuance of any such stop order or
suspension and, if issued, to obtain as soon as possible the withdrawal thereof.
The Company will not file any amendment to the Registration Statement or
supplement to the Prospectus without the prior consent of the Representative.
The Company will prepare and file with the Commission, promptly upon your
request, any amendment to the Registration Statement or supplement to the
Prospectus that you reasonably determine to be necessary or advisable in
connection with the distribution of the Securities by you, and will use its best
efforts to cause the same to become effective as promptly as possible.
(b) If, at any time when a prospectus relating to the Securities is
required to be delivered under the Act, any event
8
<PAGE>
<PAGE>
occurs as a result of which the Prospectus as then supplemented would include
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it otherwise shall be
necessary to supplement the Prospectus to comply with the Act or the rules or
regulations thereunder, the Company will promptly prepare and file with the
Commission, subject to Section 5(a) hereof, a supplement that will correct such
statement or omission or a supplement that will effect such compliance.
(c) As soon as practicable (but not later than eighteen months after the
effective date of the Registration Statement), the Company will make generally
available to its security holders and to the Representative an earnings
statement or statements (which need not be audited) of the Company covering a
period of at least twelve months after the Effective Date (but in no event
commencing later than 90 days after such date), which will satisfy the
provisions of Section 11(a) of the Act and Rule 158 promulgated thereunder.
(d) The Company will furnish to each of you and counsel for the
Underwriters, without charge, one signed copy of the Registration Statement and
any amendments thereto (including exhibits thereto) and to each other
Underwriter a conformed copy of the Registration Statement and any amendments
thereto (without exhibits thereto) and, so long as delivery of a prospectus by
an Underwriter or dealer may be required by the Act, as many copies of the
Prospectus and each Preliminary Prospectus and any supplements thereto as the
Representative may reasonably request.
(e) The Company will take all actions necessary for the registration or
qualification of the Securities for sale under the laws of such jurisdictions
within the United States and its territories as the Representative may
designate, will maintain such qualifications in effect so long as required for
the distribution of the Securities and will pay the fee of the NASD in
connection with its review of the offering, provided that the Company shall not
be required to qualify as a foreign corporation or to consent to service of
process under the laws of any such jurisdiction (except service of process with
respect to the offering and sale of the Securities).
(f) The Company will apply the net proceeds from the offering received by
it in the manner set forth under the caption "Use of Proceeds" in the
Prospectus.
(g) The Company will (i) cause the Securities (other than the Warrant
Securities) to be listed on AMEX and (ii) comply with all registration, filing
and reporting requirements of the Exchange Act, the Nasdaq National Market and
AMEX which may from time to time be applicable to the Company.
(h) The Company shall use its best efforts to list, subject to official
notice of issuance, the shares of Common Stock required to be delivered upon
redemption of shares of Series A Preferred, prior to such redemption, upon each
national securities exchange or automated quotation system, if any, upon which
the outstanding shares of Common Stock are listed or quoted at the time of such
delivery. The Company shall also take any action necessary to ensure that any
shares of Common Stock issued upon the redemption of Series A Preferred are
freely transferable and not subject to any resale restrictions under the Act, or
any applicable state securities or blue sky laws (other than any shares of
Common Stock issued upon redemption of any Series A Preferred which are held by
an "affiliate" (as defined in Rule 144 under the Act) of the Company).
(i) During the five-year period commencing on the date hereof, the Company
will furnish to its shareholders, as soon as practicable after the end of each
respective period, annual reports (including financial statements audited by
independent certified public accountants) and unaudited quarterly reports of
earnings and will furnish to you and, upon request, to the other Underwriters
hereunder (i) concurrent with furnishing such quarterly reports to its
shareholders, statements of income and other information of the Company for such
quarter in the form furnished to the Company's shareholders; (ii) concurrent
with furnishing such annual reports to its shareholders, a balance sheet of the
Company as at the end of such fiscal year, together with statements of income
and surplus and of cash flow of the Company for such fiscal year, all in
reasonable detail and accompanied by a copy of the certificate or report thereon
of its independent certified public accountants; (iii) as soon as they are
available, copies of all reports and financial statements furnished to or filed
with the Commission, the NASD, the Nasdaq National Market, AMEX or any other
securities exchange on which any of the Company's securities may be listed; (iv)
every press release and every material news item or article in respect of the
Company or its affairs which was released or prepared by the Company; and (v)
any additional information of a public nature concerning the Company or its
business that you may reasonably request. During such five-year period, if the
Company shall have active Subsidiaries, the foregoing financial statements shall
be on a consolidated basis to the extent that the accounts
9
<PAGE>
<PAGE>
of the Company and its subsidiaries are consolidated, and shall be accompanied
by similar financial statements for any significant subsidiary that is not so
consolidated.
(j) The Company will maintain a transfer agent and, if necessary under the
jurisdiction of incorporation of the Company, a registrar (which may be the same
entity as the transfer agent) for the Securities.
(k) The Company has reserved and shall continue to reserve a sufficient
number of shares of Common Stock for issuance upon exercise of the Underwriters'
Warrants and a sufficient number of shares of Common Stock for issuance upon the
redemption of the Series A Preferred.
(l) If the Company elects to rely on Rule 462(b), the Company shall file a
Rule 462(b) Registration Statement with the Commission in compliance with Rule
462(b) by 10:00 p.m., Washington D.C. time, on the date of this Agreement, and
the Company shall at the time of filing either pay to the Commission the filing
fee for the Rule 462(b) Registration Statement or give irrevocable instructions
for the payment of such fee pursuant to Rule 111(b) under the Act.
6. Conditions to the Obligations of the Underwriters. The obligations of the
Underwriters to purchase the Securities described in Sections 2(a) and 2(b)
hereof shall be subject to (i) the accuracy of the representations and
warranties on the part of the Company contained herein as of the Execution Time,
the Closing Date and (in the case of any Securities delivered after the Closing
Date) any settlement date pursuant to Section 3(b) hereof, (ii) the accuracy of
the statements of the Company made in any certificates delivered pursuant to the
provisions hereof, (iii) the performance by the Company of its obligations
hereunder, and (iv) the following additional conditions:
(a) The Registration Statement shall have become effective (or, if a
post-effective amendment is required to be filed pursuant to Rule 430A under the
Act, such post-effective amendment shall become effective) not later than ___
p.m. _____ time, on the execution date hereof or at such later date and time as
you may approve in writing and, at the Closing Date (and any settlement date
pursuant to Section 3(b) hereof), no stop order suspending the effectiveness of
the Registration Statement or any qualification in any jurisdiction shall have
been issued and no proceedings for that purpose shall have been initiated or, to
the best knowledge of the Company, threatened by the Commission.
(b) The Company shall have furnished to the Representative the opinion of
Jones, Day, Reavis & Pogue, counsel for the Company, addressed to the
Underwriters and dated the Closing Date (and any settlement date pursuant to
Section 3(b) hereof), or other evidence satisfactory to the Representative to
the effect that:
(i) The Registration Statement has become effective under the Act; any
required filing of the Prospectus or any supplements thereto pursuant to
Rule 424(b) has been made in the manner and within the time period required
by Rule 424(b); to the best knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement has been issued
and no proceedings for that purpose have been instituted or threatened; the
Registration Statement and the Prospectus (and any supplements thereto)
comply as to form in all material respects with the applicable requirements
of the Act and the rules and regulations thereunder.
(ii) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Texas, with
full corporate power and corporate authority to own its properties and
conduct its business as described in the Prospectus. Each of the Company
and each Subsidiary has all necessary and material authorizations,
approvals, orders, licenses, certificates and permits of and from all
government regulatory officials and bodies, to own its properties and
conduct its business as described in the Prospectus, except where failure
to obtain such authorizations, approvals, orders, licenses, certificates or
permits would not have a Material Adverse Effect.
(iii) The Company has the authorized share capitalization as set forth
in the Prospectus; the capital stock of the Company conforms in all
material respects to the description thereof contained in the Prospectus;
all outstanding shares of Common Stock have been duly and validly
authorized and issued and are fully paid and nonassessable and the
certificates therefor are in valid and sufficient form in accordance with
applicable state law; there are no other classes of stock outstanding
except Common Stock; all outstanding options to purchase shares of Common
Stock have been duly and validly authorized and issued; except as described
in the Prospectus, there are no options, warrant or rights to acquire, or
debt instruments convertible into or exchangeable for, or other
10
<PAGE>
<PAGE>
agreements or understandings to which the Company is a party, outstanding
or in existence, entitling any person to purchase or otherwise acquire any
shares of capital stock of the Company; the issuance and sale of the
Securities have been duly and validly authorized and, when issued and
delivered and paid for, the Securities will be fully paid and nonassessable
and free from preemptive rights, and will conform in all respects to the
description thereof contained in the Prospectus; the Underwriters' Warrants
constitute valid and binding obligations of the Company enforceable in
accordance with their terms and the Company has reserved a sufficient
number of shares of Common Stock for issuance upon exercise thereof; the
Underwriters' Warrants possess the rights, privileges and characteristics
as represented in the forms filed as Exhibits to the Registration Statement
and as described in the Prospectus; the Company has reserved a sufficient
number of shares of Common Stock for issuance upon redemption of the Series
A Preferred and any Common Stock issued upon redemption of the Series A
Preferred will be, when so issued, duly and validly authorized and issued,
fully paid and nonassessable, and freely tradeable under Rule 144 of the
Act and shall not be required to bear a restrictive legend; the Securities
(other than the Warrant Securities) have been approved for listing on AMEX
upon notice of issuance thereof; and the certificates for the Securities
are in valid and sufficient form. Each offer and sale of securities of the
Company described in Item 15 of Part II of the Registration Statement was
effected in compliance with the Act and the rules and regulations
thereunder and with all applicable Blue Sky laws.
(vi) Other than as described in the Prospectus, there is no pending
or, to the best knowledge of such counsel, threatened action, suit or
proceeding before any court or governmental agency, authority or body,
domestic or foreign, or any arbitrator involving the Company or any
Subsidiary of a character required to be disclosed in the Registration
Statement or the Prospectus that is not adequately disclosed in the
Prospectus, and, to the best knowledge of such counsel, there is no
contract or other document of a character required to be described in the
Registration Statement or the Prospectus, or to be filed as an exhibit,
which is not described or filed as required.
(vii) This Agreement has been duly authorized, executed and delivered
by the Company and constitutes the legal, valid and binding agreement and
obligation of the Company enforceable against it in accordance with its
terms (subject to standard bankruptcy and equitable remedy exceptions, and
limitations under the Act as to the enforceability of indemnification
provisions).
(viii) The Company has full corporate power and corporate authority to
enter into and perform its obligations under this Agreement and to issue,
sell and deliver the Securities in the manner provided in this Agreement;
and the Company has taken all necessary corporate action to authorize the
execution and delivery of, and the performance of its obligations under,
this Agreement.
(ix) Neither the offering, issue and sale of the Securities nor the
consummation of any other of the transactions contemplated herein, nor the
fulfillment of the terms hereof, will conflict with or result in a breach
or violation of, or constitute a default under, or result in the imposition
of a lien on any properties of the Company or any Subsidiary, or an
acceleration of indebtedness pursuant to, the Articles of Incorporation (or
other charter document) or bylaws of the Company or any Subsidiary, or any
of the terms of any indenture or other agreement or instrument to which the
Company or any Subsidiary is a party or by which its properties are bound,
or any law, order, judgment, decree, rule or regulation applicable to the
Company or any Subsidiary of any court, regulatory body, administrative
agency, governmental body, stock exchange or arbitrator having jurisdiction
over the Company or any Subsidiary. The Company is not in violation of its
Articles of Incorporation or bylaws or in breach of or default under any of
the terms of any indenture or other agreement or instrument to which it is
a party or by which it or its properties are bound, which breach or default
would, individually or in the aggregate, have a Material Adverse Effect.
(x) Except as disclosed in the Prospectus, no person has the right,
contractual or otherwise, to cause the Company to issue to it any shares of
capital stock in consequence of the issue and sale of the Securities to be
sold by the Company hereunder nor does any person have preemptive rights,
or rights of first refusal or other rights to purchase any of the
Securities. Except as referred to in the Prospectus, no person holds a
right to require or participate in a registration under the Act of Common
Stock or any other equity securities of the Company.
(xi) No consent, approval, authorization or order of, or declaration
or filing with, any court or governmental agency or body is required to be
obtained or filed by or on behalf of the Company in connection with
11
<PAGE>
<PAGE>
the transactions contemplated herein, except such as may have been obtained
or made and registration of the Securities under the Act, and such as may
be required under the Blue Sky laws of any jurisdiction.
(xiii) The Company is not an investment company subject to
registration under the Investment Company Act of 1940, as amended.
(xiv) The preparation and the filing of the Registration Statement
with the Commission have been duly authorized by and on behalf of the
Company, and the Registration Statement has been duly executed pursuant to
such authorization by and on behalf of the Company.
In addition, such counsel shall state that such counsel has participated in
conferences with officers and other representatives of the Company,
representatives of the independent public accountants of the Company and
representatives of the Underwriters at which the contents of the Registration
Statement and Prospectus were discussed and, although such counsel is not
passing upon and does not assume responsibility for the accuracy, completeness
or fairness of the statements contained in the Registration Statement or
Prospectus (except as and to the extent stated in the first one clauses of
subparagraph (v) above), on the basis of the foregoing and on such counsel's
participation in the preparation of the Registration Statement and the
Prospectus, nothing has come to the attention of such counsel that causes such
counsel to believe that the Registration Statement, at the Effective Date and at
the Closing Date (and any settlement date pursuant to Section 3(b) hereof),
contained or contains any untrue statement of a material fact or omitted or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, or that the Prospectus, at the date of such
Prospectus or at the Closing Date (or any settlement date pursuant to Section
3(b) hereof), contained or contains any untrue statement of a material fact or
omitted or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading (it being understood that such
counsel need express no comment with respect to the Consolidated Financial
Statements and schedules and other financial or statistical data included in the
Registration Statement or Prospectus).
References to the Prospectus in this Section 6(b) shall include any
supplements thereto.
(c) The Representative shall have received from Wolin, Ridley & Miller,
LLP, counsel for the Underwriters, an opinion dated the Closing Date (and any
settlement date pursuant to Section 3(b) hereof), with respect to the issuance
and sale of the Securities, and with respect to the Registration Statement, the
Prospectus and other related matters as the Representative may reasonably
require, and the Company shall have furnished to such counsel such documents as
they may reasonably request for the purpose of enabling them to pass upon such
matters.
(d) The Company shall have furnished to the Representative a certificate of
the Company, signed by its Chief Executive Officer and Chief Financial Officer,
dated the Closing Date (and any settlement date pursuant to Section 3(b)
hereof), to the effect that each has carefully examined the Registration
Statement, the Prospectus (and any supplements thereto) and this Agreement, and,
after due inquiry, that:
(i) As of the Closing Date (and any settlement date pursuant to
Section 3(b) hereof), the statements made in the Registration Statement and
the Prospectus are true and correct and the Registration Statement and the
Prospectus do not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading.
(ii) No order suspending the effectiveness of the Registration
Statement or the qualification or registration of the Securities under the
securities or Blue Sky laws of any jurisdiction is in effect and no
proceeding for such purpose is pending before or, to the knowledge of such
officers, threatened or contemplated by the Commission or the authorities
of any such jurisdiction; and any request for additional information with
respect to the Registration Statement or the Prospectus on the part of the
staff of the Commission or any such authorities brought to the attention of
such officers has been complied with to the satisfaction of the staff of
the Commission or such authorities.
12
<PAGE>
<PAGE>
(iii) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any
change in the capital stock or long-term debt of the Company, except as set
forth in or contemplated by the Registration Statement and the Prospectus,
(y) there has not been any material adverse change in the general affairs,
business, prospects, properties, management, results of operations or
condition (financial or otherwise) of the Company, whether or not arising
from transactions in the ordinary course of business, in each case, other
than as set forth in or contemplated by the Registration Statement and the
Prospectus, and (z) the Company has not sustained any material interference
with its business or properties from fire, explosion, flood or other
casualty, whether or not covered by insurance, or from any labor dispute or
any court or legislative or other governmental action, order or decree,
which is not set forth in the Registration Statement and the Prospectus.
(iv) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has been no litigation
instituted against the Company, any of its respective officers or
directors, or, to the best knowledge of such officers, any affiliate or
promoter of the Company, and since such dates there has been no proceeding
instituted or, to the best knowledge of such officers, threatened against
the Company, any of its officers or directors, or, to the best knowledge of
such officers, any affiliate or promoter of the Company, before any
federal, state or county court, commission, regulatory body, administrative
agency or other governmental body, domestic or foreign, in which litigation
or proceeding an unfavorable ruling, decision or finding could have a
Material Adverse Effect.
(v) Each of the representations and warranties of the Company in this
Agreement is true and correct in all material respects on and as of the
Execution Time and the Closing Date (and any settlement date pursuant to
Section 3(b) hereof) with the same effect as if made on and as of the
Closing Date (and any settlement date pursuant to Section 3(b) hereof).
(vi) Each of the covenants required in this Agreement to be performed
by the Company on or prior to the Closing Date (and any settlement date
pursuant to Section 3(b) hereof) has been duly, timely and fully performed,
and each condition required herein to be complied with by the Company on or
prior to the Closing Date (and any settlement date pursuant to Section 3(b)
hereof) has been duly, timely and fully complied with.
(e) At the Execution Time and on the Closing Date (and any settlement date
pursuant to Section 3(b) hereof), Coopers & Lybrand, L.L.P., shall have
furnished to the Representative letters, dated as of such dates, in form and
substance satisfactory to the Representative, confirming that they are
independent accountants within the meaning of the Act and the applicable rules
and regulations thereunder and stating in effect that:
(i) In their opinion, the audited Consolidated Financial Statements of
the Company for the fiscal year ended December 31, 1996, and the unaudited
Consolidated Financial Statements for the periods ended September 30, 1996
and 1997, and the notes to the Consolidated Financial Statements and
Financial Statement schedules for those periods included in the
Registration Statement and the Prospectus, including without limitation
transactions with unconsolidated Subsidiaries, comply in all material
respects with generally accepted accounting principles and the applicable
accounting requirements of the Act and the applicable rules and regulations
thereunder.
(ii) On the basis of a reading of the latest unaudited Consolidated
Financial Statements made available by the Company, carrying out certain
specified procedures (but not an examination in accordance with generally
accepted auditing standards), a reading of the minutes of the meetings of
the shareholders, directors and committees of the Company, and inquiries of
certain officials of the Company who have responsibility for financial and
accounting matters of the Company, nothing came to their attention that
caused them to believe that with respect to the period subsequent to
September 30, 1997, at a specified date not more than five business days
prior to the date of the letter, (y) there were any changes in the
long-term debt or capital stock of the Company, or decreases in net current
assets, net assets or stockholders' equity of the Company as compared with
the amounts shown on the September 30, 1997 balance sheets included in the
Registration Statement and the Prospectus or (z) there were any decreases
in reserves, sales, net income or income from operations, of the Company,
as compared with the corresponding period in the preceding year, except for
changes or decreases which the Registration Statement discloses have
occurred or may occur and except for changes or decreases, set forth in
such letter, in which case (A) the letter shall be accompanied by an
explanation by the Company as to the significance thereof unless said
explanation is not deemed necessary by the Representative and (B) such
changes or decreases and the explanation
13
<PAGE>
<PAGE>
thereof shall be acceptable to the Representative, in its sole discretion.
(iii) They have performed certain other specified procedures as a
result of which they determined that all information of an accounting,
financial or statistical nature (which is limited to accounting, financial
or statistical information derived from the general accounting records of
the Company) set forth in the Registration Statement and the Prospectus and
specified by you prior to the Execution Time, agrees with the accounting
records of the Company.
References to the Prospectus in this Section 6(e) shall include any
supplements thereto.
(f) Subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus, there shall not have been (i) any
changes or decreases from that specified in the letters referred to in Section
6(e) hereof or (ii) any change, or any development involving a prospective
change, in or affecting the properties, assets, results of operations, business,
capitalization, net worth, prospects, general affairs or condition (financial or
otherwise) of the Company and the Subsidiaries, taken as a whole, the effect of
which is, in the sole judgment of the Representative, so material and adverse as
to make it impractical or inadvisable to proceed with the public offering or
delivery of the Securities as contemplated by the Registration Statement and the
Prospectus.
(g) On or prior to the Effective Date, the Securities (other than the
Warrant Securities) shall have been approved for listing on AMEX.
(h) The Company shall not have sustained any uninsured substantial loss as
a result of fire, flood, accident or other calamity.
(i) The Company shall have furnished to the Representative a certificate of
the Secretary of the Company certifying as to certain information and other
matters as the Representative may reasonably request.
(j) The Company shall have furnished to the Representative such further
information, certificates and documents as the Representative may reasonably
request.
If any of the conditions specified in this Section 6 shall not have been
fulfilled in any respect when and as provided in this Agreement, or if any of
the opinions and certificates mentioned above or elsewhere in this Agreement
shall not be in all respects reasonably satisfactory in form and substance to
the Representative and its counsel, this Agreement and all obligations of the
Underwriters hereunder may be canceled at, or at any time prior to, the Closing
Date (or any settlement date, pursuant to Section 3(b) hereof), by the
Representative. Notice of such cancellation shall be given to the Company in
writing or by telephone, facsimile or telegraph confirmed in writing.
7. Fees and Expenses and Underwriters' Warrant. The Company agrees to pay or
cause to be paid the following:
(a) the fees, disbursements and expenses of its own counsel and accountants
in connection with the registration of the Securities under the Act and all
other expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus, any Prospectus, and any
drafts thereof, and amendments and supplements thereto, and the mailing and
delivery of copies thereof to the Underwriters and dealers;
(b) all expenses in connection with the qualification of the Securities for
offering under state securities laws, including the fees and disbursements of
counsel for the Underwriters in connection with such qualification and in
connection with the Blue Sky Memorandum;
(c) all filing and other fees in connection with filing with the NASD, and
complying with applicable review requirements thereof;
(d) the cost of preparing and printing certificates for the Securities;
(e) all expenses, taxes, fees and commissions, including, without
limitation, any and all fixed transfer duties sellers'
14
<PAGE>
<PAGE>
and buyers' stamp taxes or duties on the purchase and sale of the Securities and
stock exchange brokerage and transaction levies with respect to the purchase
and, if applicable, the sale of the Securities (the latter to the extent paid
and not reimbursed) (i) incident to the sale and delivery by the Company of the
Securities to the Underwriters and (ii) incident to the sale and delivery of the
Securities by the Underwriters to the initial purchasers thereof;
(f) the costs and charges of any transfer agent and registrar;
(g) the fees and expenses in connection with qualification of the
Securities (other than the Warrant Securities) for listing on the AMEX;
(h) a nonaccountable expense allowance of 2.0% of the proceeds derived from
the offering (including the Option Securities described in Section 2(b) hereof)
payable to the Representative; and
(i) all other costs and expenses incident to the performance of the
Company's obligations hereunder which are not otherwise specifically provided
for in this Section 7.
In addition to the sums payable to the Representative as provided elsewhere
herein and in addition to the Underwriters' Option, the Underwriters shall be
entitled to receive, as partial compensation for their services, warrants (the
"Underwriters' Warrants") for the purchase of an aggregate of 300,000 shares of
Common Stock of the Company. The Underwriters' Warrants shall be issued pursuant
to the Warrant Agreement in the form of Exhibit A attached hereto and shall be
exercisable, in whole or in part, for a period of four years commencing from the
one year anniversary of the date hereof, at 105% of the average closing bid
price per share of Common Stock, as quoted on the Nasdaq National Market for the
five trading days prior to the date hereof. The Underwriters' Warrants, shall be
non-transferable for one year from the date of issuance of the Underwriters'
Warrants, except for (i) transfers to officers or partners of the Underwriters,
(ii) in connection with a merger, consolidation or reorganization of the Company
or (iii) transfers occurring by operation of law.
Without limiting in any respect the foregoing obligations of the Company,
which obligations shall survive any termination of this Agreement, if the sale
of the Securities provided for herein is not consummated because any condition
to the obligations of the Underwriters set forth in Section 6 hereof is not
satisfied, because of any termination pursuant to Section 10 hereof, or because
of any refusal, inability or failure on the part of the Company to perform any
agreement herein or comply with any provision hereof other than by reason of a
default by any of the Underwriters, the Company agrees to reimburse the
Underwriters, upon demand, for all out-of-pocket expenses (including reasonable
fees and disbursements of counsel) that shall have been incurred by them in
connection with the proposed purchase and sale of the Securities to the extent
the amounts paid pursuant to Section 7(h) hereof are insufficient therefor.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each Underwriter and
each person who controls any Underwriter within the meaning of the Act or the
Exchange Act against any and all losses, claims, damages or liabilities, joint
or several, to which they or any of them may become subject under the Act, the
Exchange Act or other federal or state statutory law or regulation, at common
law or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in (i) Section 1 of
this Agreement, the Registration Statement, any Preliminary Prospectus or the
Prospectus, or in any amendment thereof or supplement thereto, or (ii) any
application or other document, or any amendment or supplement thereto, executed
by the Company or based upon written information furnished by or on behalf of
the Company filed in any jurisdiction in order to qualify the Securities under
the securities or Blue Sky laws thereof or filed with the Commission or any
securities association or securities exchange, or arise out of or are based upon
the omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
agrees to reimburse each such indemnified party, as incurred, for any legal or
other expenses reasonably incurred by it in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made
therein in reliance upon and in conformity with written information furnished to
the Company by or on behalf of any Underwriter through the Representative
specifically for use in the Registration Statement or Prospectus; provided
further, that with respect to any untrue statement or omission, or any alleged
untrue statement or omission, made in any Preliminary Prospectus, the indemnity
agreement
15
<PAGE>
<PAGE>
contained in this subsection (a) shall not inure to the benefit of any
Underwriter (or to the benefit of any person controlling any such Underwriter)
from whom the person asserting any such losses, claims, damages, liabilities or
expenses purchased the Securities concerned to the extent that such untrue
statement or omission, or alleged untrue statement or omission, has been
corrected in the Prospectus and the failure to deliver the Prospectus was not a
result of the Company's failure to comply with its obligations under Section
5(d) hereof. The indemnity agreement will be in addition to any liability which
the Company may otherwise have. The Company will not, without the prior written
consent of each Underwriter, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder (whether or not such
Underwriter or any person who controls such Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act is a party to such
claim, action, suit or proceeding), unless the settlement or compromise or
consent includes an unconditional release of such Underwriter and each such
controlling person from all liability arising out of such claim, action, suit or
proceeding, satisfactory in form and substance to the Representative.
(b) Each Underwriter severally agrees to indemnify and hold harmless the
Company, each of its directors, each of its officers who signs the Registration
Statement, and each person who controls the Company within the meaning of the
Act or the Exchange Act to the same extent as the foregoing indemnity from the
Company to each Underwriter, but only with reference to written information
relating to such Underwriter furnished to the Company by or on behalf of such
Underwriter through the Representative specifically for use in the Registration
Statement or Prospectus. The Company acknowledges that the corporate names of
the Underwriters and the information under the heading "Underwriting" in the
Prospectus and in any Preliminary Prospectus constitute the only information
furnished in writing by or on behalf of the several Underwriters. The
obligations of each Underwriter under this subsection (b) shall be in addition
to any liability which the Underwriters may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section 8 of
notice of the commencement of any action, suit or proceeding, such indemnified
party will, if a claim in respect thereof is to be made against the indemnifying
party under this Section 8, notify the indemnifying party in writing of the
commencement thereof and the indemnifying party shall assume the defense
thereof, including the employment of counsel reasonably satisfactory to the
indemnified party and the payment of all expenses; but the omission so to notify
the indemnifying party will not relieve it from any liability which it may have
to any indemnified party, unless such omission results in the forfeiture of
substantive rights or defenses by the indemnifying party. All such expenses
shall be paid by the indemnifying party as incurred by an indemnified party. Any
such indemnified party shall have the right to employ separate counsel in any
such action and to participate in the defense thereof, but the fees and expenses
of such counsel shall be at the expense of such indemnified party unless (i) the
indemnifying party has agreed to pay such fees and expenses or (ii) the
indemnifying party shall have failed promptly after notice by such indemnified
party to assume the defense of such action or proceeding and employ counsel
reasonably satisfactory to the indemnified party in any such action, suit or
proceeding or (iii) the named parties in any such action or proceeding
(including any impleaded parties) include both such indemnified party and the
indemnifying party, and such indemnified party shall have been advised by
counsel that there may be one or more legal defenses available to such
indemnified party which are different from or additional to those available to
the indemnifying party (in which case, if such indemnified party notifies the
indemnifying party in writing that it elects to employ separate counsel at the
expense of the indemnifying party, the indemnifying party shall not have the
right to assume the defense of such action or proceeding on behalf of the
indemnified party or parties, it being understood, however, that the
indemnifying party shall not, in connection with any one such action or
proceeding or separate but substantially similar or related actions or
proceedings in the same jurisdiction arising out of the same general allegations
or circumstances, be liable for the reasonable fees and expenses of more than
one separate firm of attorneys (together with appropriate local counsel) at any
time for all such indemnified parties, which firm shall be designated in writing
to the indemnifying party). Any such fees and expenses payable by the
indemnifying party shall be paid to or on behalf of the indemnified party
entitled thereto as incurred. An indemnifying party shall not be liable for any
settlement of any action or claim effected without its consent, which consent
shall not be unreasonably withheld.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in Section 8(a) or 8(b)
is applicable in accordance with its terms but is for any reason held by a court
to be unavailable from the indemnifying party on grounds of policy or otherwise,
the Company and the Underwriters shall contribute to the aggregate losses,
claims, damages and liabilities (including legal or other expenses reasonably
incurred in connection with investigating or defending same) to which the
Company and one or more of the Underwriters may be subject in such proportion so
that the Underwriters are responsible in the aggregate for that portion
represented by the percentage that the underwriting discount appearing on the
cover page of the Prospectus bears to the public offering price appearing
thereon
16
<PAGE>
<PAGE>
and the Company is responsible for the balance; provided, however, that
(i) in no case shall any Underwriter (except as may be provided in the Agreement
Among Underwriters relating to the offering of the Securities) be responsible
for any amount in excess of the underwriting discount applicable to the
Securities to be purchased by such Underwriter hereunder and (ii) no person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. For purposes of this Section 8, each person
who controls an Underwriter within the meaning of the Act shall have the same
rights to contribution as such Underwriter, and each person who controls the
Company within the meaning of the Act, each officer of the Company who shall
have signed the Registration Statement and each director of the Company shall
have the same rights to contribution as the Company, subject in each case to
clause (ii) of this Section 8(d). Any party entitled to contribution will,
promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for contribution may
be made against another party or parties under this Section 8(d), notify such
party or parties from whom contribution may be sought, but the omission so to
notify such party or parties shall not relieve the party or parties from whom
contribution may be sought from any other obligation it or they may have
hereunder or otherwise.
9. Default by an Underwriter. If any one or more Underwriters shall fail to
purchase and pay for any of the Securities agreed to be purchased by such
Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the number of Underwritten
Securities set forth opposite their names in Schedule I hereto bears to the
aggregate number of Underwritten Securities set forth opposite the names of all
the remaining Underwriters) the Underwritten Securities which the defaulting
Underwriter or Underwriters agreed but failed to purchase; provided, however,
that if the aggregate number of Underwritten Securities which the defaulting
Underwriter or Underwriters agreed but failed to purchase shall exceed 10% of
the aggregate number of Underwritten Securities set forth in Schedule I hereto,
the remaining Underwriters shall have the right to purchase all, but shall not
be under any obligation to purchase any, of such Underwritten Securities, and if
such nondefaulting Underwriters do not purchase all of such Underwritten
Securities, this Agreement will terminate without liability to any
non-defaulting Underwriter or the Company except as otherwise provided in
Section 7. In the event of a default by any Underwriter as set forth in this
Section 9, the Closing Date shall be postponed for such period, not exceeding
seven days, as the Representative shall determine in order that the required
changes in the Registration Statement and the Prospectus or in any other
documents or arrangements may be effected. Nothing contained in this Agreement
shall relieve any defaulting Underwriter of its liability, if any, to the
Company or any nondefaulting Underwriter for damages occasioned by its default
hereunder.
10. Termination. This Agreement shall be subject to termination in the absolute
discretion of the Representative, by notice given to the Company prior to
delivery of and payment for the Securities, if prior to such time (a) a
suspension or material limitation in trading in securities generally on the New
York or American Stock Exchange, the Nasdaq National Market or any
over-the-counter market, the Chicago Board Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade shall have occurred, (b) a
banking moratorium shall have been declared by federal, New York or California
state authorities, (c) the United States shall have engaged in hostilities which
shall have resulted in the declaration, on or after the date hereof, of a
national emergency or war, or (d) a change in national or international
political, financial or economic conditions or national or international equity
markets or currency exchange rates shall have occurred, if the effect of any
such event specified above is, in the sole judgment of the Representative, so
material and adverse as to make it impractical or inadvisable to proceed with
the public offering or delivery of the Securities as contemplated by the
Registration Statement and the Prospectus.
11. Representations and Indemnities to Survive. The respective agreements,
representations, warranties, indemnities and other statements of the Company,
its officers and the Underwriters set forth in, referred to in, or made pursuant
to this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or any of
the officers, directors or controlling persons referred to in Section 8 hereof,
and will survive delivery of and payment for the Securities. The provisions of
Sections 7 and 8 hereof shall survive the termination or cancellation of this
Agreement.
12. Notices. All communications hereunder will be in writing and effective only
on receipt, and will be mailed, delivered, telegraphed or sent by facsimile
transmission and confirmed:
to the Representative at:
17
<PAGE>
<PAGE>
Tejas Securities Group, Inc.
1250 Capital of Texas Hwy. South Building Two, Suite 500
Austin, Texas 78746
Attention: Robert A. Shuey, III
Facsimile No. (512) 306-1528
to the Company at:
AutoBond Acceptance Corporation
301 Congress Avenue
Austin, TX 78701
13. Successors. This Agreement will inure to the benefit of and be binding upon
the parties hereto and their respective successors and the officers, directors
and controlling persons referred to in Section 8 hereof, and no other person
will have any right or obligation hereunder.
14. Counterparts. This Agreement may be signed in one or more counterparts,
each of which shall be an original, with the same effect as if the signatures
thereon and hereon were on the same instrument.
15. Applicable Law. This Agreement will be governed by and construed in
accordance with the laws of the State of Texas.
18
<PAGE>
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to us the enclosed duplicate hereof, whereupon this
letter and your acceptance shall represent a binding agreement among the Company
and the several Underwriters.
Very truly yours,
AutoBond Acceptance Corporation
By:
----------------------------------
William O. Winsauer
Chairman of the Board and Chief Executive Officer
The foregoing Agreement is
hereby confirmed and accepted
as of the date first above written.
Tejas Securities Group, Inc.
By:
----------------------------------
Robert A. Shuey, III
For itself and the other several Underwriters in Schedule I to the foregoing
Agreement.
19
<PAGE>
<PAGE>
SCHEDULE I
Number of
Underwritten Securities
Underwriters To Be Purchased
------------ ---------------
Tejas Securities Group, Inc.
---------
Total 1,000,000
=========
1
<PAGE>
<PAGE>
EXHIBIT A
FORM OF WARRANT AGREEMENT
1
<PAGE>
<PAGE>
WARRANT AGREEMENT
______________, 1998
TEJAS SECURITIES GROUP, INC.
As Representative of the Several Underwriters
c/o Tejas Securities Group, Inc.
1250 Capital of Texas Hwy., South Building Two
Suite 500
Austin, Texas 78746
Gentlemen:
AutoBond Acceptance Corporation, a Texas corporation (the "Company"),
hereby agrees to sell to you, and you hereby agree to purchase from the Company
at an aggregate purchase price of $100, purchase warrants (the "Underwriter
Warrants") covering 100,000 shares of the Company's Common Stock, no par value.
The Underwriter Warrants will be exercisable by you as to all or any lesser
number of shares of the Company's Common Stock, no par value, covered thereby,
at the Purchase Price per share as defined below, at any time and from time to
time on and after the first anniversary of the date hereof and ending at 5:00
p.m. on the fifth anniversary of the date hereof.
1. Definitions.
As used herein, the following terms, unless the context otherwise requires,
shall have for all purposes hereof the following meanings:
The term "Act" refers to the Securities Act of 1933, as amended.
The term "Affiliate" of any Person refers to any Person directly or
indirectly controlling, controlled by or under direct or indirect common control
with, such other Person. A Person shall be deemed to control a corporation if
such Person possesses, directly or indirectly, the power to direct or cause the
direction of the management and policies of such corporation, whether through
the ownership of voting securities, by contract or otherwise.
The term "Commission" refers to the Securities and Exchange Commission.
The term "Common Stock" refers to all stock of any class or classes
(however designated) of the Company, now or hereafter authorized, the holders of
which shall have the right without limitation as to amount, either to all or to
a part of the balance of current dividends and liquidating dividends after the
payment of dividends and distributions on any shares entitled to preference, and
the holders of which shall ordinarily, in the absence of contingency, be
entitled to vote for the election of a majority of the directors of the Company
(even though the right so to vote has been suspended by the occurrence of such a
contingency).
The term "Current Market Price" on any date refers to the average of the
daily Market Price per share for the 30 consecutive Trading Days commencing 45
Trading Days before the date in question.
The term "Exchange Act" refers to the Securities Exchange Act of 1934, as
amended.
The term "Market Price" refers to the closing sale price (or, if no closing
sale price is reported, the closing bid price) of the Common Stock in the
over-the-counter market, as quoted on the Nasdaq National Market, or, if the
Common Stock is not quoted on the Nasdaq National Market, as reported by the
National Quotation Bureau Incorporated. In the event that the Common Stock is
hereafter listed for trading on one or more United States national or regional
securities exchanges, Market Price shall be the closing price on the exchange or
system designated by the Board of Directors of the Company as the principal
United States market in which the Common Stock is traded. If Market Price cannot
be established as described above, market price shall be the fair market value
of the Common Stock as determined in good faith by the Board of
1
<PAGE>
<PAGE>
Directors whose determination shall be conclusive.
The term "Other Securities" refers to any stock (other than Common Stock)
and other securities of the Company or any other person (corporate or otherwise)
which the holders of the Underwriter Warrants at any time shall be entitled to
receive, or shall have received, upon the exercise of the Underwriter Warrants,
in lieu of or in addition to Common Stock, or which at any time shall be
issuable or shall have been issued in exchange for or in replacement of Common
Stock or Other Securities pursuant to Section 6 below or otherwise.
The term "Person" refers to an individual, a partnership, a corporation, a
trust, a joint venture, an unincorporated organization and a government or any
department or agency thereof.
The term "Purchase Price" refers to the purchase price, per share, of the
shares of Common Stock subject to this Agreement. The Purchase Price shall equal
105% of the average closing bid price per share of Common Stock, as quoted on
the Nasdaq National Market for the five (5) Trading Days prior to the date
hereof. The Purchase Price is subject to adjustment as provided in Section 6
below.
The term "Registration Statement" refers to a Registration Statement filed
with the Commission pursuant to the Rules and Regulations of the Commission
promulgated under the Act.
The term "Trading Day" shall mean a day on which the Nasdaq National Market
or the principal national securities exchange on which the Common Stock is
listed or admitted to trading is open for the transaction of business.
The term "Underlying Stock" refers to the shares of Common Stock (or Other
Securities) issuable under this Warrant Agreement pursuant to the exercise, in
whole or in part, of the Underwriter Warrants.
The purchase and sale of the Underwriter Warrants shall take place, and the
purchase price therefore shall be paid by delivery of your check, simultaneously
with the purchase of and payment for any shares of ___% Series A Cumulative
Preferred Stock as provided in that certain Underwriting Agreement dated
_____________, 1998, relating to the public offering of shares of the ___%
Series A Cumulative Preferred Stock pursuant to a Registration Statement filed
under the Act.
2. Representations and Warranties.
The Company represents and warrants to you as follows:
(a) Corporate Action. The Company has all requisite corporate power and
authority, and has taken all necessary corporate action, to execute and deliver
this Agreement, to issue and deliver the Underwriter Warrants and certificates
evidencing same, and to authorize and reserve for issuance, and upon payment
from time to time of the Purchase Price to issue and deliver, the Shares.
(b) No Violation. Neither the execution nor delivery of this Agreement, the
consummation of the actions herein contemplated nor compliance with the terms
and provisions hereof will conflict with, or result in a breach of, or
constitute a default or an event permitting acceleration under, any of the
terms, provisions or conditions of the Articles of Incorporation or Bylaws of
the Company or any indenture, mortgage, deed of trust, note, bank loan, credit
agreement, franchise, license, lease, permit, judgment, decree, order, statute,
rule or regulation or any other agreement, understanding or instrument to which
the Company is a party or by which it is bound.
3. Compliance with the Act.
(a) Transferability of Underwriter Warrants. You agree that the Underwriter
Warrants may not be transferred, sold, assigned or hypothecated for a period of
one (1) year from the date hereof, except to (i) persons who are officers of
you; (ii) a successor to you in a merger or consolidation; (iii) a purchaser of
all or substantially all of your assets; (iv) your shareholders in the event you
are liquidated or dissolved; and (v) persons who are officers of participating
broker-dealers.
(b) Registration of Underlying Stock. The Underlying Stock issuable upon
the exercise of the Underwriter
2
<PAGE>
<PAGE>
Warrants have not been registered under the Act. You agree not to make any sale
or other disposition of the Underlying Stock except pursuant to a Registration
Statement which has become effective under the Act, setting forth the terms of
such offering, the underwriting discount and the commissions and any other
pertinent data with respect thereto, unless you have provided the Company with
an opinion of counsel reasonably acceptable to the Company that such
registration is not required.
(c) Demand Registration. At any time and from time to time after the
effective date hereof but prior to the fifth anniversary of the effective date
hereof, the holders of Underwriter Warrants shall have the right to make written
request of the Company on one occasion to register under the Act at least fifty
percent (50%) of the Underlying Stock which would be issuable upon exercise of
the Underwriter Warrants pursuant to the terms and conditions hereof. The
Underlying Stock specified in such request or a request pursuant to Section 3(d)
hereof is referred to herein as the "Subject Stock." Promptly upon receipt of
such request, the Company shall file with the Commission a Registration
Statement on the applicable form for the registration of the Subject Stock and
use its best efforts to cause such Registration Statement to become effective
(including, without limitation, filing post-effective amendments, appropriate
qualifications under applicable blue sky or other state securities laws and
appropriate compliance with the Act and the Rules and Regulations promulgated
thereunder) as soon as practicable to permit or facilitate the sale and
distribution of the Subject Stock. Immediately upon receipt of a request for
registration pursuant to this Section 3(c), the Company shall notify each of the
holders of Underwriter Warrants of such request.
Notwithstanding the provisions of this Section 3(c), if the Company shall
furnish to the holders of Underwriter Warrants a certificate signed by the Chief
Executive Officer of the Company stating that in the good faith judgment of the
Board of Directors of the Company it would be seriously detrimental to the
Company and its stockholders for such a Registration Statement to be filed and
it is therefore essential to defer a filing of such Registration Statement, the
Company shall have the right to defer such filing for a period of not more than
one hundred twenty (120) days after receipt of the request from the holders of
Underwriter Warrants to effect such a registration; provided, however, that the
Company may not utilize the right more than once in any twenty-four (24) month
period; and, provided further, that the holders of Underwriter Warrants may, at
any time in writing, withdraw such request for such registration and therefore
preserve the right provided in this Section 3(c) for the holders of Underwriter
Warrants to request such registration.
(d) Inclusion in Registration of Other Securities. If at any time after the
effective date hereof but prior to the fifth anniversary of the effective date
hereof, the Company shall propose the registration on an appropriate form under
the Act of any shares of Common Stock or Other Securities, the Company shall at
least 30 days prior to the filing of such Registration Statement give you
written notice, or telegraphic or telephonic notice followed as soon as
practicable by written confirmation thereof, of such proposed registration and,
upon written notice, or telegraphic or telephonic notice followed as soon as
practicable by written confirmation thereof, given to the Company within five
business days after the giving of such notice by the Company, shall include or
cause to be included in any such Registration Statement all or such portion of
the Underlying Stock as you may request, provided, however, that the Company may
at any time withdraw or cease proceeding with any such registration if it shall
at the same time withdraw or cease proceeding with the registration of such
Common Stock or such Other Securities originally proposed to be registered.
Notwithstanding any provision of this Agreement to the contrary, if any
holder of Underwriter Warrants exercises such Underwriter Warrants but shall not
have included all the Underlying Stock in a Registration Statement which
complies with Section 10(a)(3) of the Act, which has been effective for at least
30 calendar days following the exercise of the Underwriter Warrants, the
registration rights set forth in this Section 3(d) shall be extended until such
time as (i) such a Registration Statement including such Underlying Stock has
been effective for at least 30 calendar days or (ii) in the opinion of counsel
satisfactory to you and the Company, registration is not required under the Act
or under applicable state laws for resale of the Underlying Stock in the manner
proposed.
(e) Company's Obligations in Registration. In connection with any offering
of Subject Stock pursuant to Section 3(c) or 3(d) above, the Company shall:
(i) Notify you as to the filing thereof and of all amendments or
supplements thereto filed prior to the effective date thereof;
(ii) Comply with all applicable rules and regulations of the
Commission;
3
<PAGE>
<PAGE>
(iii) Notify you immediately, and confirm the notice in writing, (1)
when the Registration Statement becomes effective, (2) of the
issuance by the Commission of any stop order or of the
initiation, or the threatening, of any proceedings for that
purpose, (3) of the receipt by the Company of any notification
with respect to the suspension of qualification of the Subject
Stock for sale in any jurisdiction or of the initiation, or
the threatening, of any proceedings for that purpose and (4)
of the receipt of any comments, or requests for additional
information, from the Commission or any state regulatory
authority. If the Commission or any state regulatory authority
shall enter such a stop order or order suspending
qualification at any time, the Company will make every
reasonable effort to obtain the lifting of such order as
promptly as practicable.
(iv) During the time when a Prospectus is required to be delivered
under the Act during the period required for the distribution
of the Subject Stock, comply so far as it is able with all
requirements imposed upon it by the Act, as hereafter amended,
and by the Rules and Regulations promulgated thereunder, as
from time to time in force, so far as necessary to permit the
continuance of sales of or dealings in the Subject Stock. If
at any time when a Prospectus relating to the Subject Stock is
required to be delivered under the Act any event shall have
occurred as a result of which, in the opinion of counsel for
the Company or your counsel, the Prospectus relating to the
Subject Stock as then amended or supplemented includes an
untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it is
necessary at any time to amend such Prospectus to comply with
the Act, the Company will promptly prepare and file with the
Commission an appropriate amendment or supplement (in form
satisfactory to you).
(v) Endeavor in good faith, in cooperation with you, at or prior
to the time the Registration Statement becomes effective, to
qualify the Subject Stock for offering and sale under the
securities laws relating to the offering or sale of the
Subject Stock of such jurisdictions as you may reasonably
designate and to continue the qualifications in effect so long
as required for purposes of the sale of the Subject Stock;
provided that no such qualification shall be required in any
jurisdiction where, as a result thereof, the Company would be
subject to service of general process, or to taxation as a
foreign corporation doing business in such jurisdiction. In
each jurisdiction where such qualification shall be effected,
the Company will, unless you agree that such action is not at
the time necessary or advisable, file and make such statements
or reports at such times as are or may reasonably be required
by the laws of such jurisdiction. For the purposes of this
paragraph, "good faith" is defined as the same standard of
care and degree of effort as the Company will use to qualify
its securities other than the Subject Stock.
(vi) Make generally available to its security holders as soon as
practicable, but not later than the first day of the
eighteenth full calendar month following the effective date of
the Registration Statement, an earnings statement (which need
not be certified by independent public or independent
certified public accountants unless required by the Act or the
rules and regulations promulgated thereunder, but which shall
satisfy the provisions of Section 11(a) of the Act) covering a
period of at least twelve months beginning after the effective
date of the Registration Statement.
(vii) After the effective date of such Registration Statement,
prepare, and promptly notify you of the proposed filing of,
and promptly file with the Commission, each and every
amendment or supplement thereto or to any Prospectus forming a
part thereof as may be necessary to make any statements
therein not misleading; provided that no such amendment or
supplement shall be filed if you shall object thereto in
writing promptly after being furnished a copy thereof.
(viii) Furnish to you, as soon as available, copies of any such
Registration Statement and each preliminary or final
Prospectus, or supplement or amendment prepared pursuant
thereto, all in such quantities as you may from time to time
reasonably request;
4
<PAGE>
<PAGE>
(ix) Make such representations and warranties to any underwriter of
the Subject Stock, and use your best efforts to cause Company
counsel to render such opinions to such underwriter, as such
underwriter may reasonably request; and
(x) Pay all costs and expenses incident to the performance of the
Company's obligations under Section 3(c) or 3(d) above and
under this Section 3(e), including without limitation the fees
and disbursements of the Company's auditors and legal counsel,
of legal counsel for you and of legal counsel responsible for
qualifying the Subject Stock under blue sky laws, all filing
fees and printing expenses, all expenses in connection with
the transfer and delivery of the Underlying Stock, and all
expenses in connection with the qualification of the Subject
Stock under blue sky laws; provided, however, that the Company
shall not be responsible for compensation and reimbursement of
expenses to underwriters or selling agents for the included
Subject Stock.
(f) Agreements by Warrant Holder. In connection with the filing of a
Registration Statement pursuant to Section 3(c) or 3(d) above, if you
participate in the offering of the Subject Stock by including shares owned by
you, you agree:
(i) To furnish the Company all material information requested by
the Company concerning yourself and your holdings of
securities of the Company and the proposed method of sale or
other disposition of the Subject Stock and such other
information and undertakings as shall be reasonably required
in connection with the preparation and filing of any such
Registration Statement covering all or a part of the Subject
Stock and in order to ensure full compliance with the Act; and
(ii) To cooperate in good faith with the Company and its
underwriters, if any, in connection with such registration,
including placing the shares of Subject Stock to be included
in such Registration Statement in escrow or custody to
facilitate the sale and distribution thereof.
(g) Indemnification. The Company shall indemnify and hold harmless you and
any underwriter (as defined in the Act) for you, and each person, if any, who
respectively controls you or such underwriter within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act, against any loss, liability,
claim, damage and expense whatsoever (including but not limited to any and all
expense whatsoever reasonably incurred in investigating, preparing or defending
against any litigation, commenced or threatened, or any claim whatsoever), joint
or several, to which any of you or such underwriter or such controlling person
becomes subject, under the Act or otherwise, insofar as such loss, liability,
claim, damage and expense (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material fact
contained in (i) a Registration Statement covering the Subject Stock, in the
prospectus contained therein, or in an amendment or supplement thereto or (ii)
in any application or other document or communication (in this Section
collectively called "application") executed by or on behalf of the Company or
based upon written information furnished by or on behalf of the Company filed in
any jurisdiction in order to qualify the Subject Stock under the securities laws
thereof or filed with the Commission, or arise out of or based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading; provided,
however, that the Company shall not be obligated to indemnify in any such case
to the extent that any such loss, claim, damage, expense or liability arises out
of or is based upon any untrue statement or alleged untrue statement or omission
or alleged omission made in reliance upon, and in conformity with, written
information respectively furnished by you or such underwriter or such
controlling person for use in the Registration Statement, or any amendment or
supplement thereto, or any application, as the case may be.
If any action is brought against a person in respect of which indemnity may
be sought against, the Company pursuant to the foregoing paragraph, such person
shall promptly notify the Company in writing of the institution of such action
and the Company shall assume the defense of the action, including the employment
of counsel (satisfactory to the indemnified person in its reasonable judgment)
and payment of expenses. The indemnified person shall have the right to employ
its or their own counsel in any such case, but the fees and expenses of such
counsel shall be at the expense of such indemnified person or unless the
employment of such counsel shall have been authorized in writing by the Company
in connection with the defense of the action or the Company shall not have
employed counsel to have charge of the defense of the action or the indemnified
person shall have reasonably concluded that there may be defenses available to
it or them which
5
<PAGE>
<PAGE>
are different from or additional to those available to the Company (in which
case the Company shall not have the right to direct the defense of the action on
behalf of the indemnified person), in any of which events these fees and
expenses shall be borne by the Company. Anything in this paragraph to the
contrary notwithstanding, the Company shall not be liable for any settlement of
any claim or action effected without its written consent. The Company's
indemnity agreements contained in this Section shall remain in full force and
effect regardless of any investigation made by or on behalf of any indemnified
person, and shall survive any termination of this Agreement. The Company agrees
promptly to notify you of the commencement of any litigation or proceedings
against the Company or any of its officers or directors in connection with the
Registration Statement pursuant to Section 3(c) or 3(d) above.
If you choose to include any Subject Stock in a public offering pursuant to
Section 3(c) or 3(d) above, then you agree to indemnify and hold harmless the
Company and each of its directors and officers who have signed any such
Registration Statement, and any underwriter for the Company (as defined in the
Act), and each person, if any, who controls the Company or such underwriter
within the meaning of the Act, to the same extent as the indemnity by the
Company in this Section 3(g) but only with respect to statements or omissions,
if any, made in such Registration Statement, or any amendment or supplement
thereto, or in any application in reliance upon, and in conformity with, written
information furnished by you to the Company for use in the Registration
Statement, or any amendment or supplement thereto, or any application, as the
case may be. In case any action shall be brought in respect of which indemnity
may be sought against you, you shall have the rights and duties given to the
Company, and the persons so indemnified shall have the rights and duties given
to you by the provisions of the first paragraph of this Section.
The Company further agrees that, if the indemnity provisions of the
foregoing paragraphs are held to be unenforceable, any holder of an Underwriter
Warrant or controlling person of such a holder may recover contribution from the
Company in an amount which, when added to contributions such holder or
controlling person has theretofore received or concurrently receives from
officers and directors of the Company or controlling persons of the Company,
will reimburse such holder or controlling person for all losses, claims, damages
or liabilities and legal or other expenses; provided, however, that if the full
amount of the contribution specified in this Section 3(g) is not permitted by
law, then such holder or controlling person shall be entitled to contribution
from the Company and its officers, directors and controlling persons to the full
extent permitted by law.
4. Exercise of Underwriter Warrants.
(a) Cash Exercise. Each Underwriter Warrant may be exercised in full or in
part (but not as to a fractional share of Common Stock) by the holder thereof by
surrender of the Warrant Certificate, with the form of subscription at the end
thereof duly executed by such holder, to the Company at its principal office,
accompanied by payment, in cash or by certified or bank cashiers' check payable
to the order of the Company, in the respective amount obtained by multiplying
the number of shares of the Underlying Stock to be purchased by the Purchase
Price per share.
(b) Net Exercise. Notwithstanding anything to the contrary contained in
Section 4(a), any holder of an Underwriter Warrant may elect to exercise the
Underwriter Warrant and receive shares on a "net exercise" basis in an amount
equal to the value of the Underwriter Warrant by delivery of the form of
subscription attached to the Warrant Certificate and surrender of the
Underwriter Warrant at the principal office of the Company, in which event the
Company shall issue to the holder a number of shares computed using the
following formula:
6
<PAGE>
<PAGE>
X= (P)(Y)(A-B)
-----------
A
Where: X= the number of shares of Common Stock to be issued
to holder.
P= the portion of the Underwriter Warrant being
exercised (expressed as a fraction).
Y= the total number of shares of Common Stock
issuable upon exercise of the Underwriter Warrant.
A= the Current Market Price of one share of Common
Stock.
B= Purchase Price.
(c) Partial Exercise. Prior to the expiration of the Underwriter Warrants,
upon any partial exercise, the Company at its expense will forthwith issue and
deliver to or upon the order of the purchasing holder, a new Warrant Certificate
or Certificates of like tenor, in the name of the holder thereof or as such
holder (upon payment by such holder of any applicable transfer taxes) may
request calling in the aggregate for the purchase of the number of shares of the
Underlying Stock equal to the number of such shares called for on the face of
the Warrant Certificate (after giving effect to any adjustment therein as
provided in Section 6 below) minus the number of such shares (after giving
effect to such adjustment) designated by the holder in the aforementioned form
of subscription.
(d) Company to Reaffirm Obligations. The Company will, at the time of any
exercise of any Underwriter Warrant, upon the request of the holder thereof,
acknowledge in writing its continuing obligation to afford to such holder any
rights (including without limitation any right to registration of the shares of
the Underlying Stock issued upon such exercise) to which such holder shall
continue to be entitled after such exercise in accordance with the provisions of
this Agreement; provided, however, that if the holder of an Underwriter Warrant
shall fail to make any such request, such failure shall not affect the
continuing obligation of the Company to afford to such holder any such rights.
5. Delivery of Certificates, etc, on Exercise.
As soon as practicable after the exercise of any Underwriter Warrant in
full or in part, and in any event within twenty days thereafter, the Company at
its expense (including the payment by it of any applicable issue taxes) will
cause to be issued in the name of and delivered to the purchasing holder
thereof, a certificate or certificates for the number of fully paid and
nonassessable shares of the Underlying Stock to which such holder shall be
entitled upon such exercise, plus in lieu of any fractional share to which such
holder would otherwise be entitled, cash in an amount determined pursuant to
Section 7(g), together with any other stock or other securities and property
(including cash, where applicable) to which such holder is entitled upon such
exercise pursuant to Section 6 below or otherwise.
6. Anti-dilution Provisions.
The Underwriter Warrants are subject to the following terms and conditions
during the term thereof:
(a) Stock Distributions and Splits. In case (i) the outstanding shares of
Common Stock (or Other Securities) shall be subdivided into a greater number of
shares or (ii) a dividend in Common Stock (or Other Securities) shall be paid in
respect of Common Stock (or Other Securities), the Purchase Price per share in
effect immediately prior to such subdivision or at the record date of such
dividend or distribution shall simultaneously with the effectiveness of such
subdivision or immediately after the record date of such dividend or
distribution be proportionately reduced; and if outstanding shares of Common
Stock (or Other Securities) shall be combined into a smaller number of shares
thereof, the Purchase Price per share in effect immediately prior to such
combination shall simultaneously with the effectiveness of such combination be
proportionately increased. Any dividend paid or distributed on the Common Stock
(or Other Securities) in stock or any other securities convertible into shares
of Common Stock (or Other Securities) shall be treated as a dividend paid in
Common Stock (or Other Securities) to the extent that shares of Common Stock (or
Other Securities) are issuable upon the conversion thereof.
7
<PAGE>
<PAGE>
(b) Adjustments. Whenever the Purchase Price per share is adjusted as
provided in Section 6(a) above, the number of shares of the Underlying Stock
purchasable upon exercise of the Underwriter Warrants immediately prior to such
Purchase Price adjustment shall be adjusted, effective simultaneously with such
Purchase Price adjustment, to equal the product obtained (calculated to the
nearest full share) by multiplying such number of shares of the Underlying Stock
by a fraction, the numerator of which is the Purchase Price per share in effect
immediately prior to such Purchase Price adjustment and the denominator of which
is the Purchase Price per share in effect upon such Purchase Price adjustment,
which adjusted number of shares of the Underlying Stock shall thereupon be the
number of shares of the Underlying Stock purchasable upon exercise of the
Underwriter Warrants until further adjusted as provided herein.
(c) Reorganizations. In case the Company shall be recapitalized by
reclassifying its outstanding Common Stock (or Other Securities) into a stock
with a different par value or by changing its outstanding Common Stock (or Other
Securities) with par value to stock without par value, then, as a condition of
such reorganization, lawful and adequate provision shall be made whereby each
holder of an Underwriter Warrant shall thereafter have the right to purchase,
upon the terms and conditions specified herein, in lieu of the shares of Common
Stock (or Other Securities) theretofore purchasable upon the exercise of the
Underwriter Warrants, the kind and amount of shares of stock and other
securities receivable upon such recapitalization by a holder of the number of
shares of Common Stock (or Other Securities) which the holder of an Underwriter
Warrant might have purchased immediately prior to such recapitalization. If any
consolidation or merger of the Company with another corporation, or the sale of
all or substantially all of its assets to another corporation, shall be effected
in such a way that holders of Common Stock shall be entitled to receive stock,
securities or assets with respect to or in exchange for Common Stock, then, as a
condition of such consolidation, merger or sale, lawful and adequate provisions
shall be made whereby the holder hereof shall thereafter have the right to
purchase and receive upon the basis and upon the terms and conditions specified
in this Warrant Agreement and in lieu of the shares of the Common Stock of the
Company immediately theretofore purchasable and receivable upon the exercise of
the rights represented hereby, such shares of stock, securities or assets as may
be issued or payable with respect to or in exchange for a number of outstanding
shares of such Common Stock equal to the number of shares of such stock
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby had such consolidation, merger or sale not taken
place, and in any such case, appropriate provision shall be made with respect to
the rights and interests of the holders of Underwriter Warrants to the end that
the provisions hereof (including without limitation provisions for adjustments
of the Purchase Price and of the number of shares purchasable and receivable
upon the exercise of the Underwriter Warrants) shall thereafter be applicable,
as nearly as may be, in relation to any shares of stock, securities or assets
thereafter deliverable upon the exercise hereof (including an immediate
adjustment, by reason of such consolidation or merger, of the Purchase Price to
the value for the Common Stock reflected by the terms of such consolidation or
merger if the value so reflected is less than the Purchase Price in effect
immediately prior to such consolidation or merger). In the event of a merger or
consolidation of the Company with or into another corporation as a result of
which a number of shares of Common Stock of the surviving corporation greater or
lesser than the number of shares of Common Stock of the Company outstanding
immediately prior to such merger or consolidation are issuable to holders of
Common Stock of the Company, then the Purchase Price in effect immediately prior
to such merger or consolidation shall be adjusted in the same manner as though
there were a subdivision or combination of the outstanding shares of Common
Stock of the Company. The Company will not effect any such consolidation, merger
or sale, unless prior to the consummation thereof the successor corporation (if
other than the Company) resulting from such consolidation or merger or the
corporation purchasing such assets shall assume by written instrument executed
and mailed or delivered to the registered holder hereof at the last address of
such holder appearing on the books of the Company, the obligation to deliver to
such holder such shares of stock, securities or assets as, in accordance with
the foregoing provisions, such holder may be entitled to purchase. If a
purchase, tender or exchange offer is made to and accepted by the holders of
more than of the outstanding shares of Common Stock of the Company, the Company
shall not effect any consolidation, merger or sale with the Person having made
such offer or with any Affiliate of such Person, unless prior to the
consummation of such consolidation, merger or sale the holders of Underwriter
Warrants shall have been given a reasonable opportunity to then elect to receive
upon the exercise of Underwriter Warrants either the stock, securities or assets
then issuable with respect to the Common Stock of the Company or the stock,
securities or assets, or the equivalent issued to previous holders of the Common
Stock in accordance with such offer.
(d) Effect of Dissolution or Liquidation. In case the Company shall
dissolve or liquidate all or substantially all of its assets, all rights under
this Agreement shall terminate as of the date upon which a certificate of
dissolution or liquidation shall be filed with the Secretary of the State of
Texas (or, if the Company theretofore shall have been merged or consolidated
with a corporation incorporated under the laws of another state, the date upon
which action of equivalent effect shall have been taken); provided, however,
that (i) no dissolution or liquidation shall affect the rights under Section
6(c) of
8
<PAGE>
<PAGE>
any holder of an Underwriter Warrant and (ii) if the Company's Board of
Directors shall propose to dissolve or liquidate the Company, each holder of an
Underwriter Warrant shall be given written notice of such proposal at the
earlier of (x) the time when the Company's shareholders are first given notice
of the proposal or (y) the time when notice to the Company's shareholders is
first required.
(e) Notice of Change of Purchase Price. Whenever the Purchase Price per
share or the kind or amount of securities purchasable under the Underwriter
Warrants shall be adjusted pursuant to any of the provisions of this Agreement,
the Company shall forthwith thereafter cause to be sent to each holder of an
Underwriter Warrant, a certificate setting forth the adjustments in the Purchase
Price per share and/or in such number of shares, and also setting forth in
detail the facts requiring, such adjustments, including without limitation a
statement of the consideration received or deemed to have been received by the
Company for any additional shares of stock issued by it requiring such
adjustment. In addition, the Company at its expense shall within 90 days
following the end of each of its fiscal years during the term of this Agreement,
and promptly upon the reasonable request of any holder of an Underwriter Warrant
in connection with the exercise from time to time of all or any portion of any
Underwriter Warrant, cause independent certified public accountants of
recognized standing selected by the Company to compute any such adjustment in
accordance with the terms of the Underwriter Warrants and prepare a certificate
setting forth such adjustment and showing in detail the facts upon which such
adjustment is based.
(f) Notice of a Record Date. In the event of (i) any taking by the Company
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a cash dividend payable out of earned surplus of the Company) or other
distribution, or any right to subscribe for, purchase or otherwise acquire any
shares of stock of any class or any other securities or property, or to receive
any other right, (ii) any capital reorganization of the Company, or any
reclassification or recapitalization of the capital stock of the Company, or any
transfer of all or substantially all of the assets of the Company to, or
consolidation or merger of the Company with or into, any other person or (iii)
any voluntary or involuntary dissolution or liquidation of the Company, then and
in each such event the Company will mail or cause to be mailed to each holder of
an Underwriter Warrant a notice specifying not only the date on which any such
record is to be taken for the purpose of such dividend, distribution or right
and stating the amount and character of such dividend, distribution or right,
but also the date on which any such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding-up is to take place, and the time, if any, as of which the holders of
record of Common Stock (or Other Securities) shall be entitled to exchange their
shares of Common Stock (or other Securities) for securities or other property
deliverable upon such reorganization, reclassification, recapitalization,
transfer, consolidation, merger, dissolution, liquidation or winding-up. Such
notice shall be mailed at least 20 days prior to the proposed record date
therein specified.
7. Further Covenants of the Company.
(a) Reservation of Stock. The Company shall at all times reserve and keep
available, solely for issuance and delivery upon the exercise of the Underwriter
Warrants, all shares of the Underlying Stock from time to time issuable upon the
exercise of the Underwriter Warrants and shall take all necessary actions to
ensure that the par value per share, if any, of the Underlying Stock is, at all
times equal to or less than the then effective Purchase Price per share.
(b) Title to Shares. All shares of the Underlying Stock delivered upon the
exercise of the Underwriter Warrants shall be validly issued, fully paid and
nonassessable; each holder of an Underwriter Warrant shall receive good and
marketable title to the Underlying Stock, free and clear of all voting and other
trust arrangements, liens, encumbrances, equities and claims whatsoever; and the
Company shall have paid all taxes, if any, in respect of the issuance thereof.
(c) Listing on Securities Exchanges; Registration. If the Company at any
time shall list any Common Stock on any national securities exchange, the
Company will, at its expense, simultaneously list on such exchange, upon
official notice of issuance upon the exercise of the Underwriter Warrants, and
maintain such listing of, all shares of the Underlying Stock from time to time
issuable upon the exercise of the Underwriter Warrants; and the Company will so
list on any national securities exchange, will so register and will maintain
such listing of, any Other Securities if and at the time that any securities of
like class or similar type shall be listed on such national securities exchange
by the Company.
(d) Exchange of Underwriter Warrants. Subject to Section 3(a) hereof, upon
surrender for exchange of any Warrant Certificate to the Company, the Company at
its expense will promptly issue and deliver to or upon the order of the holder
thereof a new Warrant Certificate or certificates of like tenor, in the name of
such holder or as such holder (upon
9
<PAGE>
<PAGE>
payment by such holder of any applicable transfer taxes) may direct, calling in
the aggregate for the purchase of the number of shares of the Underlying Stock
called for on the face or faces of the Warrant Certificate or Certificates so
surrendered.
(e) Replacement of Underwriter Warrants. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of any Warrant Certificate and, in the case of any such loss, theft
or destruction, upon delivery of an indemnity agreement reasonably satisfactory
in form and amount to the Company or, in the case of any such mutilation, upon
surrender and cancellation of such Warrant Certificate, the Company, at the
expense of the warrant holder will execute and deliver, in lieu thereof, a new
Warrant Certificate of like tenor.
(f) Reporting by the Company. The Company agrees that, if it files a
Registration Statement during the term of the Underwriter Warrants, it will use
its best efforts to keep current in the filing of all forms and other materials
which it may be required to file with the appropriate regulatory authority
pursuant to the Exchange Act, and all other forms and reports required to be
filed with any regulatory authority having jurisdiction over the Company.
(g) Fractional Shares. No fractional shares of Underlying Stock are to be
issued upon the exercise of any Underwriter Warrant, but the Company shall pay a
cash adjustment in respect of any fraction of a share which would otherwise be
issuable in an amount equal to the same fraction of the highest market price per
share of Underlying Stock on the day of exercise, as determined by the Company.
8. Other Holders.
The Underwriter Warrants are issued upon the following terms, to all of
which each holder or owner thereof by the taking thereof consents and agrees as
follows: (a) any person who shall become a transferee, within the limitations on
transfer imposed by Section 3(a) hereof, of an Underwriter Warrant properly
endorsed shall take such Underwriter Warrant subject to the provisions of
Section 3(a) hereof and thereupon shall be authorized to represent himself as
absolute owner thereof and, subject to the restrictions contained in this
Agreement, shall be empowered to transfer absolute title by endorsement and
delivery thereof to a permitted bona fide purchaser for value; (b) each prior
taker or owner waives and renounces all of his equities or rights in such
Underwriter Warrant in favor of each such permitted bona fide purchaser, and
each such permitted bona fide purchaser shall acquire absolute title thereto and
to all rights presented thereby; (c) until such time as the respective
Underwriter Warrant is transferred on the books of the Company, the Company may
treat the registered holder thereof as the absolute owner thereof for all
purposes, notwithstanding any notice to the contrary and (d) all references to
the word "you" in this Warrant Agreement shall be deemed to apply with equal
effect to any person to whom a Warrant Certificate or Certificates have been
transferred in accordance with the terms hereof, and where appropriate, to any
person holding shares of the Underlying Stock.
9. Miscellaneous.
All notices, certificates and other communications from or at the request
of the Company to the holder of any Underwriter Warrant shall be mailed by first
class, registered or certified mail, postage prepaid, to such address as may
have been furnished to the Company in writing by such holder, or, until an
address is so furnished, to the address of the last holder of such Underwriter
Warrant who has so furnished an address to the Company, except as otherwise
provided herein. This Agreement and any of the terms hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Texas. The headings in this Agreement are
for reference only and shall not limit or otherwise affect any of the terms
hereof. This Agreement, together with the forms of instruments annexed hereto as
Schedule I, constitutes the full and complete agreement of the parties hereto
with respect to the subject matter hereof.
10
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Agreement to be
executed on this _____ day of ______1998, in Austin, Texas, by its proper
corporate officers thereunto duly authorized.
AutoBond Acceptance Corporation
By:
----------------------------------
William O. Winsauer
Chairman of the Board and
Chief Executive Officer
The above Warrant Agreement is confirmed this _____ day of ________________1998.
Tejas Securities Group, Inc.
By:
----------------------------------
Robert A. Shuey, III
11
<PAGE>
<PAGE>
SCHEDULE I
AUTOBOND ACCEPTANCE CORPORATION
Stock Purchase Warrant
Certificate Evidencing Right to Purchase 100,000 Shares of Common Stock
This is to certify that Tejas Securities Group, Inc. ("TSG") or assigns, is
entitled to purchase at any time or from time to time after 9 A.M., Austin,
Texas time, on____, 1999 and until 9 A.M., Austin, Texas time, on ________, 2003
up to the above referenced number of shares of Common Stock, no par value, of
AutoBond Acceptance Corporation, a Texas corporation (the "Company"), for the
consideration specified in Section 4 of the Warrant Agreement dated ________,
1998 between the Company and TSG (the "Warrant Agreement"), pursuant to which
this Warrant is issued. All rights of the holder of this Warrant Certificate are
subject to the terms and provisions of the Warrant Agreement, copies of which
are available for inspection at the office of the Company.
The shares of Common Stock issuable upon the exercise of this Warrant have
not been registered under the Securities Act of 1933, as amended (the "Act"),
and no distribution of such shares may be made until the effectiveness of a
Registration Statement under the Act covering such Shares. Transfer of this
Warrant Certificate is restricted as provided in Section 3(a) of the Warrant
Agreement.
This Warrant has been issued to the registered owner in reliance upon
written representations necessary to ensure that this Warrant was issued in
accordance with an appropriate exemption from registration under any applicable
state and federal securities laws, rules and regulations. This Warrant may not
be sold, transferred, or assigned unless, in the opinion of the Company and its
legal counsel, such sale, transfer or assignment will not be in violation of the
Act, applicable rules and regulations of the Securities and Exchange Commission,
and any applicable state securities laws.
Subject to the provisions of the Act and of such Warrant Agreement, this
Warrant Certificate and all rights hereunder are transferable, in whole or in
part, at the offices of the Company, by the holder hereof in person or by duly
authorized attorney, upon surrender of this Warrant Certificate, together with
the Assignment hereof duly endorsed. Until transfer of this Warrant Certificate
on the books of the Company, the Company may treat the registered holder hereof
as the owner hereof for all purposes.
Any shares of Common Stock (or other securities) which are acquired
pursuant to the exercise of this Warrant shall be acquired in accordance with
the Warrant Agreement and certificates representing all securities so acquired
shall bear a restrictive legend reading substantially as follows:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
OR UNDER ANY APPLICABLE STATE LAW. THEY MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR PLEDGED WITHOUT (1) REGISTRATION UNDER THE SECURITIES ACT OF
1933 AND ANY APPLICABLE STATE LAW, OR (2) AN OPINION OF COUNSEL
(SATISFACTORY TO THE CORPORATION) THAT REGISTRATION IS NOT REQUIRED.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
executed on this ___ day of ________ , 1998, in Austin, Texas, by its proper
corporate officer's thereunto duly authorized.
AutoBond Acceptance Corporation
By: _______________________________ Attest:____________________________
William O. Winsauer
Chairman of the Board and
Chief Executive Officer
<PAGE>
<PAGE>
SUBSCRIPTION
(To be signed only upon exercise of Warrant)
To: AutoBond Acceptance Corporation
The undersigned, the holder of the enclosed Warrant Certificate, hereby
irrevocably elects to exercise the purchase right represented by such Warrant
Certificate for, and to purchase thereunder, _________________ shares of Common
Stock, no par value, of AutoBond Acceptance Corporation and either tenders
herewith payment of the purchase price in full in the form of cash or a
certified or official bank check in the amount of $______________ therefor or,
if the undersigned elects pursuant to Section 4(b) of the Warrant Agreement to
convert the Warrant into Common Stock by net issuance, the undersigned exercises
the Warrant by exchange under the terms of said Section 4(b), and requests that
the certificate or certificates for such shares be issued in the name of and
delivered to the undersigned.
Date:
--------------------------
----------------------------------
(Signature must conform
in all respects to name
of holder as specified on
the face of the Warrant
Certificate)
----------------------------------
----------------------------------
(Address)
Please indicate in the space below the number of shares called for on
the face of the Warrant Certificate (or, in the case of a partial exercise, the
portion thereof as to which the Warrant is being exercised), in either case
without making any adjustment for additional shares or other securities or
property or cash which, pursuant to the adjustment provisions of the Warrant,
may be deliverable upon exercise and whether the exercise is a cash exercise
pursuant to Section 4(a) of the Warrant Agreement or a net issuance exercise
pursuant to Section 4(b) of the Warrant Agreement.
Number of Shares:__________
Cash:____________________
Net issuance:______________
<PAGE>
<PAGE>
ASSIGNMENT
(To be signed only upon transfer of Warrant)
For value received, the undersigned hereby sells, assigns and transfers unto
_______________________________ the right represented by the enclosed Warrant
Certificate to purchase ________ shares of Common Stock, no par value, of
AutoBond Acceptance Corporation with full power of substitution in the premises.
The undersigned represents and warrants that the transfer, in whole in or
in part, of such right to purchase represented by the enclosed Warrant
Certificate is permitted by the terms of the Warrant Agreement pursuant to which
the enclosed Warrant has been issued, and the transferee hereof, by his
acceptance of this Assignment, represents and warrants that he is familiar with
the terms of such Warrant Agreement and agrees to be bound by the terms thereof
with the same force and effect as if a signatory thereto.
Date:
--------------------------
----------------------------------
(Signature must conform
in all respects to name
of holder as specified on
the face of the Warrant
Certificate)
----------------------------------
(Address)
Signed in the presence of:
<PAGE>
<PAGE>
___% SERIES A CUMULATIVE PREFERRED STOCK
(Liquidation Preference $10.00 Per Share)
AUTOBOND ACCEPTANCE CORPORATION
------------------
Certificate of Designation of
___% Series A Cumulative Preferred Stock
and Fixing Distributions and
Other Preferences and Rights of Such Series
------------------
Dated as of __________, 1998
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION
------------------
Certificate of Designation of
___% Series A Cumulative Preferred Stock
and Fixing Distributions and
Other Preferences and Rights of Such Series
------------------
AutoBond Acceptance Corporation, a Delaware corporation, having its
principal office in Austin, Texas (the "Corporation"), hereby certifies to the
Secretary of State of the State of Texas that:
Pursuant to authority expressly vested in the Board of Directors of the
Corporation by Article __ of the Articles of Incorporation of the Corporation
(the "Articles of Incorporation"), the Board of Directors has duly adopted
resolutions authorizing the creation and issuance of up to One Million One
Hundred Fifty Thousand (1,150,000) shares of ___% Series A Cumulative Preferred
Stock, no par value, with a liquidation preference of Ten Dollars ($10.00) per
share, and determining the preferences, rights, powers, limitations,
qualifications and restrictions, as follows:
Section 1. Number of Shares and Designation. This series of Preferred
Stock, no par value, shall be designated as ___% Series A Cumulative Preferred
Stock (the "Series A Preferred Stock"), and the number of shares which shall
constitute such series shall be 1,150,000 shares.
Section 2. Definitions. For purposes of the Series A Preferred Stock, the
following terms shall have the meanings indicated below:
"Act" shall mean the Securities Act of 1933, as amended.
"Affiliate" of a person means a person that directly, or indirectly through
one or more intermediaries, controls or is controlled by, or is under
common control with, the person specified.
"Board of Directors" shall mean the Board of Directors of the Corporation
or any committee authorized by such Board of Directors to perform any of
its responsibilities with respect to the Series A Preferred Stock.
"Business Day" shall mean any day other than a Saturday, Sunday or a day on
which state or federally chartered banking institutions in New York, New
York are not required to be open.
"Call Date" shall have the meaning set forth in paragraph (b) of Section 5
hereof.
<PAGE>
<PAGE>
"Common Stock" shall mean the common stock, no par value, of the
Corporation or such shares of the Corporation's capital stock into which
such Common Stock shall be reclassified.
"Current Market Price" of publicly traded shares of Common Stock or any
other class or series of capital stock or other security of the Corporation
or of any similar security of any other issuer for any day shall mean the
last reported sale price, regular way on such day, or, if no sale takes
place on such day, the reported closing bid price, regular way on such day,
in either case as reported on the American Stock Exchange ("AMEX") or, if
such security is not listed or admitted for trading on the AMEX, on the
principal national securities exchange on which such security is listed or
admitted for trading or, if not listed or admitted for trading on any
national securities exchange, on the Nasdaq National Market of the National
Association of Securities Dealers, Inc. Automated Quotation System
("NASDAQ") or, if such security is not quoted on the Nasdaq National
Market, the closing bid price on such day in the over-the-counter market as
reported by NASDAQ, or, if the bid price for such security on such day
shall not have been reported through NASDAQ, the bid price on such day as
furnished by any AMEX member firm regularly making a market in such
security selected for such purpose by the Chief Executive Officer or the
Board of Directors or if any class or series of securities are not publicly
traded, the fair value of the shares of such class as determined reasonably
and in good faith by the Board of Directors of the Corporation.
"Dividend Payment Date" shall mean, with respect to each Dividend Period,
the last day of March, June, September and December, in each year,
commencing on March 31, 1998; provided, however, that if any Dividend
Payment Date falls on any day other than a Business Day, the dividend
payment due on such Dividend Payment Date shall be paid on the Business Day
immediately following such Dividend Payment Date.
"Dividend Periods" shall mean quarterly dividend periods commencing on
January 1, April 1, July 1 and October 1 of each year and ending on and
including the day preceding the first day of the next succeeding Dividend
Period (other than the initial Dividend Period, which shall commence on the
Issue Date and end on and include March 31, 1998).
"Fair Market Value" shall mean the average of the daily Current Market
Price of a share of Common Stock during five (5) consecutive Trading Days
ending not later than the day in question.
"Funds Available for Distribution" shall mean funds from operations (net
income, computed in accordance with generally accepted accounting
principles excluding gains or losses from debt restructuring and sales of
property, plus depreciation and amortization) minus non-revenue generated
capital expenditures and debt principal amortization, as determined by the
Board of Directors on a basis consistent with the policies and practices
adopted by the Corporation for reporting publicly its results of operations
and financial condition.
"Issue Date" shall mean ___________, 1998.
2
<PAGE>
<PAGE>
"Junior Stock" shall mean the Common Stock and any other class or series of
capital stock of the Corporation over which the shares of Series A
Preferred Stock have preference or priority in the payment of dividends or
in the distribution of assets on any liquidation, dissolution or winding up
of the Corporation.
"Parity Stock" shall have the meaning set forth in paragraph (b) of Section
7 hereof.
"Permitted Common Stock Cash Distributions" means cash dividends and cash
distributions paid on Common Stock after March 31, 1998 not in excess of
the sum of the Corporation's cumulative undistributed net earnings at
December 31, 1998, plus the cumulative amount of Funds Available for
Distribution after March 31, 1998, minus the cumulative amount of dividends
accumulated, accrued or paid on the Series A Preferred Stock or any other
class of Preferred Stock after March 31, 1998.
"Person" shall mean any individual, partnership, corporation or other
entity and shall include the successor (by merger or otherwise) of such
entity.
"Series A Preferred Stock" shall have the meaning set forth in Section 1
hereof.
"Set apart for payment" shall be deemed to include, without any action
other than the following, the recording by the Corporation in its
accounting ledgers of any accounting or bookkeeping entry which indicates,
pursuant to a declaration of dividends or other distribution by the Board
of Directors, the allocation of funds to be so paid on any series or class
of capital stock of the Corporation; provided, however, that if any funds
for any class or series of Junior Stock or any class or series of Parity
Stock are placed in a separate account of the Corporation or delivered to a
disbursing, paying or other similar agent, then "set apart for payment"
with respect to the Series A Preferred Stock shall mean placing such funds
in a separate account or delivering such funds to a disbursing, paying or
other similar agent.
"Trading Day," as to any securities, shall mean any day on which such
securities are traded on the AMEX or, if such securities are not listed or
admitted for trading on the AMEX, on the principal national securities
exchange on which such securities are listed or admitted or, if such
securities are not listed or admitted for trading on any national
securities exchange, on the Nasdaq National Market or, if such securities
are not quoted on the Nasdaq National Market, in the securities market in
which such securities are traded.
"Transfer Agent" means American Stock Transfer and Trust Company or such
other U.S. bank or trust company with aggregate capital, surplus and
undivided profits, as shown on its last published report, of at least
$25,000,000 as may be designated by the Board of Directors or their
designee as the transfer agent for the Series A Preferred Stock.
3
<PAGE>
<PAGE>
Section 3. Dividends.
(a) The holders of Series A Preferred Stock shall be entitled to
receive, when and as declared by the Board of Directors out of funds legally
available for that purpose, cumulative dividends payable in cash in an amount
per share of Series A Preferred Stock equal to $____ per annum. Such dividends
shall be cumulative from the Issue Date, whether or not in any Dividend Period
or Periods such dividends shall be declared or there shall be funds of the
Corporation legally available for the payment of such dividends, and shall be
payable quarterly in arrears on the Dividend Payment Dates, commencing on the
first Dividend Payment Date after the Issue Date. Each such dividend shall be
payable in arrears to the holders of record of the Series A Preferred Stock, as
they appear on the stock records of the Corporation at the close of business on
a record date which shall be not more than sixty (60) days prior to the
applicable Dividend Payment Date. Accumulated, accrued and unpaid dividends for
any past Dividend Periods may be declared and paid at any time, without
reference to any regular Dividend Payment Date, to holders of record on such
date, which date shall not precede by more than forty-five (45) days the payment
date thereof, as may be fixed by the Board of Directors. The amount of
accumulated, accrued and unpaid dividends on any share of Series A Preferred
Stock, or fraction thereof, at any date shall be the amount of any dividends
thereon calculated at the applicable rate to and including such date, whether or
not earned or declared, which have not been paid in cash.
(b) The amount of dividends payable per share of Series A Preferred
Stock for each Dividend Period shall be computed by dividing the annual dividend
by four (4). The amount of dividends payable per share of Series A Preferred
Stock for the initial Dividend Period, or any other period shorter or longer
than a full Dividend Period, shall be computed ratably on the basis of twelve
(12) 30-day months and a 360-day year. Holders of Series A Preferred Stock shall
not be entitled to any dividends, whether payable in cash, property or stock, in
excess of cumulative dividends, as herein provided on the Series A Preferred
Stock. No interest, or sum of money in lieu of interest, shall be payable in
respect of any dividend payment or payments on the Series A Preferred Stock that
may be in arrears.
(c) So long as any of the shares of Series A Preferred Stock are
outstanding, no dividends, except as described in the immediately following
sentence, shall be declared or paid or set apart for payment by the Corporation,
or other distribution of cash or other property declared or made directly or
indirectly by the Corporation or any affiliate or any person acting on behalf of
the Corporation or any of its affiliates with respect to any class or series of
Parity Stock for any period unless dividends equal to the full amount of
accumulated, accrued and unpaid dividends have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof have
been or contemporaneously are set apart for such payment on the Series A
Preferred Stock for all Dividend Periods terminating on or prior to the Dividend
Payment Date with respect to such class or series of Parity Stock. When
dividends are not paid in full or a sum sufficient for such payment is not set
apart, as aforesaid, all dividends declared upon the Series A Preferred Stock
and all dividends declared upon any other class or series of Parity Stock shall
be declared ratably in proportion to the respective amounts of dividends
accumulated, accrued and unpaid on the Series A Preferred Stock and accumulated,
accrued and unpaid on such Parity Stock.
4
<PAGE>
<PAGE>
(d) So long as any of the shares of Series A Preferred Stock are
outstanding, no dividends (other than dividends or distributions paid in shares
of, or options, warrants or rights to subscribe for or purchase shares of,
Junior Stock) shall be declared or paid or set apart for payment by the
Corporation, or other distribution of cash or other property declared or made
directly or indirectly by the Corporation or any affiliate or any person acting
on behalf of the Corporation or any of its affiliates with respect to any shares
of Junior Stock, nor shall any shares of Junior Stock be redeemed, purchased or
otherwise acquired (other than a redemption, purchase or other acquisition of
Common Stock made for purposes of an employee incentive or benefit plan of the
Corporation or any subsidiary) for any consideration (or any moneys be paid to
or made available for a sinking-fund for the redemption of any shares of any
such stock) directly or indirectly by the Corporation or any affiliate or any
person acting on behalf of the Corporation or any of its affiliates (except by
conversion into or exchange for Junior Stock), nor shall any other cash or other
property otherwise be paid or distributed to or for the benefit of any holder of
shares of Junior Stock in respect thereof, directly or indirectly, by the
Corporation or any affiliate or any person acting on behalf of the Corporation
or any of its affiliates unless in each case (i) the full cumulative dividends
(including all accumulated, accrued and unpaid dividends) on all outstanding
shares of Series A Preferred Stock and any other Parity Stock of the Corporation
shall have been paid or such dividends have been declared and set apart for
payment for all past Dividend Periods with respect to the Series A Preferred
Stock and all past Dividend Periods with respect to such Parity Stock, and (ii)
sufficient funds shall have been paid or set apart for the payment of the full
dividend for the current Dividend Period with respect to the Series A Preferred
Stock and the current Dividend Period with respect to such Parity Stock.
Section 4. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, before any payment or
distribution of the assets of the Corporation (whether capital or surplus) shall
be made to or set apart for the holders of Junior Stock, the holders of shares
of Series A Preferred Stock shall be entitled to receive Ten Dollars ($10.00)
per share of Series A Preferred Stock, plus an amount equal to all dividends
(whether or not earned or declared) accumulated, accrued and unpaid thereon to
the date of final distribution to such holders; but such holders shall not be
entitled to any further payment. Until the holders of the Series A Preferred
Stock have been paid the liquidation preference in full, no payment will be made
to any holder of Junior Stock upon the liquidation, dissolution or winding up of
the Corporation. If, upon any liquidation, dissolution or winding up of the
Corporation, the assets of the Corporation, or proceeds thereof, distributable
among the holders of Series A Preferred Stock shall be insufficient to pay in
full the preferential amount aforesaid and liquidating payments on any other
shares of any class or series of Parity Stock, then such assets, or the proceeds
thereof, shall be distributed among the holders of Series A Preferred Stock and
any such other Parity Stock ratably in the same proportion as the respective
amounts that would be payable on such Series A Preferred Stock and any such
other Parity Stock if all amounts payable thereon were paid in full. For the
purposes of this Section 4, (i) a consolidation or merger of the Corporation
with one or more corporations, (ii) a sale or transfer of all or substantially
all of the Corporation's assets, or (iii) a statutory share exchange shall not
be deemed to be a liquidation, dissolution or winding up, voluntary or
involuntary, of the Corporation.
5
<PAGE>
<PAGE>
(b) Subject to the rights of the holders of any shares of Parity
Stock, upon any liquidation, dissolution or winding up of the Corporation, after
payment shall have been made in full to the holders of Series A Preferred Stock
and any Parity Stock, as provided in this Section 4, any other series or class
or classes of Junior Stock shall, subject to the respective terms thereof, be
entitled to receive any and all assets remaining to be paid or distributed, and
the holders of the Series A Preferred Stock and any Parity Stock shall not be
entitled to share therein.
Section 5. Redemption at the Option of the Corporation.
(a) Shares of Series A Preferred Stock shall not be redeemable by
the Corporation prior to _____________, 200_. On or after _____________, 200_,
the Corporation, at its option, may redeem one-sixth (1/6) of the shares of
Series A Preferred Stock each year:
(i) in such number (X) of authorized but previously unissued
shares of Common Stock such that
X = $10/Series A Preferred share
------------------------------
.85 ($Y/Common share),
where Y equals the average of the closing bid prices per share of the
Common Stock on NASDAQ for the five (5) Trading Days prior to the Call
Date; or
(ii) out of funds legally available therefor, in cash at a
redemption price equal to Ten Dollars ($10.00) per share of Series A
Preferred Stock, plus an amount equal to all accumulated, accrued and
unpaid dividends, if any, to the Call Date, whether or not earned or
declared.
(b) Shares of Series A Preferred Stock shall be redeemed by the
Corporation on the date specified in the notice to holders required under
paragraph (d) of this Section 5 (the "Call Date"). The Call Date shall be
selected by the Corporation, shall be specified in the notice of redemption and
shall be thirty (30) days after the date notice of redemption is sent by the
Corporation. Immediately prior to authorizing any redemption of the Series A
Preferred Stock, and as a condition precedent for such redemption, the
Corporation, by resolution of its Board of Directors, shall declare a mandatory
dividend on the Series A Preferred Stock payable in cash on the Call Date in an
amount equal to all accumulated, accrued and unpaid dividends as of the Call
Date on the Series A Preferred Stock to be redeemed, which amount shall be added
to the redemption price. If the Call Date falls after a dividend payment record
date and prior to the corresponding Dividend Payment Date, then each holder of
Series A Preferred Stock at the close of business on such dividend payment
record date shall be entitled to the dividend payable on such shares on the
corresponding Dividend Payment Date notwithstanding the redemption of such
shares prior to such Dividend Payment Date. Except as provided above, the
Corporation shall make no payment or allowance for accumulated or accrued
dividends on shares of Series A Preferred Stock called for redemption or on the
shares of Common Stock issued upon such redemption.
6
<PAGE>
<PAGE>
(c) If full cumulative dividends on all outstanding shares of Series
A Preferred Stock have not been paid or declared and set apart for payment, no
shares of Series A Preferred Stock may be redeemed unless all outstanding shares
of Series A Preferred Stock are simultaneously redeemed and neither the
Corporation nor any affiliate of the Corporation may purchase or acquire shares
of Series A Preferred Stock, otherwise than pursuant to a purchase or exchange
offer made on the same terms to all holders of shares of Series A Preferred
Stock.
(d) If the Corporation shall redeem shares of Series A Preferred
Stock pursuant to paragraph (a) of this Section 5, notice of such redemption
shall be given to each holder of record of the shares to be redeemed. Such
notice shall be provided by first class mail, postage prepaid, at such holder's
address as the same appears on the stock records of the Corporation, or by
publication in The Wall Street Journal or The New York Times, or, if neither
such newspaper is then being published, any other daily newspaper of national
circulation, thirty (30) days prior to the Call Date. If the Corporation elects
to provide such notices by publication, it shall also promptly mail notice of
such redemption to the holders of the shares of Series A Preferred Stock to be
redeemed. Neither the failure to mail any notice required by this paragraph (d),
nor any defect therein or in the mailing thereof, to any particular holder,
shall affect the sufficiency of the notice or the validity of the proceedings
for redemption with respect to the other holders. Any notice which was mailed in
the manner herein provided shall be conclusively presumed to have been duly
given on the date mailed whether or not the holder receives the notice. Each
such mailed or published notice shall state, as appropriate: (1) the Call Date;
(2) the number of shares of Series A Preferred Stock to be redeemed and, if
fewer than all such shares held by such holder are to be redeemed, the number of
such shares to be redeemed from such holder; (3) whether redemption will be for
shares of Common Stock pursuant to paragraph (a)(i) of this Section 5 or for
cash pursuant to paragraph (a)(ii) of this Section 5, and, if redemption will be
for Common Stock, the number of shares of Common Stock to be issued with respect
to each share of Series A Preferred Stock to be redeemed; (4) the place or
places at which certificates for such shares are to be surrendered for
certificates representing shares of Common Stock; and (5) that dividends on the
shares of Series A Preferred Stock to be redeemed shall cease to accrue on such
Call Date except as otherwise provided herein. Notice having been published or
mailed as aforesaid, from and after the Call Date (unless the Corporation shall
fail to issue and make available at the office of the Transfer Agent the number
of shares of Common Stock and/or amount of cash necessary to effect such
redemption, including all accumulated, accrued and unpaid dividends to the Call
Date, whether or not earned or declared), (i) except as otherwise provided
herein, dividends on the shares of Series A Preferred Stock so called for
redemption shall cease to accumulate or accrue on the shares of Series A
Preferred Stock called for redemption (except that, in the case of a Call Date
after a dividend record date and prior to the related Dividend Payment Date,
holders of Series A Preferred Stock on the dividend record date will be entitled
on such Dividend Payment Date to receive the dividend payable on such shares),
(ii) said shares shall no longer be deemed to be outstanding, and (iii) all
rights of the holders thereof as holders of Series A Preferred Stock of the
Corporation shall cease (except the rights to receive the shares of Common Stock
and/or cash payable upon such redemption, without interest thereon, upon
surrender and endorsement of their certificates if so required and to receive
any dividends payable thereon). The Corporation's obligation to provide shares
of Common Stock and/or cash in accordance with the preceding sentence shall be
deemed fulfilled if, on or before the Call Date, the Corporation shall
deposit with a bank or trust company (which may be an affiliate of the
Corporation) that has an office
7
<PAGE>
<PAGE>
in the Borough of Manhattan, the City of New York, or in Dallas, Texas, and that
has, or is an affiliate of a bank or trust company that has, a capital and
surplus of at least $25,000,000, such number of shares of Common Stock and such
amount of cash as is necessary for such redemption, in trust, with irrevocable
instructions that such shares of Common Stock and/or cash be applied to the
redemption of the shares of Series A Preferred Stock so called for redemption.
In the case of any redemption pursuant to paragraph (a)(i) of this Section 5, at
the close of business on the Call Date, each holder of shares of Series A
Preferred Stock to be redeemed (unless the Corporation defaults in the delivery
of the shares of Common Stock or cash payable on such Call Date) shall be deemed
to be the record holder of the number of shares of Common Stock into which such
shares of Series A Preferred Stock are to be converted at redemption, regardless
of whether such holder has surrendered the certificates representing the shares
of Series A Preferred Stock to be so redeemed. No interest shall accrue for the
benefit of the holders of shares of Series A Preferred Stock to be redeemed on
any cash so set aside by the Corporation. Subject to applicable escheat laws,
any such cash unclaimed at the end of two (2) years from the Call Date shall
revert to the general funds of the Corporation, after which reversion the
holders of shares of Series A Preferred Stock so called for redemption shall
look only to the general funds of the Corporation for the payment of such cash.
As promptly as practicable after the surrender in accordance with
said notice of the certificates for any such shares so redeemed (properly
endorsed or assigned for transfer, if the Corporation shall so require and if
the notice shall so state), such certificates shall be exchanged for
certificates representing shares of Common Stock and/or any cash (without
interest thereon) for which such shares have been redeemed in accordance with
such notice. If fewer than all the outstanding shares of Series A Preferred
Stock are to be redeemed, shares to be redeemed shall be selected by the
Corporation from outstanding shares of Series A Preferred Stock not previously
called for redemption by lot or, with respect to the number of shares of Series
A Preferred Stock held of record by each holder of such shares, pro rata (as
nearly as may be) or by any other method as may be determined by the Board of
Directors in its discretion to be equitable. If fewer than all the shares of
Series A Preferred Stock represented by any certificate are redeemed, then a new
certificate representing the unredeemed shares shall be issued without cost to
the holders thereof.
(e) In the case of any redemption pursuant to paragraph (a)(i) of
this Section 5, no fractional shares of Common Stock or scrip representing
fractions of shares of Common Stock shall be issued upon redemption of the
shares of Series A Preferred Stock. Instead of any fractional interest in a
share of Common Stock that would otherwise be deliverable upon redemption of
shares of Series A Preferred Stock, the Corporation shall pay to the holder of
such share an amount in cash (computed to the nearest cent) based upon the
Current Market Price of the Common Stock on the Trading Day immediately
preceding the Call Date. If more than one share shall be surrendered for
redemption at one time by the same holder, the number of full shares of Common
Stock issuable upon redemption thereof shall be computed on the basis of the
aggregate number of shares of Series A Preferred Stock so surrendered.
(f) In the case of any redemption pursuant to paragraph (a)(i) of
this Section 5, the Corporation covenants that any shares of Common Stock issued
upon redemption of shares of Series A Preferred Stock shall be validly issued,
fully paid and non-assessable. The Corporation shall use its best efforts to
list, subject to official notice of issuance, the shares of Common Stock
required
8
<PAGE>
<PAGE>
to be delivered upon any such redemption of shares of Series A Preferred Stock,
prior to such redemption, upon each national securities exchange or automated
quotation system, if any, upon which the outstanding shares of Common Stock are
listed or quoted at the time of such delivery.
The Corporation shall take any action necessary to ensure that any
shares of Common Stock issued upon the redemption of Series A Preferred Stock
are freely transferable and not subject to any resale restrictions under the
Act, or any applicable state securities or blue sky laws (other than any shares
of Common Stock issued upon redemption of any Series A Preferred Stock which are
held by an "affiliate" (as defined in Rule 144 under the Act) of the
Corporation).
Section 6. Series A Preferred Stock To Be Retired. All shares of Series A
Preferred Stock which shall have been issued and reacquired in any manner by the
Corporation shall be restored to the status of authorized, but unissued shares
of Preferred Stock, without designation as to series. The Corporation may also
retire any unissued shares of Series A Preferred Stock, and such shares shall
then be restored to the status of authorized but unissued shares of Preferred
Stock, without designation as to series.
Section 7. Ranking. Any class or series of capital stock of the Corporation
shall be deemed to rank:
(a) prior or senior to the Series A Preferred Stock, as to the
payment of dividends and as to distribution of assets upon liquidation,
dissolution or winding up, if the holders of such class or series shall be
entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference or
priority to the holders of Series A Preferred Stock;
(b) on a parity with the Series A Preferred Stock, as to the payment
of dividends and as to distribution of assets upon liquidation, dissolution or
winding up, whether or not the dividend rates, dividend payment dates or
redemption or liquidation prices per share thereof be different from those of
the Series A Preferred Stock, if the holders of such class of stock or series
and the Series A Preferred Stock shall be entitled to the receipt of dividends
and of amounts distributable upon liquidation, dissolution or winding up in
proportion to their respective amounts of accrued and unpaid dividends per share
or liquidation preferences, without preference or priority of one over the other
("Parity Stock"); and
(c) junior to the Series A Preferred Stock, as to the payment of
dividends or as to the distribution of assets upon liquidation, dissolution or
winding up, if such stock or series shall be Common Stock or if the holder of
Series A Preferred Stock shall be entitled to receipt of dividends or of amounts
distributable upon liquidation, dissolution or winding up, as the case may be,
in preference or priority to the holders of shares of such class or series
("Junior Stock").
9
<PAGE>
<PAGE>
Section 8. Voting.
(a) The affirmative vote of the holders of two-thirds (2/3) of the
votes entitled to be cast by holders of the Series A Preferred Stock then
outstanding, voting as a single class, in person or by proxy, either in writing
without a meeting or by vote at any meeting called for the purpose, will be
required in order to amend the Articles of Incorporation or Bylaws to affect
materially and adversely the rights, preferences or voting power of the holders
of the Series A Preferred Stock or to authorize, create or increase the
authorized amount of, any class of stock having rights prior or senior to the
Series A Preferred Stock with respect to the payment of dividends or amounts
upon liquidation, dissolution or winding up or change any provision of the
Articles of Incorporation or Bylaws that relate to the Board of Directors or the
election of directors or approve any merger or consolidation involving the
Corporation or a sale of all or substantially all of the assets of the
Corporation. However, the Corporation may create additional classes of Parity or
Junior Stock, increase the authorized number of shares of Parity or Junior Stock
and issue additional series of Parity or Junior Stock without the consent of any
holder of Series A Preferred Stock.
(b) If and whenever two (2) quarterly dividends (whether or not
consecutive) payable on the Series A Preferred Stock or any series or class of
Parity Stock shall be in arrears (which shall, with respect to any such
quarterly dividend, mean that any such dividend has not been paid in full),
whether or not earned or declared, the number of directors then constituting the
Board of Directors shall be increased by three (3), and the holders of shares of
Series A Preferred Stock shall be entitled to elect the three (3) additional
directors to serve on the Board of Directors, by the vote of a plurality of the
votes cast by the holders of the Series A Preferred Stock at an annual meeting
of stockholders or special meeting held in place thereof, or at a special
meeting of the holders of the Series A Preferred Stock called as hereinafter
provided. Whenever all arrears in dividends on the Series A Preferred Stock then
outstanding shall have been paid and dividends thereon for the current quarterly
dividend period shall have been paid or declared and set apart for payment, then
the right of the holders of the Series A Preferred Stock to elect such
additional three (3) directors shall cease (but subject always to the same
provision of the vesting of such voting rights in the case of any similar future
arrearages in two (2) quarterly dividends), and the terms of office of all
persons elected as directors by the holders of the Series A Preferred Stock
shall forthwith terminate and the number of the Board of Directors shall be
reduced accordingly. At any time after such voting power shall have been so
vested in the holders of Series A Preferred Stock, the Secretary of the
Corporation shall, and upon the written request of any holder of Series A
Preferred Stock (addressed to the Secretary at the principal office of the
Corporation), call a special meeting of the holders of the Series A Preferred
Stock for the election of the three (3) directors to be elected by them as
herein provided, such call to be made by notice similar to that provided in the
Bylaws of the Corporation for a special meeting of the stockholders or as
required by law. If any such special meeting required to be called, as above
provided, shall not be called by the Secretary within twenty (20) days after
receipt of any such request, then any holder of Series A Preferred Stock may
call such meeting, upon the notice above provided, and for that purpose shall
have access to the stock books of the Corporation. The directors elected at any
such special meeting shall hold office until the next annual meeting of the
stockholders or special meeting held in lieu thereof if such office shall not
have previously terminated as above provided. If any vacancy shall occur among
the directors elected by the holders of the Series A Preferred Stock, a
successor shall be elected by the Board of Directors, upon the nomination
10
<PAGE>
<PAGE>
of the then remaining directors elected by the holders of the Series A Preferred
Stock or the successors of such remaining directors, to serve until the next
annual meeting of the stockholders or special meeting held in place thereof if
such office shall not have previously terminated as above provided.
Notwithstanding the foregoing, the total number of directors elected by the
holders of Series A Preferred Stock and the Representative (as defined in the
Underwriting Agreement relating to the Series A Preferred Stock) shall not
exceed three (3).
So long as any shares of Series A Preferred Stock are outstanding,
the number of directors of the Corporation shall at all times be such that the
exercise by the holders of shares of Series A Preferred Stock of the right to
elect directors under the circumstance provided in this Section 8(b) will not
contravene any provisions of the Texas Business Corporation Act or the Articles
of Incorporation.
For purposes of the foregoing provisions of this Section 8, each
share of Series A Preferred Stock shall have one (1) vote per share. Except as
otherwise required by applicable law or as set forth herein, the holders of the
Series A Preferred Stock shall not have any voting rights and powers, and the
approval or consent of the holders thereof shall not be required for the taking
of any corporate action.
Section 9. Record Holders. The Corporation and the Transfer Agent may deem
and treat the record holder of any share of Series A Preferred Stock as the true
and lawful owner thereof for all purposes, and neither the Corporation nor the
Transfer Agent shall be affected by any notice to the contrary.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be duly
executed as of ______________, 1998.
AUTOBOND ACCEPTANCE CORPORATION
By:
------------------------------------
11
<PAGE>
<PAGE>
__% SERIES A CUMULATIVE PREFERRED STOCK __% SERIES A CUMULATIVE PREFERRED STOCK
INCORPORATED UNDER THE LAWS
OF THE STATE OF TEXAS
NUMBER NUMBER
- -------- --------
AUTOBOND
A C C E P T A N C E
AUTOBOND ACCEPTANCE CORPORATION
CUSIP 052918 ______
SEE REVERSE FOR CERTAIN DEFINITIONS
- --------------------------------------------------------------------------------
THIS CERTIFIES THAT
IS THE OWNER OF
- --------------------------------------------------------------------------------
FULLY PAID AND NONASSESSABLE SHARES OF __% SERIES A CUMULATIVE PREFERRED STOCK,
$10 LIQUIDATION PREFERENCE, OF AUTOBOND ACCEPTANCE CORPORATION
transferrable on the books of the Corporation by the holder hereof in person, or
by duly authorized attorney, upon surrender of this Certificate properly
endorsed. This Certificate is not valid unless countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
SECRETARY CHIEF EXECUTIVE OFFICER
[ S E A L ]
<PAGE>
<PAGE>
AUTOBOND
A C C E P T A N C E
AUTOBOND ACCEPTANCE CORPORATION
A STATEMENT DENYING PREEMPTIVE RIGHTS OF SHAREHOLDERS IS SET FORTH IN
THE ARTICLES OF INCORPORATION ON FILE IN THE OFFICE OF THE SECRETARY OF STATE.
THE CORPORATION WILL FURNISH A COPY OF SUCH STATEMENT TO THE RECORD HOLDER OF
THIS CERTIFICATE WITHOUT CHARGE ON REQUEST TO THE CORPORATION AT ITS PRINCIPAL
PLACE OF BUSINESS OR REGISTERED OFFICE.
THE CORPORATION IS AUTHORIZED TO ISSUE SHARES OF MORE THAN ONE CLASS AND TO
ISSUE PREFERRED SHARES IN SERIES. A STATEMENT OF THE DESIGNATIONS, PREFERENCES,
LIMITATIONS, AND RELATIVE RIGHTS OF THE SHARES OF EACH CLASS AUTHORIZED TO BE
ISSUED BY THE CORPORATION, THE RELATIVE RIGHTS AND PREFERENCES OF THE SHARES OF
EACH SERIES OF PREFERRED SHARES TO THE EXTENT THEY HAVE BEEN FIXED AND
DETERMINED, AND THE AUTHORITY OF THE BOARD OF DIRECTORS OF THE CORPORATION TO
FIX AND DETERMINE THE RELATIVE RIGHTS AND PREFERENCES OF ANY SERIES OF PREFERRED
SHARES SET FORTH IN THE ARTICLES OF INCORPORATION OF THE CORPORATION IS ON FILE
IN THE OFFICE OF THE SECRETARY OF STATE OF TEXAS. THE CORPORATION WILL FURNISH A
COPY OF SUCH STATEMENT TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE
ON WRITTEN REQUEST TO THE CORPORATION AT ITS PRINCIPAL PLACE OF BUSINESS OR
REGISTERED OFFICE.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- _________ Custodian___________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right Under Uniform Gifts to Minors
of survivorship and not as Act _________________________
tenants in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received, ______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS,
INCLUDING POSTAL ZIP CODE, OF ASSIGNEE
__________________________________________________________________________Shares
of the Stock represented by the within Certificate, and do hereby irrevocably
constitute and appoint
________________________________________________________________________________
Attorney to transfer the said stock on the books of the within-named
Corporation, with full power of substitution in the premises.
Dated:_________________________________ X ___________________________________
NOTICE (SIGNATURE)
THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND X ___________________________________
WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE
IN EVERY PARTICULAR WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
----------------------------------------------------------
THE SIGNATURE SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO SEC RULE 17Ad-15.
----------------------------------------------------------
SIGNATURE(S) GUARANTEED BY:
----------------------------------------------------------
<PAGE>
<PAGE>
EXHIBIT 5.1
[JONES, DAY, REAVIS & POGUE]
February 5, 1998
AutoBond Acceptance Corporation
301 Congress Avenue
Austin, Texas 78701
Re: 1,150,000 Shares of 15% Series A Cumulative Preferred Stock
-----------------------------------------------------------
Ladies and Gentlemen:
We are acting as counsel for AutoBond Acceptance Corporation
(the "Company") in connection with the registration under the Securities Act of
1933 (the "Act") and the issuance and sale, of up to 1,150,000 shares of 15%
Series A Cumulative Preferred Stock, $10 liquidation preference, of the Company
(the "Shares") in accordance with the Underwriting Agreement (the "Underwriting
Agreement") between the Company and Tejas Securities Group, Inc., as
Representative of the several Underwriters to be named therein.
We have examined such documents, records, and matters of law
as we have deemed necessary or appropriate for purposes of this opinion. Upon
the basis of such examination, we are of the opinion that when the Registration
Statement referred to below has become effective under the Act, a certificate of
designation in substantially the form filed as an exhibit to such Registration
Statement has been duly filed under the Texas Business Corporation Act, the
terms of the Shares and of their issue and sale have been duly established in
conformity with the articles of incorporation of the Company so as not to
violate any applicable law or agreement or instrument then binding on the
Company, and the Shares have been duly issued and sold pursuant to the
Underwriting Agreement as contemplated in the Registration Statement, the Shares
will be duly and validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement (No. 333-41257) on Form S-1 filed by the Company
to effect registration of the Shares under the Act and to the reference to us
under the caption "Legal Matters" in the Prospectus constituting a part of such
Registration Statement. In giving such consent, we do not thereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Act.
Very truly yours,
/s/Jones, Day, Reavis & Pogue
<PAGE>
<PAGE>
Execution Copy
CONSULTING AND EMPLOYMENT AGREEMENT
THIS CONSULTING AND EMPLOYMENT AGREEMENT dated as of January
1, 1998, between AutoBond Acceptance Corporation, a Texas corporation (the
"Company"), and Manuel A. Gonzalez, an individual (the "Executive"):
W I T N E S S E T H:
WHEREAS, the Company desires to retain the Executive for the
period of time set forth herein; and
WHEREAS, the Executive is willing to undertake the duties
hereinafter set forth and to be subject to the restrictions hereinafter
specified in exchange for the substantial inducements and incentives herein set
forth:
NOW, THEREFORE, the Company and the Executive agree as
follows:
1. Term. The Company hereby retains the Executive (a) as a
consultant to the Company for the period commencing on the date hereof and
continuing through and including January 31, 1998, and (b) as President of the
Company for the period commencing on February 1, 1998 and continuing until the
third anniversary of the date hereof (such periods collectively being
hereinafter sometimes called the "term of this Agreement"). The Executive
accepts such retention and employment and agrees to perform the services
specified herein, all upon the terms and conditions hereinafter stated.
2. Duties of Executive. The Executive shall serve the Company
as a consultant and shall report to the Board of Directors of the Company (the
"Board") and the Chief Executive Officer ("CEO") of the Company through and
including January 31, 1998. During such period, the Executive shall provide
consulting services to the Company regarding its executive, management and
administrative functions and requirements. From and after February 1, 1998, the
Executive shall serve the Company in the capacity of President and shall report
to, and be subject to the general direction of, the Board and the CEO of the
Company. During such period, the Executive shall perform the executive,
management and administrative duties of the President of the Company and such
other executive duties as are from time to time assigned to him by the Board or
the CEO and as are not inconsistent with the provisions thereof. In addition,
effective upon his employment as President of the Company on February 1, 1998,
the Executive shall resign his position as a non-employee member of the Board.
3. Time and Availability. The Executive shall devote his full
business time and attention to the business of the Company, and, except as may
be specifically permitted by the Company, shall not be engaged in any other
business activity during the term of this Agreement. The foregoing shall not be
construed as preventing the Executive from making passive investments in other
businesses or enterprises, provided, however, that such investments do not
require services on
<PAGE>
<PAGE>
the part of the Executive which would in any way impair the performance of his
duties under this Agreement, and does not violate Section 9 hereof.
4. Compensation. As compensation for the services the
Executive will provide to the Company hereunder and for the agreements of the
Executive set forth herein, the Company shall pay to the Executive a one-time
signing bonus of $100,000 and a salary of $200,000 (the "Base Pay") per full
calendar year of service completed. From time to time during the term of this
Agreement, the Executive's salary may be increased by, and at the sole
discretion of, the Board in which case the amount of such increased salary shall
thereafter be deemed to be the amount of Base Pay contracted for in this
Agreement. In addition to the Base Pay payable to the Executive hereunder, the
Executive shall be entitled to receive a performance bonus of up to $25,000 per
quarter, based upon criteria prepared by the Chief Executive Officer and
approved by the Compensation Committee ("Incentive Pay"):
The Executive shall also receive under the Company's 1996
Stock Option Plan options as follows: (a) as of the date hereof, an option to
purchase 100,000 shares ("Option A") of the Company's common stock and (b) on
December 1, 1998, an option to purchase 50,000 shares ("Option B") of the
Company's common stock. Such options shall have an exercise price per share
equal to the fair market value per share of the common stock on the date of
grant and shall become vested and exercisable to the extent of one-third of the
shares covered thereby on February 1, 1998 in the case of Option A and December
1, 1998 in the case of Option B, and each of the first two anniversaries
thereof, provided that the Executive is an employee of the Company on each such
date. Such options shall also be subject to the terms and conditions of the 1996
Stock Option Plan and shall be reflected in a standard stock option agreement
between the Company and the Executive as contemplated by such Plan. In addition,
the Board may grant the Executive compensation in the form of additional bonuses
or stock options or such other consideration as may be determined from time to
time in the sole discretion of the Board. The compensation set forth herein
shall be payable in accordance with the payroll and incentive compensation
policies of the Company in effect from time to time during the term of this
Agreement.
5. Benefits. During the portion of the term of this Agreement
from and after February 1, 1998, the Executive shall be entitled to participate
in all employee benefit plans and arrangements of the Company in the same manner
as other executive officers of the Company, subject to the terms and conditions
of such plans and arrangements.
6. Expenses. During the term of this Agreement, the Company
shall pay or reimburse the Executive, upon submission of an appropriate
statement by him documenting such expenses as required by the Internal Revenue
Code, for all reasonable out-of-pocket expenses for entertainment, travel,
meals, hotel accommodations and the like incurred by him in the interest of the
business of the Company and in accordance with such procedures as may be
established by the Board.
7. Termination.
(a) Death. If the Executive should die during the
term of this Agreement, the Company shall have no further
obligation hereunder to the Executive, his spouse or his
estate except to pay to the Executive's spouse, if she should
survive him, or the
2
<PAGE>
<PAGE>
Executive's estate if his spouse shall not survive him, the
Base Pay accrued through the end of the month in which the
Executive's death occurred. All such payments to the
Executive's spouse or estate shall be made in the same manner
and at the same times as the Base Pay would have been paid to
the Executive had he not died.
(b) Disability. If, during the term of this
Agreement, the Executive shall be prevented from performing
his duties hereunder by reason of disability, and such
disability shall continue for a period of six months, then the
Company, upon 30 days' prior written notice to the Executive,
may terminate this Agreement at any time after the expiration
of such six-month period. For purposes of this Agreement, the
Executive shall be deemed to have become disabled when the
Board, upon the advice of a licensed physician (mutually
approved by the Company and the Executive or the
representative of the Executive in the event of his inability
to approve), shall have determined that the Executive has
become physically or mentally incapable (excluding infrequent
and temporary absences due to ordinary illness) of performing
his duties under this Agreement. If the Company terminates
this Agreement, then the Company shall have no further
obligation to the Executive except to pay to the Executive, or
in the event of his subsequent death, to his spouse if she
should survive him or to his estate if his spouse shall not
survive him, the Base Pay accrued through the end of the month
in which the Executive's disability occurred. All such
payments to the Executive or his spouse or estate shall be
made in the same manner and at the same times as the Base Pay
would have been paid to the Executive had he not become
disabled.
(c) Termination by Executive. If the Executive
voluntarily terminates this Agreement, then the Company shall
have no further obligation to the Executive except to pay to
the Executive the Base Pay accrued through the date on which
the Executive terminated this Agreement. Such payment to the
Executive shall be made in the same manner and at the same
times as the Base Pay would have been paid to the Executive
had he not terminated this Agreement.
(d) Discharge for Cause. Notwithstanding any other provision
of this Agreement, if prior to the expiration of the term of
this Agreement the Executive shall be discharged by the
Company for cause, then this Agreement shall automatically
terminate (except for the provisions of Sections 8, 9 and 11
which shall continue in effect), and upon such termination,
the Company shall have no further obligation to the Executive
except that the Company shall pay to the Executive an amount
equal to the Executive's Base Pay accrued to the date of such
termination. For purposes of this Agreement, a discharge for
cause shall mean a discharge resulting from a good faith
determination by the Company (after the Executive has been
given notice of such intended termination and, if the reasons
for such termination can be cured, a period of 10 days to cure
such reasons) that the Executive (i) has been convicted of a
crime involving fraud, theft or embezzlement or of any other
crime involving moral turpitude, (ii) has failed or refused to
follow reasonable policies or directives established by the
Board of Directors, (iii) has persistently failed to attend to
his duties hereunder, (iv) has committed acts amounting to
gross negligence or willful
3
<PAGE>
<PAGE>
misconduct to the substantial detriment of the Company, or (v)
has willfully breached any material term or provision of this
Agreement. Such payment to the Executive shall be made in the
same manner and at the same times as the Base Pay would have
been paid to the Executive had this Agreement not been
terminated.
(e) Termination by the Company. Subject to the terms
of the Severance Agreement, dated the date hereof (the
"Severance Agreement"), between the Executive and the Company,
the Executive's employment with the Company may be terminated
prior to the expiration of this Agreement for any reason and
the Company shall have no further obligation hereunder to the
Executive, his spouse or his estate except to pay to the
Executive, to his spouse if she should survive him, or to his
estate if his spouse shall not survive him, his Base Pay for
the remainder of the year in which such termination occurs.
All such payments to the Executive, his spouse or estate shall
be made in the same manner and at the same times as the Base
Pay would have been paid to the Executive had his employment
not been terminated.
8. Confidentiality.
(a) Acknowledgment. The Executive agrees and
acknowledges that in the course of rendering services to the
Company and its Clients (as defined below) he will have access
to and will become acquainted with confidential information
about the professional, business and financial affairs of the
Company, the Company's direct or indirect subsidiaries (for
purpose of Sections 8 and 9 herein, the term Company shall
include any of the Company's direct or indirect subsidiaries),
the Company's strategy and procedures and the Company's
Clients, and may in the future contribute to such information.
As used in this Agreement, the term "Clients" refers to any
entity in the sub-prime automobile financing or refinancing
business with which the Company conducts business. The
Executive agrees and acknowledges that the Company is engaged
in a highly competitive business, and that the success of the
Company in the marketplace depends upon its good will and
reputation for providing exemplary services to its Clients by
developing innovative, aggressive, cutting-edge and/or novel
methods of financing or refinancing the purchase of
automobiles in the sub-prime market, and arranging financing
for companies that are in the business of financing the
purchase of automobiles in the sub-prime market. The Executive
recognizes that in order to guard the legitimate interests of
the Company it is necessary for the Company to protect all
such confidential information, good will and reputation.
(b) Proprietary Information. In the course of his
service to the Company, the Executive may have access to and
may help create confidential information, including, but not
limited to: the identity of proposed transactions or the
parties thereto, the status of negotiations concerning
proposed transactions, forecasts, budgets, pricing
information, Company developed methods of operation, risk
management strategies and procedures, Client lists, lists of
contact persons at Clients, specialized know-how developed by
the Company, business documents or information, marketing
data, trade secrets, personnel rosters, including the
identity, qualifications and/or salary scale of any consultant
or other Company employee, and other information generated by
the
4
<PAGE>
<PAGE>
Company or arising in connection with the Company's
business the disclosure of which would give an advantage to
the Company's competitors or Clients. Such information shall
hereinafter be called "Proprietary Information" and shall
include any and all items enumerated in the preceding sentence
which come within the scope of the business activities of the
Company as to which the Executive has had or may have access,
whether previously existing, now existing or arising
hereafter, whether or not conceived or developed by others or
by the Executive alone or with others during the period of his
service to the Company, and whether or not conceived or
developed during regular working hours. "Proprietary
Information" shall not include (a) any information which is in
the public domain during the period of service by the
Executive, provided such information is not in the public
domain as a consequence of disclosure by the Executive in
violation of this Agreement or by any other person who was
contractually obligated not to disclose such information and
(b) any information not considered confidential information by
similar enterprises operating in the sub-prime automobile
finance industry.
(c) Fiduciary Obligations. The Executive agrees and
acknowledges that Proprietary Information belongs solely to
the Company and is of critical importance to the Company and
that a use or disclosure of the Proprietary Information in
violation of this Section 8 may seriously and irreparably
impair and damage the Company's businesses. The Executive
therefore agrees, while he is a consultant to or employee of
the Company, and at all times thereafter, (a) to keep all
Proprietary Information in a fiduciary capacity for the sole
benefit of the Company and (b) not to use the Proprietary
Information for the benefit of the Executive or any other
person or entity.
(d) Non-Disclosure. The Executive shall not disclose,
directly or indirectly (except as required by law), any
Proprietary Information to any person other than (a) the
Company, (b) Executives of the Company that the Executive
reasonably believes have been authorized to receive such
information, (c) such other persons to whom the Executive has
been instructed to make disclosure by the Board, or (d) the
Executive's counsel so long as such counsel agrees to keep all
Proprietary Information confidential (in the case of clause
(b) only to the extent required in the course of the
Executive's service to the Company). At the termination of his
service hereunder, the Executive shall deliver to the Company
all notes, letters, documents and records which may contain
Proprietary Information which are then in his possession or
control and shall not retain or use any copies or summaries
thereof.
9. Non-Competitive and Non-Solicitation.
(a) Non-Competition Covenant. The Executive
acknowledges and agrees that (a) in order for the Company to
further ensure that the Proprietary Information will be used
solely for the benefit of the Company and not for the benefit
of the Executive or any other person or entity and (b) in
consideration of the Company entering into this Agreement, the
Executive has agreed not to compete with the Company to the
extent provided in this Section. The Executive covenants and
agrees
5
<PAGE>
<PAGE>
that during the Restricted Covenant Period (as that terms
is defined below), the Executive shall not, whether for
his own account or for any other person or organization other
than the Company, (a) manage, operate, control, assist
(directly or indirectly), or participate in the management,
operation or control of, (b) serve as a director, officer,
partner, manager, employee or consultant of, or own more than
five percent of the outstanding voting securities of, or (c)
lease property to any enterprise which, within the Restricted
Area (as that term is defined below), carries on the business
of financing or refinancing the purchase of automobiles in the
subprime market or arranging financing for companies that are
in the business of financing the purchase of automobiles in
the sub-prime market. The Executive further agrees that,
during the Restrictive Covenant Period and within the
Restricted Area, he shall not knowingly call upon, solicit,
divert, attempt to solicit or divert, or conduct or carry on
any business with any of the former Clients, current Clients
or potential Clients of the Company known to the Executive
(including for this purpose only those former Clients who were
Clients during the last twelve (12) months of his service to
the Company), without in each case obtaining the prior written
consent of the Company, which consent will not be unreasonably
withheld.
(b) Non-Solicitation of Employees. The Executive
further agrees that during the Restrictive Covenant Period, he
will not directly or indirectly, solicit the employment or
engagement as a consultant of any person who was an employee
of or a consultant to the Company at any time during the last
twelve months of the Executive's service with the Company, or
hire such employee or engage as a consultant any such person,
unless in each case the Executive obtains the prior written
consent of the Company.
(c) Definitions. For the purposes of Section 9.1, the
term "Restricted Covenant Period" shall mean the period
commencing on the date hereof and terminating on the date 12
months after the Executive's service to the Company ends. For
the purposes of this Section 9, the term "Restricted Area"
shall mean the State of Texas.
(d) No Conflicting Agreement. The Executive
represents and warrants to the Company that he is not bound by
the provisions of any agreement with a current or former
employer which would prohibit or limit the Executive's ability
to render services to the Company as herein provided. The
Executive further represents to the Company that in the course
of rendering services hereunder he will not divulge to the
Company any proprietary information of any other party to whom
the Executive owes an obligation of non-disclosure.
10. Vacations. The Executive shall be entitled each year to a
vacation of four weeks, during which time his compensation shall be paid in
full. Each vacation shall be taken during a period of time to be mutually agreed
upon by the parties.
11. Intellectual Property. The Executive hereby agrees that
any and all copyrights, patents, trademarks, patent or trademark applications,
copyrights, franchises, licenses, permits, rights
6
<PAGE>
<PAGE>
(including, without limitation, rights to software and rights to trade secrets
and proprietary information, processes and know-how) and other authorizations
(collectively, the "Rights") which he develops either alone or in collaboration
with other consultants to or employees of the Company during the term of this
Agreement shall belong exclusively to the Company and, if requested, he will
execute any deeds, bills of sale, assignments, assurances, or any other actions
or things necessary or desirable to vest, perfect, or confirm of record or
otherwise in the Company its rights, title, or interest in, to, or under any of
the Rights.
12. Notices. All notices, requests, consents and other
communications under this Agreement shall be in writing and shall be deemed to
have been delivered on the date personally delivered or on the date mailed,
postage prepaid, by certified mail, return receipt requested, if addressed to
the respective parties as follows:
If to Executive: 8830 Memorial Drive
Houston, TX 77024
If to the Company AutoBond Acceptance Corporation
301 Congress Avenue, 9th Floor
Austin, Texas 78701
Either party hereto may designate a different address by providing written
notice of such new address to the other party hereto.
13. Specific Performance. The Executive acknowledges that a
remedy at law for any breach or attempted breach of Section 8, 9 or 11 of this
Agreement will be inadequate, agrees that the Company shall be entitled to
specific performance and injunctive and other equitable relief in case of any
such breach or attempted breach, and further agrees to waive any requirement for
the securing or posting of any bond in connection with the obtaining of any such
injunctive or any other equitable relief.
14. Severability. In case any term, phrase, clause, paragraph,
section, restriction, covenant or agreement contained in this Agreement shall be
held to be invalid or unenforceable, the same shall be deemed, and it is hereby
agreed that the same are meant, to be severable, and shall not defeat or impair
the remaining provisions hereof.
15. Waiver. The waiver by the Company of a breach of any
provision of this Agreement by the Executive shall not operate or be construed
as a waiver of any subsequent or continuing breach of this Agreement by the
Executive.
16. Assignment. This Agreement may not be assigned by the
Executive. Neither the Executive nor his spouse or estate shall have any right
to commute, encumber or dispose of any right to receive payments hereunder, it
being agreed that such payments and the right thereto are nonassignable and
nontransferable.
7
<PAGE>
<PAGE>
17. Binding Effect. Subject to the provisions of Section 16,
this Agreement shall be binding upon and inure to the benefit of the parties
hereto, the Executive's heirs and personal representatives, and the successors
and assigns of the Company.
18. Entire Agreement. This Agreement and the Severance
Agreement embody the entire agreement and understanding between the parties
hereto with respect to the matters covered hereby.
19. Amendment. This Agreement may be amended only by an
instrument in writing executed by the parties hereto.
20. Governing Law. This Agreement shall be construed and
enforced in accordance with and governed by the law of the State of Texas.
21. Survival. The provisions of this Section 8, 9 and 11 shall
survive until the termination of this Agreement, regardless of the fact that the
Company will no longer be obligated to continue to make payments to the
Executive hereunder.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date and year first above written.
AUTOBOND ACCEPTANCE
CORPORATION
By
---------------------------
MANUEL A. GONZALEZ
8
<PAGE>
<PAGE>
Execution Copy
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (this "Agreement"), dated as of
February 1, 1998, is made and entered by and between AutoBond Acceptance
Corporation, a Texas corporation (the "Company"), and Manuel A. Gonzalez (the
"Executive").
WITNESSETH:
WHEREAS, the Executive is a senior executive of the Company
and has made and is expected to continue to make major contributions to the
short- and long-term profitability, growth and financial strength of the
Company;
WHEREAS, the Company recognizes that, as is the case for most
publicly held companies, the possibility of a Change in Control (as defined
below) exists;
WHEREAS, the Company desires to assure itself of both present
and future continuity of management and desires to establish certain minimum
severance benefits for certain of its senior executives, including the
Executive, applicable in the event of a Change in Control;
WHEREAS, the Company wishes to ensure that its senior
executives are not practically disabled from discharging their duties in respect
of a proposed or actual transaction involving a Change in Control; and
WHEREAS, the Company desires to provide additional inducement
for the Executive to continue to remain in the ongoing employ of the Company.
NOW, THEREFORE, the Company and the Executive agree as
follows:
1. Certain Defined Terms. In addition to terms defined
elsewhere herein, the following terms have the following meanings when used in
this Agreement with initial capital letters:
(a) "Base Pay" means the Executive's annual base salary at a
rate not less than the Executive's annual fixed or base compensation as
in effect for Executive immediately prior to the occurrence of a Change
in Control or such higher rate as may be determined thereafter from
time to time by the Board or a committee thereof.
(b) "Board" means the Board of Directors of the Company.
<PAGE>
<PAGE>
(c) "Cause" means that, prior to any termination pursuant to
Section 3(b) or Section 3(c), the Executive shall have committed:
(i) an intentional act of fraud, embezzlement or theft
in connection with his duties or in the course of his employment with
the Company or any Subsidiary;
(ii) intentional wrongful damage to property of the
Company or any Subsidiary;
(iii) intentional wrongful disclosure of secret
processes or confidential information of the Company or any Subsidiary;
or
(iv) intentional wrongful engagement in any Competitive
Activity;
and any such act shall have been materially harmful to the Company. For
purposes of this Agreement, no act or failure to act on the part of the
Executive shall be deemed "intentional" if it was due primarily to an
error in judgment or negligence, but shall be deemed "intentional" only
if done or omitted to be done by the Executive not in good faith and
without reasonable belief that his action or omission was in the best
interest of the Company. Notwithstanding the foregoing, the Executive
shall not be deemed to have been terminated for "Cause" hereunder
unless and until there shall have been delivered to the Executive a
copy of a resolution duly adopted by the affirmative vote of not less
than three quarters of the Board then in office at a meeting of the
Board called and held for such purpose, after reasonable notice to the
Executive and an opportunity for the Executive, together with his
counsel (if the Executive chooses to have counsel present at such
meeting), to be heard before the Board, finding that, in the good faith
opinion of the Board, the Executive had committed an act constituting
"Cause" as herein defined and specifying the particulars thereof in
detail. Nothing herein will limit the right of the Executive or his
beneficiaries to contest the validity or propriety of any such
determination.
(d) "Change in Control" means the occurrence during the Term
of any of the following events:
(i) The Company is merged, consolidated or reorganized
into or with another corporation or other legal person, and as a result
of such merger, consolidation or reorganization less than a majority of
the combined voting power of the then-outstanding Voting Stock of such
corporation or person immediately after such transaction are held in
the aggregate by the holders of Voting Stock of the Company immediately
prior to such transaction;
(ii) The Company sells or otherwise transfers all or
substantially all of its assets to another corporation or other legal
person, and as a result of such sale or transfer less than a majority
of the combined voting power of the then-outstanding Voting Stock of
such corporation or person immediately after such sale or transfer is
held in the
2
<PAGE>
<PAGE>
aggregate by the holders of Voting Stock of the Company immediately
prior to such sale or transfer;
(iii) There is a report filed on Schedule 13D or Schedule
14D-1 (or any successor schedule, form or report), each as promulgated
pursuant to the Exchange Act, disclosing that any person (as the term
"person" is used in Section 13(d)(3) or Section 14(d)(2) of the
Exchange Act) has become the beneficial owner (as the term "beneficial
owner" is defined under Rule 13d-3 or any successor rule or regulation
promulgated under the Exchange Act) of securities representing 50% or
more of the combined voting power of the then-outstanding Voting Stock
of the Company; or
(iv) The Company files a report or proxy statement with
the Securities and Exchange Commission pursuant to the Exchange Act
disclosing in response to Form 8-K or Schedule 14A (or any successor
schedule, form or report or item therein) that a change in control of
the Company has occurred or will occur in the future pursuant to any
then-existing contract or transaction.
Notwithstanding the foregoing provisions of Section 1(d)(iii) or
1(d)(iv), unless otherwise determined in a specific case by majority
vote of the Board, a "Change in Control" shall not be deemed to have
occurred (A) for purposes of Section 1(d)(iii) or 1(d)(iv) solely
because the Company, a Subsidiary, or any Company-sponsored employee
stock ownership plan or any other employee benefit plan of the Company
or any Subsidiary either files or becomes obligated to file a report or
a proxy statement under or in response to Schedule 13D, Schedule 14D-1,
Form 8-K or Schedule 14A (or any successor schedule, form or report or
item therein) under the Exchange Act disclosing beneficial ownership by
it of shares of Voting Stock, whether in excess of 50% or otherwise, or
because the Company reports that a change in control of the Company has
occurred or will occur in the future by reason of such beneficial
ownership, or (B) in any case after the Company is the subject of a
voluntary or involuntary bankruptcy proceeding.
(e) "Competitive Activity" means the Executive's
participation, without the written consent of the Board of Directors,
in the management of any business enterprise if such enterprise engages
in substantial and direct competition with the Company and such
enterprise's sales of any product or service competitive with any
product or service of the Company amounted to 10% of such enterprise's
net sales for its most recently completed fiscal year and if the
Company's net sales of said product or service amounted to 10% of the
Company's net sales for its most recently completed fiscal year.
"Competitive Activity" will not include (i) the mere ownership of
securities in any such enterprise and the exercise of rights
appurtenant thereto or (ii) participation in the management of any such
enterprise other than in connection with the competitive operations of
such enterprise.
(f) "Employee Benefits" means the perquisites, benefits and
service credit for benefits as provided under any and all employee
retirement income and welfare benefit policies, plans, programs or
arrangements in which Executive is entitled to participate,
3
<PAGE>
<PAGE>
including without limitation any stock option, stock purchase, stock
appreciation, savings, pension, supplemental executive retirement, or
other retirement income or welfare benefit, deferred compensation,
incentive compensation, group or other life, health, medical/hospital
or other insurance (whether funded by actual insurance or self-insured
by the Company or a Subsidiary), disability, salary continuation,
expense reimbursement and other employee benefit policies, plans,
programs or arrangements that may now exist or any equivalent successor
policies, plans, programs or arrangements that may be adopted hereafter
by the Company or a Subsidiary, providing perquisites, benefits and
service credit for benefits at least as great in the aggregate as are
payable thereunder prior to a Change in Control.
(g) "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
(h) "Incentive Pay" means an amount equal to not less than the
highest aggregate annual bonus, incentive or other payments of cash
compensation, in addition to Base Pay, made or to be made in regard to
services rendered in any calendar year during the three calendar years
immediately preceding the year in which the Change in Control occurred
pursuant to any bonus, incentive, profit-sharing, performance,
discretionary pay or similar agreement, policy, plan, program or
arrangement (whether or not funded) of the Company or a Subsidiary, or
any successor thereto providing benefits at least as great as the
benefits payable thereunder prior to a Change in Control.
(i) "Severance Period" means the period of time commencing on
the date of the first occurrence of a Change in Control and continuing
until the earlier of (i) the second anniversary of the occurrence of
the Change in Control or (ii) the Executive's death; provided, however,
that commencing on each anniversary of the Change in Control, the
Severance Period will automatically be extended for an additional year
unless, not later than 90 calendar days prior to such anniversary date,
either the Company or the Executive shall have given written notice to
the other that the Severance Period is not to be so extended.
(j) "Subsidiary" means an entity in which the Company directly
or indirectly beneficially owns 50% or more of the outstanding Voting
Stock.
(k) "Term" means the period commencing as of the date hereof
and expiring as of the later of (i) the close of business on February
1, 2001, or (ii) the expiration of the Severance Period; provided,
however, that (A) commencing on February 1, 2001 and each January 1
thereafter, the term of this Agreement will automatically be extended
for an additional year unless, not later than November 30 of the
immediately preceding year, the Company or the Executive shall have
given notice that it or the Executive, as the case may be, does not
wish to have the Term extended and (B) subject to the last sentence of
Section 9, if, prior to a Change in Control, the Executive ceases for
any reason to be an employee of the Company and any Subsidiary,
thereupon without further action the Term shall be deemed to have
expired and this Agreement will immediately terminate and be of no
further effect. For purposes of this Section 1(k), the Executive shall
not be deemed to
4
<PAGE>
<PAGE>
have ceased to be an employee of the Company and any Subsidiary by
reason of the transfer of Executive's employment between the Company
and any Subsidiary, or among any Subsidiaries.
(l) "Termination Date" means the date on which the Executive's
employment is terminated (the effective date of which shall be the date
of termination, or such other date that may be specified by the
Executive if the termination is pursuant to Section 3(b).
(m) "Voting Stock" means securities entitled to vote generally
in the election of directors.
2. Operation of Agreement. This Agreement will be effective
and binding immediately upon its execution, but, anything in this Agreement to
the contrary notwithstanding, this Agreement will not be operative unless and
until a Change in Control occurs. Upon the occurrence of a Change in Control at
any time during the Term, without further action, this Agreement shall become
immediately operative.
3. Termination Following a Change in Control. (a) In the event
of the occurrence of a Change in Control, the Executive's employment may be
terminated by the Company or a Subsidiary during the Severance Period and the
Executive shall be entitled to the benefits provided by Section 4 unless such
termination is the result of the occurrence of one or more of the following
events:
(i) The Executive's death;
(ii) If the Executive becomes permanently disabled
within the meaning of, and begins actually to receive disability
benefits pursuant to, the long-term disability plan in effect for, or
applicable to, Executive immediately prior to the Change in Control; or
(iii) Cause.
If, during the Severance Period, the Executive's employment is terminated by the
Company or any Subsidiary other than pursuant to Section 3(a)(i), 3(a)(ii) or
3(a)(iii), the Executive will be entitled to the benefits provided by Section 4
hereof.
(b) In the event of the occurrence of a Change in Control, the
Executive may terminate employment with the Company and any Subsidiary during
the Severance Period with the right to severance compensation as provided in
Section 4 upon the occurrence of one or more of the following events (regardless
of whether any other reason, other than Cause as hereinabove provided, for such
termination exists or has occurred, including without limitation other
employment):
(i) (A) A reduction in the aggregate of the Executive's Base
Pay received from the Company and any Subsidiary, or (B) the
termination or denial of the Executive's rights to
5
<PAGE>
<PAGE>
Employee Benefits or a reduction in the scope or value thereof, any of
which is not remedied by the Company within 10 calendar days after
receipt by the Company of written notice from the Executive of such
change, reduction or termination, as the case may be;
(ii) The liquidation, dissolution, merger, consolidation or
reorganization of the Company or transfer of all or substantially all
of its business and/or assets, unless the successor or successors (by
liquidation, merger, consolidation, reorganization, transfer or
otherwise) to which all or substantially all of its business and/or
assets have been transferred (directly or by operation of law) assumed
all duties and obligations of the Company under this Agreement pursuant
to Section 10(a); or
(iii) Without limiting the generality or effect of the
foregoing, any material breach of this Agreement by the Company or any
successor thereto.
(c) A termination by the Company pursuant to Section 3(a) or
by the Executive pursuant to Section 3(b) will not affect any rights that the
Executive may have pursuant to any agreement, policy, plan, program or
arrangement of the Company or Subsidiary providing Employee Benefits, which
rights shall be governed by the terms thereof.
4. Severance Compensation. (a) If, following the occurrence of
a Change in Control, the Company or Subsidiary terminates the Executive's
employment during the Severance Period other than pursuant to Section 3(a)(i),
3(a)(ii) or 3(a)(iii), or if the Executive terminates his employment pursuant to
Section 3(b), the Company will pay to the Executive the following amounts within
five business days after the Termination Date and continue to provide to the
Executive the following benefits:
(i) A lump sum payment in an amount equal to the sum of (A) Base
Pay, plus (B) Incentive Pay (determined in accordance with the
standards set forth in Section 1(h)).
(ii) (A) For a period of 12 months following the Termination Date (the
"Continuation Period"), the Company will arrange to provide the
Executive with Employee Benefits that are welfare benefits (but not
stock option, stock purchase, stock appreciation or similar
compensatory benefits) substantially similar to those that the
Executive was receiving or entitled to receive immediately prior to the
Termination Date (or, if greater, immediately prior to the reduction,
termination, or denial described in Section 3(b)(ii)), except that the
level of any such Employee Benefits to be provided to the Executive may
be reduced in the event of a corresponding reduction generally
applicable to all recipients of or participants in such Employee
Benefits, and (B) such Continuation Period will be considered service
with the Company for the purpose of determining service credits and
benefits due and payable to the Executive under the retirement income,
supplemental executive retirement and other benefit plans of the
Company or Subsidiary applicable to the Executive, his dependents or
his beneficiaries immediately prior to the Termination Date (or, if
greater, immediately prior to the reduction, termination or denial
described in Section 3(b)(ii)). If and to the extent that any benefit
described in subsection (A) or (B) of this Section 4(a)(ii) is not or
cannot be paid or provided under any policy,
6
<PAGE>
<PAGE>
plan, program or arrangement of the Company or any Subsidiary, as the
case may be, then the Company will itself pay or provide for the
payment to the Executive, his dependents and beneficiaries, of such
Employee Benefits along with, in the case of any benefit described in
subsection (A) of this Section 4(a)(ii) which is subject to tax because
it is not or cannot be paid or provided under any such policy, plan,
program or arrangement of the Company or any Subsidiary, an additional
amount such that after payment by the Executive, or his dependents or
beneficiaries, as the case may be, of all taxes so imposed, the
recipient retains an amount equal to such taxes. Without otherwise
limiting the purposes or effect of Section 5, Employee Benefits
otherwise receivable by the Executive pursuant to subsection (A) of
this Section 4(a)(ii) will be reduced to the extent comparable welfare
benefits are actually received by the Executive from another employer
during the Continuation Period following the Executive's Termination
Date, and any such benefits actually received by the Executive shall be
reported by the Executive to the Company.
(b) The parties' respective rights and obligations under this
Section 4 and under Section 5 will survive any termination or expiration of this
Agreement or the termination of the Executive's employment following a Change in
Control.
5. Limitation on Payments and Benefits. Notwithstanding any
provision of this Agreement to the contrary, if any amount or benefit to be paid
or provided under this Agreement would be an "Excess Parachute Payment," within
the meaning of Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code"), or any successor provision thereto, but for the application of
this sentence, then the payments and benefits to be paid or provided under this
Agreement shall be reduced to the minimum extent necessary (but in no event to
less than zero) so that no portion of any such payment or benefit, as so
reduced, constitutes an Excess Parachute Payment; provided, however, that the
foregoing reduction shall be made only if and to the extent that such reduction
would result in an increase in the aggregate payment and benefits to be
provided, determined on an after-tax basis (taking into account the excise tax
imposed pursuant to Section 4999 of the Code, or any successor provision
thereto, any tax imposed by any comparable provision of state law, and any
applicable federal, state and local income taxes). The determination of whether
any reduction in such payments or benefits to be provided under this Agreement
or otherwise is required pursuant to the preceding sentence shall be made at the
expense of the Company, if requested by the Executive or the Company, by the
Company's independent accountants. The fact that the Executive's right to
payments or benefits may be reduced by reason of the limitations contained in
this Section 5 shall not of itself limit or otherwise affect any other rights of
the Executive other than pursuant to this Agreement. In the event that any
payment or benefit intended to be provided under this Agreement or otherwise is
required to be reduced pursuant to this Section 5, the Executive shall be
entitled to designate the payments and/or benefits to be so reduced in order to
give effect to this Section 5. The Company shall provide the Executive with all
information reasonably requested by the Executive to permit the Executive to
make such designation. In the event that the Executive fails to make such
designation within 10 business days of the Termination Date, the Company may
effect such reduction in any manner it deems appropriate.
7
<PAGE>
<PAGE>
6. No Mitigation Obligation. The Company hereby acknowledges
that it will be difficult and may be impossible for the Executive to find
reasonably comparable employment following the Termination Date and that the
non-competition covenant contained in Section 7 will further limit the
employment opportunities for the Executive. Accordingly, the payment of the
severance compensation by the Company to the Executive in accordance with the
terms of this Agreement is hereby acknowledged by the Company to be reasonable,
and the Executive will not be required to mitigate the amount of any payment
provided for in this Agreement by seeking other employment or otherwise, nor
will any profits, income, earnings or other benefits from any source whatsoever
create any mitigation, offset, reduction or any other obligation on the part of
the Executive hereunder or otherwise, except as expressly provided in the last
sentence of Section 4(a)(ii).
7. Competitive Activity. During a period ending one year
following the Termination Date, if the Executive shall have received or shall be
receiving benefits under Section 4, the Executive shall not, without the prior
written consent of the Company, engage in any Competitive Activity.
8. Employment Rights. Nothing expressed or implied in this
Agreement will create any right or duty on the part of the Company or the
Executive to have the Executive remain in the employment of the Company or any
Subsidiary prior to or following any Change in Control. Any termination of
employment of the Executive or the removal of the Executive from the office or
position in the Company or any Subsidiary following the commencement of any
discussion with a third person that ultimately results in a Change in Control
shall be deemed to be a termination or removal of the Executive after a Change
in Control for purposes of this Agreement.
9. Withholding of Taxes. The Company may withhold from any
amounts payable under this Agreement all federal, state, city or other taxes as
the Company is required to withhold pursuant to any law or government regulation
or ruling.
10. Successors and Binding Agreement. (a) The Company will
require any successor (whether direct or indirect, by purchase, merger,
consolidation, reorganization or otherwise) to all or substantially all of the
business or assets of the Company, by agreement in form and substance
satisfactory to the Executive, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent the Company would be
required to perform if no such succession had taken place. This Agreement will
be binding upon and inure to the benefit of the Company and any successor to the
Company, including without limitation any persons acquiring directly or
indirectly all or substantially all of the business or assets of the Company
whether by purchase, merger, consolidation, reorganization or otherwise (and
such successor shall thereafter be deemed the "Company" for the purposes of this
Agreement), but will not otherwise be assignable, transferable or delegable by
the Company.
(b) This Agreement will inure to the benefit of and be
enforceable by the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees and legatees.
8
<PAGE>
<PAGE>
(c) This Agreement is personal in nature and neither of the
parties hereto shall, without the consent of the other, assign, transfer or
delegate this Agreement or any rights or obligations hereunder except as
expressly provided in Sections 10(a) and 10(b). Without limiting the generality
or effect of the foregoing, the Executive's right to receive payments hereunder
will not be assignable, transferable or delegable, whether by pledge, creation
of a security interest, or otherwise, other than by a transfer by Executive's
will or by the laws of descent and distribution and, in the event of any
attempted assignment or transfer contrary to this Section 10(c), the Company
shall have no liability to pay any amount so attempted to be assigned,
transferred or delegated.
11. Notices. For all purposes of this Agreement, all
communications, including without limitation notices, consents, requests or
approvals, required or permitted to be given hereunder will be in writing and
will be deemed to have been duly given when hand delivered or dispatched by
electronic facsimile transmission (with receipt thereof orally confirmed), or
five business days after having been mailed by United States registered or
certified mail, return receipt requested, postage prepaid, or three business
days after having been sent by a nationally recognized overnight courier service
such as Federal Express, UPS, or Purolator, addressed to the Company (to the
attention of the Secretary of the Company) at its principal executive office and
to the Executive at his principal residence, or to such other address as any
party may have furnished to the other in writing and in accordance herewith,
except that notices of changes of address shall be effective only upon receipt.
12. Governing Law. The validity, interpretation, construction
and performance of this Agreement will be governed by and construed in
accordance with the substantive laws of the State of Texas, without giving
effect to the principles of conflict of laws of such State.
13. Validity. If any provision of this Agreement or the
application of any provision hereof to any person or circumstances is held
invalid, unenforceable or otherwise illegal, the remainder of this Agreement and
the application of such provision to any other person or circumstances will not
be affected, and the provision so held to be invalid, unenforceable or otherwise
illegal will be reformed to the extent (and only to the extent) necessary to
make it enforceable, valid or legal.
14. Miscellaneous. No provision of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing signed by the Executive and the Company. No waiver by
either party hereto at any time of any breach by the other party hereto or
compliance with any condition or provision of this Agreement to be performed by
such other party will be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, expressed or implied with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement. References to Sections are to references to
Sections of this Agreement.
9
<PAGE>
<PAGE>
15. Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be duly executed and delivered as of the date first above written.
AUTOBOND ACCEPTANCE CORPORATION
By:
-----------------------------
-----------------------------
Manuel A. Gonzalez
10
<PAGE>
<PAGE>
INDENTURE dated as of January 15, 1998,
between AUTOBOND ACCEPTANCE CORPORATION, a Texas
corporation (the "Company"), and BankBoston, N.A., as
Agent (the "Agent").
The Company has duly authorized the execution and delivery of this
Indenture to provide for the creation of an issue of 15% Senior Subordinated
Notes Due 2001 (the "Series A Securities") and its 15% Convertible Subordinated
Notes Due 2001 (the "Series B Securities" and together with the Series A
Securities, the "Securities"), of substantially the tenor and amount hereinafter
set forth, and to provide therefor the Company has duly authorized the execution
and delivery of this Indenture.
Each party agrees as follows for the benefit of the other party and
for the equal and ratable benefit of the Holders of the Securities:
ARTICLE 1.
Definitions and Incorporation by Reference
SECTION 1.1 Definitions.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) used or useful in a Related Business, (ii) the
Capital Stock of a Person that becomes a Restricted Subsidiary as a result of
the acquisition of such Capital Stock by the Company or another Restricted
Subsidiary, (iii) Capital Stock constituting a minority interest in any Person
that at such time is a Restricted Subsidiary; provided, however, that any such
Restricted Subsidiary described in clause (ii) or (iii) above is primarily
engaged in a Related Business or (iv) the Capital Stock or Indebtedness of a
Strategic Alliance Client.
"Affiliate" of any specified Person means any other Person, directly
or indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 51% or more of the voting securities of a Person shall
be deemed to be control.
"Agent" means the party named as such in this Indenture until a
successor replaces it and, thereafter, means the successor.
"Asset Disposition" means any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions) of
assets (of any kind, nature, or description) by the Company or any Subsidiary,
including any disposition by means of a
<PAGE>
<PAGE>
merger, consolidation or similar transaction.
"Associate" of any Person, means (1) any corporation or organization
(other than the Company or a Subsidiary of the Company) of which such Person is
an officer, employee or partner or is, directly or indirectly, the beneficial
owner of 10% or more of any class of equity securities, (2) any trust or other
estate in which such Person has a substantial beneficial interest or as to which
such Person serves as trustee or in a similar fiduciary capacity, and (3) any
relative or spouse of such Person, or any relative of such spouse, who has the
same home as such Person or who is a director or officer of the Company or any
of its Affiliates.
"Average Life" means, as of the date of determination, with respect to
any Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the
sum of the products of numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Board of Directors" means the Board of Directors of the Company or
any committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means, (i) in the case of a corporation,
corporate stock, (ii) in the case of an association, trust or business entity,
any and all shares, interests, participations, rights or other equivalents
(however designated) of corporate stock, (iii) in the case of a partnership,
partnership interests (whether general or limited) and (iv) any other interest
or participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person.
"Change of Control" means the occurrence of any of the following: (i)
the sale, lease, transfer, conveyance or other disposition, in one or a series
of related transactions, of all or substantially all of the assets of the
Company to any Person, other than any of the Principals, (ii) the adoption of a
plan relating to the liquidation or dissolution of the Company, or (iii) the
acquisition by any Person, together with any Affiliates or Associates, other
than any of the Principals, of a direct or indirect interest in more than 51% of
the voting power of the voting stock of the Company, by way of merger or
consolidation or otherwise.
2
<PAGE>
<PAGE>
"Class B Indebtedness" mean non-recourse indebtedness of the Company's
securitization subsidiaries secured by and payable from Class B Certificates.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" means any stock of any class of the Company which has
no preference in respect of dividends or of amounts payable in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the Company
and which is not subject to redemption by the Company. However, subject to the
provisions of Section 8.11, shares issuable on conversion of Series B Securities
shall include only shares of the class designated as Common Stock of the Company
at the date of this instrument (or, at the option of the Holder, non-voting
Common Stock) or shares of any class or classes resulting from any
reclassification or reclassifications thereof and which have no preference in
respect of dividends or of amounts payable in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company and which are
not subject to redemption by the Company; provided that if any time there shall
be more than one such resulting class, the shares of each such class then so
issuable shall be substantially in the proportion which the total number of
shares of such class resulting from all such reclassifications bears to the
total number of shares of all such classes resulting from all such
reclassifications.
"Company" means the party named as such in this Indenture until a
successor replaces it and, thereafter, means the successor.
"Consolidated Leverage Ratio" as of any date of determination means
the ratio of (i) the aggregate amount of all Indebtedness of the Company and its
Restricted Subsidiaries on a consolidated basis, excluding Excluded Debt, to
(ii) the Consolidated Net Worth of the Company.
"Consolidated Net Income" means, for any period, the Net Income of the
Company and its consolidated Subsidiaries.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company for which financial statements are available, as
(i) the par or stated value of all outstanding Capital Stock of the Company plus
(ii) paid-in capital or capital surplus relating to such Capital Stock plus
(iii) any retained earnings or earned surplus.
"Consolidated Restricted Subsidiary" means a Restricted Subsidiary (i)
80% of the Capital Stock and 80% of the Voting Stock of which is owned by the
Company or one or more Consolidated Restricted Subsidiaries and (ii) which is
treated as a consolidated subsidiary for the purpose of the Company's U.S.
Federal income tax reporting.
"Cumulative Repossession Ratio" means as of any date of determination,
the cumulative static pool repossession percentage determined by a fraction (i)
the
3
<PAGE>
<PAGE>
numerator of which is equal to the aggregate unpaid principal balance of all
Receivables which have been repossessed from the related cut-off date through
the end of the most recent calendar month and (ii) the denominator of which is
the unpaid principal balance of all Receivables as of such cut-off date.
"Current Market Price" shall have the meaning specified in Section
8.04(6).
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency option, currency swap agreement or other similar agreement to
which such Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time
or both would be, an Event of Default.
"EBITDA to Interest Expense" means, for any period, the ratio of the
Company's Consolidated Net Income (as increased by interest expense, provision
for taxes, depreciation and amortization to the extent included in determining
net income) to the interest expense for such period.
"Excess Spread" means, over the life of a "pool" of Receivables that
have been sold by a Person to a trust or other Person in a securitization or
sale, the rights retained by such Person or its Restricted Subsidiaries at or
subsequent to the closing of such securitization or sale to receive cash flows
attributable to such "pool."
"Excess Spread Receivables" of a Person means the contractual or
certificated right to Excess Spread capitalized on such Person's consolidated
balance sheet (the amount of which shall be the present value of the Excess
Spread, calculated in accordance with GAAP).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excluded Debt" means Indebtedness of the Company which is:
(1) Permitted Warehouse Indebtedness;
(2) Indebtedness owed to and held by the Company or a Consolidated
Restricted Subsidiary; provided, however, that any subsequent issuance or
transfer of any Capital Stock which results in any such Consolidated
Restricted Subsidiary ceasing to be a Consolidated Restricted Subsidiary or
any subsequent transfer of such Indebtedness (other than to the Company or
another Consolidated Restricted Subsidiary) shall be deemed, in each case,
to constitute the incurrence of such Indebtedness by the Company;
(3) Hedging Obligations with respect to warehouse or repurchase
facilities;
(4) Class B Indebtedness to the extent constituting Non-Recourse
4
<PAGE>
<PAGE>
Debt; and
(5) Non-Recourse Debt.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect from time to time, as set forth (i) in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants, (ii) in the statements and
pronouncements of the Financial Accounting Standards Board and (iii) in such
other statements by such other entity as approved by a significant segment of
the accounting profession.
"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness or other obligation
of any Person; provided, however, that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business.
"Hedging Obligations" of any Person means the obligations of such
Person pursuant to any Interest Rate Agreement.
"Holder" or "Securityholder" means the Person in whose name a Security
is registered on the Registrar's books.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable; (ii) all Capital
Lease Obligations of such Person; (iii) all obligations of such Person issued or
assumed as the deferred purchase price of property, all conditional sale
obligations of such Person and all obligations of such Person under any title
retention agreement (but excluding trade accounts payable and expense accruals
arising in the ordinary course of business); (iv) all obligations of such Person
for the reimbursement of any obligor on any letter of credit, banker's
acceptance or similar credit transaction (other than obligations with respect to
letters of credit securing obligations (other than obligations described in (i)
through (iii) above) entered into in the ordinary course of business of such
Person to the extent such letters of credit are not drawn upon or, if and to the
extent drawn upon, such drawing is reimbursed no later than the tenth Business
Day following receipt by such Person of a demand for reimbursement following
payment on the letter of credit); (v) accrued net liabilities under Hedging
Obligations; (vi) Warehouse Indebtedness; (vii) in connection with each sale by
such Person of any Receivables, the maximum aggregate contractual claim (if any)
that the purchaser thereof could have against such Person if the amounts
anticipated at the time of such sale to be received by such purchaser in
connection with such Receivables are not received by such purchaser; (viii) all
obligations of the type referred to in clauses (i) through (vii) of other
Persons and all dividends of other Persons for the payment of which, in either
case, such Person is responsible or liable, directly or indirectly, as obligor,
guarantor or otherwise, including by means of any Guarantee; and (ix) all
obligations of the type referred to in clauses (i) through (viii) of other
Persons secured by any Lien on any property or asset of
5
<PAGE>
<PAGE>
such Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value of such
property or assets or the amount of the obligation so secured. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at such
date of all unconditional obligations as described above and the maximum
liability, upon the occurrence of the contingency giving rise to the obligation,
of any contingent obligations at such date. Notwithstanding the foregoing, any
securities issued in a securitization by a special purpose corporation
(including a Subsidiary) or similar entity formed by or on behalf of a Person
and to which Receivables or Excess Spread Receivables have been sold or
otherwise transferred by or on behalf of such Person or its Subsidiaries shall
not be treated as Indebtedness of such Person or its Subsidiaries under this
Indenture, regardless of whether such securities are treated as indebtedness for
tax purposes.
"Indenture" means this Indenture as amended or supplemented from time
to time.
"Initial Purchaser" means BancBoston Investments, Inc., a
Massachusetts corporation.
"interest," when used with respect to any Security, means the amount
of all interest accruing on such Security.
"Interest Rate Agreement" means any interest rate swap agreement,
interest rate cap agreement, repurchase agreement, futures contract or other
financial agreement or arrangement designed to protect the Company or any
Restricted Subsidiary against fluctuations in interest rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to (a) officers, directors or employees made in the
ordinary course of business for commissions, travel or similar activities, or
(b) customers in the ordinary course of business that are recorded as trade
accounts on the balance sheet of the lender) or other extensions of credit
(including by way of Guarantee or similar arrangement) or capital contribution
to (by means of any transfer of cash or other property to others or any payment
for property or services for the account or use of others), or any purchase or
acquisition of Capital Stock, Indebtedness or other similar instruments issued
by such Person. For purposes of the definition of "Unrestricted Subsidiary", the
definition of "Restricted Payment" and Section 3.05, (i) "Investment" shall
include the portion (proportionate to the Company's equity interest in such
Subsidiary) of the fair market value of the net assets of any Subsidiary of the
Company at the time that such Subsidiary is designated an Unrestricted
Subsidiary; provided, however, that upon a redesignation of such Subsidiary as a
Restricted Subsidiary, the Company shall be deemed to continue to have a
permanent "Investment" in an Unrestricted Subsidiary equal to an amount (if
positive) equal to (x) the Company's "Investment" in such Subsidiary at the time
of such redesignation less (y) the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value of the net assets
of such Subsidiary at the time of such redesignation; and (ii) any property
transferred to or from an Unrestricted Subsidiary shall be valued at its fair
market value at the time of such transfer, in each case as
6
<PAGE>
<PAGE>
determined in good faith by the Board of Directors.
"Issue Date" means the date on which the Securities are originally
issued.
"Lien" means any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (including any conditional sale or other title
retention agreement or lease in the nature thereof).
"Net Cash Proceeds," with respect to any issuance or sale of Capital
Stock, means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Net Income" means, with respect to any Person, the net income (loss)
of such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provisions for taxes on such gain, realized in
connection with (a) the extinguishment of any Indebtedness of such Person or any
of its Restricted Subsidiaries or (b) currency exchange transactions not in the
ordinary course of business and (ii) any extraordinary gain (but not loss),
together with any related provisions for taxes on such extraordinary gain.
"Non-Recourse Debt" means indebtedness (i) as to which neither the
Company nor any of its Restricted Subsidiaries (a) provides credit support of
any kind (including any undertaking, agreement or instrument that would
constitute Indebtedness), (b) is directly or indirectly liable (as a guarantor
or otherwise), or (c) constitutes the lender; and (ii) no default with respect
to which (including any rights that the holders thereof may have to take
enforcement action against and Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness (other than
the Notes being offered hereby) of the Company or any of its Restricted
Subsidiaries to declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its stated maturity; and
(iii) as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of the Company or any of its Restricted
Subsidiaries other than the assets pledged to secure such Indebtedness.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Officer" means the Chairman of the Board, the Vice Chairman, the
President, the Chief Financial Officer, or the Secretary of the Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
7
<PAGE>
<PAGE>
acceptable to the Agent. The counsel may be an employee of or counsel to the
Company or the Agent.
"Permitted Investment" means an Investment by the Company or any
Restricted Subsidiary in (i) a Restricted Subsidiary or a Person that will, upon
the making of such Investment, become a Restricted Subsidiary; provided,
however, that the primary business of such Restricted Subsidiary is a Related
Business; (ii) a Strategic Alliance Client to the extent such Investment
consists of options, warrants or other securities that are convertible or
exchangeable for equity securities of such Strategic Alliance Client and is
received by the Company or a Restricted Subsidiary without the payment of any
consideration other than the concurrent provision by the Company or such
Restricted Subsidiary to such Strategic Alliance Client of origination,
servicing, financing or asset securitization expertise; (iii) another Person if
as a result of such Investment such other Person is merged or consolidated with
or into, or transfers or conveys all or substantially all its assets to, the
Company or a Restricted Subsidiary; provided, however, that such Person's
primary business is a Related Business; (iv) Temporary Cash Investments; (v)
receivables owing to the Company or any Restricted Subsidiary if created or
acquired in the ordinary course of business and payable or dischargeable in
accordance with customary trade terms; (vi) payroll, travel and similar advances
to cover matters that are expected at the time of such advances ultimately to be
treated as expenses for accounting purposes and that are made in the ordinary
course of business; (vii) loans or advances to employees made in the ordinary
course of business consistent with past practices of the Company or such
Restricted Subsidiary and not exceeding $1 million on the aggregate; (viii)
stock, obligations or securities received in settlement of debts created in the
ordinary course of business and owing to the Company or any Restricted
Subsidiary or in satisfaction of judgments; (ix) any Person to the extent such
Investment represents the non-cash portion of the consideration received for an
Asset Disposition as permitted pursuant to Section 3.07; (x) Receivables; (xi) a
Strategic Alliance Client to the extent such Investment consists of (A)
Indebtedness of such Strategic Alliance Client that is secured by Receivables
owned by such Strategic Alliance Client in an aggregate principal amount at any
time outstanding not to exceed 100% of the aggregate market value of such
Receivables; provided, however, that such Receivables are eligible to be
characterized under GAAP as held for sale on the balance sheet of such Strategic
Alliance Client and such Indebtedness has not been outstanding in excess of 364
days; and (B) Indebtedness of such Strategic Alliance Client that is secured by
Excess Spread Receivables owned by such Strategic Alliance Client; provided,
however, that such Excess Spread Receivables are attributed solely to one or
more "pools" of Receivables that were securitized in one or more transactions in
which the Company or its Restricted Subsidiaries either acted as underwriters or
placement agent or provided all or a portion of the financing for such "pool"
prior to such securitization; and (xii) Excess Spread Receivables; provided,
however, that such Excess Spread Receivables represent interests in one or more
"pools" of Receivables that were securitized in one or more transactions in
which the Company or its Restricted Subsidiaries acted as sponsor, underwriter
or placement agent or provided all or a portion of the financing for such "pool"
prior to such securitization.
"Permitted Liens" means, with respect to any Person, (a) pledges or
deposits by such Person under worker's compensation laws, unemployment insurance
8
<PAGE>
<PAGE>
laws or similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of Indebtedness) or leases to
which such Person is a party, or deposits to secure public or statutory
obligations of such Person or deposits of cash or United States government
bonds to secure surety or appeal bonds to which such Person is a party, or
deposits as security for contested taxes or import duties or for the payment
of rent, in each case incurred in the ordinary course of business; (b) Liens
imposed by law, such as carriers', warehousemen's and mechanics' Liens, in
each case for sums not yet due or being contested in good faith by appropriate
proceedings or other Liens arising out of judgments or awards against such
Person with respect to which such Person shall then be proceeding with an appeal
or other proceedings for review; (c) Liens for property taxes not yet subject
to penalties for non-payment or which are being contested in good faith and by
appropriate proceedings; (d) Liens in favor of issuers of surety bonds or
letters of credit issued pursuant to the request of and for the account of
such Person in the ordinary course of its business; provided, however, that
such letters of credit do not constitute Indebtedness; (e) minor survey
exceptions, minor encumbrances, easements or reservations of, or rights of
others for, licenses, rights of way, sewers, electric lines, telegraph and
telephone lines and other similar purposes, or zoning or other restrictions
as to the use of real property or Liens incidental to the conduct of the
business of such Person or to the ownership of its properties which were not
incurred in connection with Indebtedness and which do not in the aggregate
materially adversely affect the value of said properties or materially impair
their use in the operation of the business of such Person; (f) Liens securing
Indebtedness incurred to finance the construction, purchase or lease of, or
repairs, improvements or additions to, property of such Person (but excluding
Capital Stock of another Person); (g) Liens on Receivables owned by the Company
or a Restricted Subsidiary, as the case may be, to secure Permitted Warehouse
Indebtedness or Class B Indebtedness; (h) Liens existing on the Issue Date on
Excess Spread Receivables to secure the Company's 18% Convertible Secured Notes;
(i) Liens on property or shares of Capital Stock of another Person at the time
such other Person becomes a Subsidiary of such Person; (j) Liens on property at
the time such Person or any of its Subsidiaries acquires the property, including
any acquisition by means of a merger or consolidation with or into such Person
or a Subsidiary of such Person; (k) Liens securing Indebtedness or other
obligations of a Subsidiary of such Person owing to such Person or a
Consolidated Restricted Subsidiary of such Person; (l) Liens securing Hedging
Obligations; (m) Liens on cash or other assets securing Warehouse Indebtedness
(other than Permitted Warehouse Indebtedness) of the Company or its Restricted
Subsidiaries; (n) Liens to secure any Refinancing (or successive Refinancings)
as a whole, or in part, of any Indebtedness secured by any Lien referred to in
the foregoing clauses (f), (h), (i), or (j); (o) Liens incurred in the ordinary
course of business of the Company or any Restricted Subsidiary of the Company
with respect to obligations that do not exceed $2.0 million at any one time
outstanding and that (i) are not incurred in connection with the borrowing of
money or the obtaining of advances or credit (other than trade credit in the
ordinary course of business) and (ii) do not in the aggregate materially detract
from the value of the property or materially impair the use thereof in the
operation of business by the Company or such Restricted Subsidiary; and (p)
Liens granted under this Indenture; provided, however, that (x) such new Lien
specified in (n) above shall be limited to all or part of the same property that
secured the original Lien (plus improvements to or on such property) and (y) the
9
<PAGE>
<PAGE>
Indebtedness secured by such Lien at such time is not increased to any amount
greater than the sum of (A) the outstanding principal amount or, if greater,
committed amount of the Indebtedness described under clauses (f), (h), (i) or
(j), as the case may be, at the time the original Lien became a Permitted Lien
and (B) an amount necessary to pay any fees and expenses, including premiums,
related to such refinancing, refunding, extension, renewal or replacement.
"Permitted Warehouse Indebtedness" means Warehouse Indebtedness in
connection with a Warehouse Facility; provided, however, that any such
Indebtedness has not been outstanding in excess of 364 days.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, limited liability company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any Person,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such Person,
over shares of Capital Stock of any other class of such Person.
"Principals" means each of William O. Winsauer, Adrian Katz and John
S. Winsauer.
"Purchase Agreement" means the Purchase Agreement dated as of January
30, 1998, between the Company and the Initial Purchaser.
"Qualified Institutional Buyer" or "QIB" shall have the meaning
specified in Rule 144A under the Securities Act.
"Receivables" means consumer loans, leases and receivables acquired by
the Company, any Restricted Subsidiary or a Strategic Alliance Client in the
ordinary course of business; provided, however, that for purposes of determining
the amount of a Receivable at any time, such amount shall be determined in
accordance with GAAP, consistently applied, as of the most recent practicable
date.
"Redemption Date", when used with respect to any Security to be
redeemed, means the date fixed for such redemption by or pursuant to this
Indenture.
"Redemption Price", when used with respect to any Security to be
redeemed, means the price at which it is to be redeemed pursuant to this
Indenture.
"Refinance" means, in respect of any Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue
other Indebtedness in exchange or replacement for, such Indebtedness.
"Refinanced" and "Refinancing" shall have correlative meanings.
10
<PAGE>
<PAGE>
"Refinancing Indebtedness" means Indebtedness incurred by the Company
or any Restricted Subsidiary that Refinances any Indebtedness of the Company or
such Restricted Subsidiary existing on the Issue Date or incurred in compliance
with this Indenture, including Indebtedness that Refinances Refinancing
Indebtedness; provided, however, that (a) such Refinancing Indebtedness has an
aggregate principal amount (or if incurred with original issue discount, an
aggregate issue price) that is equal to or less than the aggregate principal
amount (or if Incurred with original issue discount, the aggregate accreted
value) then outstanding or committed (plus fees and expenses, including any
premium and defeasance costs) under the Indebtedness being Refinanced, (b) such
Refinancing Indebtedness has a final maturity date later than the final maturity
date of, and has a weighted Average Life equal to or greater than the weighted
Average Life of, such Refinancing Indebtedness and (c) if the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded is subordinated in
right of payment of the Securities, such Refinancing Indebtedness is
subordinated in right of payment to the Securities on terms at least as
favorable to the Holders of Securities as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded.
"Related Business" means any consumer finance business or any consumer
financial services business.
"Restricted Payment" with respect to any Person means (i) the
declaration or payment of any dividends or any other distributions of any sort
in respect of its Capital Stock (including any payment in connection with any
merger or consolidation involving such Person) or similar payment to the direct
or indirect holders of its Capital Stock (other than (A) dividends or
distributions payable solely in its Capital Stock, (B) dividends or
distributions payable solely to the Company or a Restricted Subsidiary, (C) so
long as no Event of Default has occurred and is continuing, dividends or
distributions on the Company's ___% Series A Cumulative Preferred Stock (subject
to the registration statement on Form #S-1 (No. 333-41257), as amended solely to
effectuate the issuance thereof) and (D) pro rata dividends or other
distributions made by a Subsidiary that is not a Wholly Owned Subsidiary to
minority stockholders (or owners of an equivalent interest in the case of a
Subsidiary that is an entity other than a corporation)), (ii) the purchase,
redemption or other acquisition or retirement for value of any Capital Stock of
the Company held by any Person or of any Capital Stock of a Restricted
Subsidiary held by any Affiliate of the Company (other than a Restricted
Subsidiary), including the exercise of any option to exchange any Capital Stock
(other than into Capital Stock of the Company), (iii) any payments due on
Subordinated Obligations, or the purchase, repurchase, redemption, defeasance or
other acquisition or retirement for value, prior to scheduled maturity,
scheduled repayment or scheduled sinking fund payment of any Subordinated
Obligations (other than the purchase, repurchase or other acquisition of
Subordinated Obligations purchased in anticipation of satisfying a sinking fund
obligation, principal installment or final maturity, in each case due within one
year of the date of acquisition) or (iv) the making of any Investment (other
than a Permitted Investment) in any Person.
11
<PAGE>
<PAGE>
"Restricted Subsidiary" means any Subsidiary of the Company that is
not an Unrestricted Subsidiary.
"Rule 144A" means Rule 144A under the Securities Act.
"SEC" means the Securities and Exchange Commission.
"Securities" has the meaning stated in the first recital of this
Indenture. "Securities Act" means the Securities Act of 1933.
"Senior Indebtedness" means the principal, premium, if any, and unpaid
interest on (i) any Indebtedness for borrowed money of the Company now
outstanding or hereafter incurred or assumed, (ii) all deferrals, renewals,
extensions and refundings of any such Indebtedness for borrowed money, (iii)
obligations of the Company under foreign exchange contracts, and (iv)
reimbursement obligations of the Company under bankers acceptances, letters of
credit, and bid, performance and surety bonds; provided, that the following
shall not constitute Senior Indebtedness: (a) any Indebtedness for borrowed
money as to which, in the instrument creating or evidencing the same or pursuant
to which the same is outstanding, it is expressly provided that such
Indebtedness is subordinate in right of payment to all other indebtedness of the
Company, (b) any Indebtedness for borrowed money which by its terms refers
explicitly to the Securities issued hereunder and states that such Indebtedness
for borrowed money shall not be senior in right of payment thereto, (c)
Indebtedness for borrowed money of the Company in respect of the Securities; and
(d) Indebtedness incurred by the Company which results in the occurrence of a
Default or Event of Default hereunder.
"Significant Subsidiary" means any Restricted Subsidiary that would be
a "Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any obligation, the date
specified in such security as the fixed date on which the final payment of
principal of such obligation is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such obligation at the option of the holder thereof upon the
happening of any contingency unless such contingency has occurred).
"Strategic Alliance Client" means any Person (other than a Restricted
Subsidiary) engaged in a Related Business to which the Company provides, or
reasonably expects to provide, origination, servicing, financing or asset
securitization expertise.
"Subordinated Obligation" means any Indebtedness of the Company
(whether outstanding on the Issue Date or thereafter incurred) which is pari
passu, subordinate or junior in right of payment to the Series A or Series B
Securities pursuant to a written agreement to that effect.
"Subsidiary" means, in respect of any Person, any corporation,
association,
12
<PAGE>
<PAGE>
partnership or other business entity of which more than 50% of the total voting
power of shares of Capital Stock or other interests (including partnership
interests) entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by (i) such Person, (ii) such
Person and one or more Subsidiaries of such Person or (iii) one or more
Subsidiaries of such Person.
"Temporary Cash Investments" means any of the following: (i) any
investment in direct obligations of the United States of America or any agency
thereof or obligations guaranteed by the United States of America or any agency
thereof, (ii) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 180 days of the date of acquisition
thereof issued by a bank or trust company that is not an Affiliate of the
Company and which is organized under the laws of the United States of America,
any state thereof or any foreign country recognized by the United States, and
which bank or trust company has capital, surplus and undivided profits
aggregating in excess of $50,000,000 (or the foreign currency equivalent
thereof) and has outstanding debt which is rated "A" (or such similar equivalent
rating) or higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor, (iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above, (iv)
investments in commercial paper, maturing not more than 90 days after the date
of acquisition, issued by a corporation (other than an Affiliate of the Company)
organized and in existence under the laws of the United States of America or any
foreign country recognized by the United States of America with a rating at the
time as of which any investment therein is made of "P-1" (or higher) according
to Moody's Investors Service, Inc. or "A-1" (or higher) according to Standard
and Poor's Ratings Group, and (v) investments in securities with maturities of
six months or less from the date of acquisition issued or fully guaranteed by
any state, commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A" by
Standard & Poor's Ratings Group or "A" by Moody's Investors Service, Inc.
"Uniform Commercial Code" means the Texas Uniform Commercial Code as
in effect from time to time.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that
at the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary
of the Company (including any newly acquired or newly formed Subsidiary) to be
an Unrestricted Subsidiary, but only so long as such Subsidiary (a) has no
Indebtedness other than Non-Recourse Debt, (b) is not party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time
13
<PAGE>
<PAGE>
from Persons who are not Affiliates of the Company, (c) is a person with respect
to which neither the Company nor any of its Restricted Subsidiaries has any
direct or indirect obligation (i) to subscribe for additional equity or (ii) to
maintain or preserve such Person's financial condition or to cause such Person
to achieve any specified levels of operating results, and (d) has not guaranteed
or otherwise directly or indirectly provided credit support for any Indebtedness
of the Company or any of its Restricted Subsidiaries. Any such designation by
the Board of Directors shall be evidenced by the Company to the Agent by
promptly filing with the Agent a copy of the board resolution giving effect to
such designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or
certificates representing an ownership interest in such obligations) of the
United States of America (including any agency or instrumentality thereof) for
the payment of which the full faith and credit of the United States of America
is pledged and which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests or membership interests) of such
Person then outstanding and normally entitled (without regard to the occurrence
of any contingency) to vote in the election of directors, managers or trustees
thereof.
"Warehouse Facility" means any funding arrangement with a financial
institution or other lender or purchaser exclusively to finance the acquisition
of Receivables by the Company, a Subsidiary of the Company or a Strategic
Alliance Client for the purpose of pooling such Receivables prior to
securitization or sale in the ordinary course of business, including purchase
and sale facilities pursuant to which the Company or a Subsidiary of the Company
sells Receivables or debt of a Strategic Alliance Client secured by Receivables
owned or financed by such Strategic Alliance Client to a financial institution
and retains a right of first refusal upon the subsequent resale of such
Receivables or debt by such financial institution.
"Warehouse Indebtedness" means advances outstanding to the borrower
under a Warehouse Facility.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the
Capital Stock of which (other than directors' qualifying shares and shares held
by other Persons to the extent such shares are required by applicable law to be
held by a Person other than the Company or a Restricted Subsidiary) is owned by
the Company or one or more Wholly Owned Subsidiaries.
SECTION 1.2 Other Definitions.
Defined in
Term Section
"Bankruptcy Law"..............................................5.01
"Custodian"...................................................5.01
14
<PAGE>
<PAGE>
"Event of Default"............................................5.01
"Legal Holiday"..............................................11.05
"Registrar"...................................................2.03
"Successor Company"...........................................4.01
SECTION 1.3 Rules of Construction. Unless the context otherwise
requires:
(a) a term has the meaning assigned to it;
(b) an accounting term not otherwise defined has the meaning assigned
to it in accordance with GAAP;
(c) "or" is not exclusive;
(d) "including" means including without limitation;
(e) words in the singular include the plural and words in the plural
include the singular;
(f) unsecured Indebtedness shall not be deemed to be subordinate or
junior to Secured Indebtedness merely by virtue of its nature as unsecured
Indebtedness;
(g) the principal amount of any noninterest bearing or other discount
security at any date shall be the principal amount thereof that would be
shown on a balance sheet of the issuer dated such date prepared in
accordance with GAAP and accretion of principal on such security shall be
deemed to be the incurrence of Indebtedness; and
(h) the principal amount of any Preferred Stock shall be (i) the
maximum liquidation value of such Preferred Stock or (ii) the maximum
mandatory redemption or mandatory repurchase price with respect to such
Preferred Stock, whichever is greater.
ARTICLE 2.
The Securities
SECTION 2.1 Form and Dating. The Series A Securities shall be
substantially in the form of Exhibit A which is hereby incorporated in and
expressly made a part of this Indenture. The Series B Securities shall be
substantially in the form of Exhibit B, which is hereby incorporated in and
expressly made a part of this Indenture. In addition, the Series A Securities
and Series B Securities may be evidenced by a combined certificate. The
Securities may have notations, legends or endorsements required by law, stock
exchange rule, agreements to which the Company is subject, if any, or usage
(provided that any such notation, legend or endorsement is in a form acceptable
to the
15
<PAGE>
<PAGE>
Company and the Agent). Each Security shall be dated the date of its
authentication. The terms of the Securities set forth in Exhibit A and Exhibit B
are part of the terms of this Indenture.
The Securities are being sold by the Company to the Initial Purchaser
pursuant to the Purchase Agreement.
SECTION 2.2 Execution and Authentication. Any Officer may sign the
Securities for the Company by manual signature.
The aggregate principal amount outstanding at any time may not exceed
$6,284,075.40 for the Series A Securities and $1,215,924.60 for the Series B
Securities, in each case except as provided in Section 2.07, and except that the
combined aggregate principal amount of the Securities may be increased to
$10,000,000 pursuant to the Purchase Agreement.
SECTION 2.3 Registrar and Paying Agent. The Company shall maintain an
office or agency where Securities may be presented for registration of transfer
or for exchange (the "Registrar") and an office or agency where Securities may
be presented for payment (the "Paying Agent"). The Registrar shall keep a
register of the Securities and of their transfer and exchange. The Company may
have one or more co-registrars and one or more additional paying agents. The
term "Paying Agent" includes any additional paying agent.
The Company shall enter into an appropriate agency agreement with any
Registrar, Paying Agent or co-registrar not a party to this Indenture. The
agreement shall implement the provisions of this Indenture that relate to such
agent. The Company shall notify the Agent of the name and address of any such
agent. If the Company fails to maintain a Registrar or Paying Agent, the Agent
shall act as such and shall be entitled to appropriate compensation therefor
pursuant to Section 6.07. The Company may act as Paying Agent, Registrar,
co-registrar or transfer agent.
The Company initially will act as Paying Agent and appoints the Agent
as Registrar in connection with the Securities.
SECTION 2.4 Paying Agent. By 11:00 a.m., New York time, on each due
date of the principal and interest on any Security, the Company shall deposit
with the Paying Agent a sum sufficient to pay such principal and interest when
so becoming due. The Company shall require each Paying Agent (other than the
Agent) to agree in writing that the Paying Agent shall hold in trust for the
benefit of Securityholders all money held by the Paying Agent for the payment of
principal of or interest on the Securities and shall notify the Agent of any
default by the Company in making any such payment. The Paying Agent shall make
payments to Holders in immediately available funds when due. The Company at any
time may require a Paying Agent to pay all money held by it to the Agent and to
account for any funds disbursed by the Paying Agent. Upon complying with this
Section, the Paying Agent shall have no further liability for the money paid to
the Agent.
16
<PAGE>
<PAGE>
SECTION 2.5 Securityholder Lists. The Agent shall preserve in as
current a form as is reasonably practicable the most recent list available to it
of the names and addresses of Securityholders. If the Agent is not the
Registrar, the Company shall furnish to the Agent, in writing at least five
Business Days before each interest payment date and at such other times as the
Agent may request in writing, a list in such form and as of such date as the
Agent may reasonably require of the names and addresses of Securityholders.
SECTION 2.6 Transfer and Exchange. The Securities shall be issued in
registered form and shall be transferable only upon the surrender of a Security
for registration of transfer. Subject to the restrictions on transfer set forth
in Section 2.12, when a Security is presented to the Registrar or a co-registrar
with a request to register a transfer, the Registrar shall register the transfer
as requested if the requirements of the Uniform Commercial Code are met. To
permit registration of transfers and exchanges, the Company shall execute
Securities at the Registrar's or co-registrar's request. The Company may require
payment of a sum sufficient to pay all taxes, assessments or other governmental
charges in connection with any transfer or exchange pursuant to this Section.
The Company shall not be required to make and the Registrar need not register
transfers or exchanges of Securities for a period of 15 days before an interest
payment date.
Prior to the due presentation for registration of transfer of any
Security, the Company, the Agent, the Paying Agent, the Registrar or any
co-registrar may deem and treat the person in whose name a Security is
registered as the absolute owner of such Security for the purpose of receiving
payment of principal of and interest on such Security and for all other purposes
whatsoever, whether or not such Security is overdue, and none of the Company,
the Agent, the Paying Agent, the Registrar or any co-registrar shall be affected
by notice to the contrary.
SECTION 2.7 Replacement Securities. If a mutilated Security is
surrendered to the Registrar or if the Holder of a Security claims that the
Security has been lost, destroyed or wrongfully taken, the Company shall issue a
replacement Security if the requirements of the Uniform Commercial Code are met
and the Holder satisfies any other reasonable requirements of the Agent. If
required by the Agent or the Company, such Holder shall furnish an indemnity
agreement sufficient in the reasonable judgment of the Company and the Agent to
protect the Company, the Agent, the Paying Agent, the Registrar and any
co-registrar from any loss which any of them may suffer if a Security is
replaced. The Company and the Agent may charge the Holder for their expenses in
replacing a Security.
SECTION 2.8 Outstanding Securities. Securities outstanding at any time
are all Securities executed by the Company except for those delivered to it for
cancellation and those described in this Section as not outstanding. A Security
does not cease to be outstanding because the Company or an Affiliate of the
Company holds the Security.
If a Security is replaced pursuant to Section 2.07, it ceases to be
17
<PAGE>
<PAGE>
outstanding unless the Agent and the Company receive proof satisfactory to them
that the replaced Security is held by a bona fide purchaser.
SECTION 2.9 Temporary Securities. Until definitive Securities are
ready for delivery, the Company may prepare temporary Securities. Temporary
Securities shall be substantially in the form of definitive Securities but may
have variations that the Company reasonably considers appropriate for temporary
Securities. Without unreasonable delay, the Company shall prepare definitive
Securities and deliver them in exchange for temporary Securities.
SECTION 2.10 Cancellation. The Company at any time may deliver
Securities to the Agent for cancellation. The Registrar and the Paying Agent
shall forward to the Agent any Securities surrendered to them for registration
of transfer, exchange or payment. The Agent and no one else shall cancel and
destroy all Securities surrendered for registration of transfer, exchange,
replacement in the event of a mutilated security, payment or cancellation and
deliver a certificate of such destruction to the Company unless the Company
directs the Agent to deliver canceled Securities to the Company. The Company may
not issue new Securities to replace Securities it has redeemed, paid or
delivered to the Agent for cancellation.
SECTION 2.11 Defaulted Interest. If the Company defaults in a payment
of interest on the Securities, the Company shall pay defaulted interest (plus
interest on such defaulted interest to the extent lawful) in any lawful manner.
The Company may pay the defaulted interest to the persons who are
Securityholders on a subsequent special record date. The Agent shall fix or
cause to be fixed any such special record date (which shall be no less than 10
days prior to the payment date) and payment date and shall promptly mail to each
Securityholder a notice that states the special record date, the payment date
and the amount of defaulted interest to be paid, which notice shall be mailed
not less than 10 days prior to such special record date.
SECTION 2.12 Special Transfer Provisions. No transfer of any Security
may be made unless such transfer satisfies one of the following: (i) such
transfer is in compliance with Rule 144A under the Securities Act, to a person
who the transferor reasonably believes is a Qualified Institutional Buyer (as
defined in Rule 144A) that is purchasing for its own account or for the account
of a Qualified Institutional Buyer and to whom notice is given that such
transfer is being made in reliance upon Rule 144A under the Securities Act as
certified by such transferee in a letter in the form of Exhibit C hereto; (ii)
after the appropriate holding period, such transfer is pursuant to an exemption
from registration under the Securities Act provided by Rule 144 under the
Securities Act; (iii) such transfer is to a transferee who is an accredited
investor in a transaction exempt from the registration requirements of the
Securities Act, in each case in accordance with any applicable securities laws
of any State of the United States or (iv) such transfer is otherwise exempt from
the registration requirements of the Securities Act. The Company will require,
in order to assure compliance with such laws, that the Securityholder's
prospective transferee referred to in the preceding clauses (iii) or (iv)
deliver an investment letter certifying to the Company and the Agent as to the
facts surrounding such transfer in the Form of Exhibit D hereto. Except in the
case of a transfer of
18
<PAGE>
<PAGE>
Securities to a transferee referred to in the preceding clause (i), a transfer
to an Affiliate of the Agent or of a Holder, or, in general, a transfer that is
to be made after two years from the Issuance Date, the Agent shall require an
opinion of counsel satisfactory to it to the effect that such transfer may be
made pursuant to an exemption from the Securities Act without such registration
(which opinion of counsel shall not be an expense of the Agent or the Company).
ARTICLE 3.
Covenants
SECTION 3.1 Payment of Securities. The Company shall promptly pay the
principal of and interest on the Securities on the dates and in the manner
provided in the Securities and in this Indenture. Principal and interest shall
be considered paid on the date due if by 2:00 p.m. New York time on such date
the Agent has received from the Company or the Paying Agent in immediately
available funds money sufficient to pay all principal, interest, premiums and
any other amounts then due. The Company shall pay interest on overdue principal
at the rate specified therefor in the Securities, and it shall pay interest on
overdue installments of interest at the same rate to the extent lawful.
SECTION 3.2 SEC Reports. The Company shall file with the SEC and
provide the Agent and Securityholders with such annual reports and such
information, documents and other reports as are specified in Sections 13 and
15(d) of the Exchange Act and applicable to a U.S. corporation subject to such
Sections, such information, documents and other reports to be so filed and
provided at the time specified for the filing of such information, documents and
reports under such Sections.
SECTION 3.3 Limitation on Indebtedness. The Company shall not incur,
directly or indirectly, any Indebtedness if, on the date of such incurrence and
after giving effect thereto, the Consolidated Leverage Ratio exceeds 2.0 to 1.0.
SECTION 3.4 Limitation on Indebtedness and Preferred Stock of
Restricted Subsidiaries. The Company shall not permit any Restricted Subsidiary
to incur, directly or indirectly, any Indebtedness or Preferred Stock except:
(a) Permitted Warehouse Indebtedness and Class B Indebtedness;
(b) Indebtedness or Preferred Stock issued to and held by the Company
or a Consolidated Restricted Subsidiary; provided, however, that any subsequent
issuance or transfer of any Capital Stock which results in any such Consolidated
Restricted Subsidiary ceasing to be a Consolidated Restricted Subsidiary or any
subsequent transfer of such Indebtedness or Preferred Stock (other than to the
Company or a Consolidated Restricted Subsidiary) shall be deemed, in each case,
to constitute the issuance of such Indebtedness or Preferred Stock by the issuer
thereof;
19
<PAGE>
<PAGE>
(c) Indebtedness or Preferred Stock of a Subsidiary incurred and
outstanding on or prior to the date on which such Subsidiary was acquired by the
Company (other than Indebtedness or Preferred Stock incurred in connection with,
or to provide all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant to which
such Subsidiary became a Subsidiary or was acquired by the Company); provided,
however, that on the date of such acquisition and after giving effect thereto,
the Company would have been able to incur at least $1.00 of Indebtedness
pursuant to Section 3.03(a).
(d) Refinancing Indebtedness incurred in respect of Indebtedness
referred to in clause (c) of this Section 3.04 or this clause (d); provided,
however, that to the extent such Refinancing Indebtedness directly or indirectly
Refinances Indebtedness of a Subsidiary described in clause (c) of this Section
3.04, such Refinancing Indebtedness shall be incurred only by such Subsidiary.
SECTION 3.5 Limitation on Restricted Payments. (a) The Company shall
not, and shall not permit any Restricted Subsidiary, directly or indirectly, to
make a Restricted Payment if at the time the Company or such Restricted
Subsidiary makes such Restricted Payment or immediately thereafter: (i) a
Default shall have occurred and be continuing (or would result therefrom); or
(ii) the Company is not able to incur an additional $1.00 of Indebtedness
pursuant to Section 3.03(a) as if such Restricted Payment had been made at the
beginning of the four quarter period ending in the quarterly period in which
such Restricted Payment is made.
(b) The provisions of Section 3.05(a) shall not prohibit: (i) any
purchase or redemption of Capital Stock or Subordinated Obligations of the
Company made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Company by the Company (other than
Capital Stock issued or sold to a Subsidiary of the Company or an employee stock
ownership plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees) (except to the extent that a
Holder holding registration rights was precluded from participating in the
subject sale of Capital Stock despite having elected to do so to the full extent
so elected); (ii) the exercise or conversion of an option, warrant or other
security convertible or exchangeable for an equity security of a Strategic
Alliance Client in connection with a substantially simultaneous sale or other
disposition by the Company or a Restricted Subsidiary of such equity security.
SECTION 3.6 Limitation on Restrictions on Distributions from
Restricted Subsidiaries. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any consensual encumbrance or restriction on
the ability of any Restricted Subsidiary (a) to pay dividends or make any other
distributions on its Capital Stock to the Company or a Restricted Subsidiary or
pay any Indebtedness owed to the Company, (b) to make any loans or advances to
the Company or (c) transfer any of its property or assets to the Company,
except: (i) any encumbrance or restriction pursuant to an agreement in effect at
or entered into on the Issue Date; (ii) any encumbrance or restriction with
respect to a Restricted Subsidiary pursuant to an agreement applicable to
20
<PAGE>
<PAGE>
such Restricted Subsidiary on or prior to the date on which such Restricted
Subsidiary was acquired by the Company (other than an agreement entered into in
connection with, or in anticipation of, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Company) and outstanding on such date; (iii)
any encumbrance or restriction with respect to a Restricted Subsidiary pursuant
to any other agreement contained in any amendment to an agreement referred to in
clause (i) or (ii) of this Section 3.06 or this clause (iii); provided, however,
that the encumbrances and restrictions with respect to such Restricted
Subsidiary contained in any such agreement or amendment are no less favorable to
the Securityholders than encumbrances and restrictions with respect to such
Restricted Subsidiary contained in the agreements referred to in clauses (i) or
(ii) of this Section 3.06, as the case may be; (iv) any such encumbrance or
restriction consisting of customary non-assignment provisions in leases
governing leasehold interests to the extent such provisions restrict the
transfer of the lease or the property leased thereunder; (v) in the case of
clause (c) above, restrictions contained in Permitted Liens securing
Indebtedness of a Restricted Subsidiary to the extent such restrictions restrict
the transfer of the property subject to such security agreements or mortgages;
and (vi) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of all or
substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition.
SECTION 3.7 Limitation on Sales of Assets and Subsidiary Stock. In any
calendar year, the Company shall not consummate any Asset Disposition in excess
of 10% of consolidated total assets at such time, other than in the ordinary
course of business and so long as the aggregate amount of such Asset Depositions
(on a cumulative basis from the Issue Date) does not exceed 25% of consolidated
total assets as of the end of the quarter preceding such Asset Dispositions.
SECTION 3.8 Limitation on Liens. The Company shall not, and shall not
permit any Restricted Subsidiary to, directly or indirectly, incur or permit to
exist any Lien of any nature whatsoever on any of its properties (including
Capital Stock of a Restricted Subsidiary), whether owned at the Issue Date or
thereafter acquired, other than Permitted Liens, without effectively providing
that the Securities shall be secured equally and ratably with (or prior to) the
obligations so secured for so long as such obligations are so secured.
SECTION 3.9 Financial Covenants.
(a) Minimum Consolidated Net Worth. As of the end of each quarter, the
Company will have a Consolidated Net Worth of at least $12,000,000, plus (i)
100% of the Net Cash Proceeds to the Company from the sale of Capital Stock,
plus (ii) 75% of net income, in each case on a cumulative basis on and after
February 1, 1998.
(b) Minimum Ratio of Earnings Before Interest, Taxes, Depreciation and
Amortization to Interest. As of the end of each quarter, the Company will have a
trailing 12-month ratio of EBITDA to Interest Expense of at least 1.5.
21
<PAGE>
<PAGE>
(c) Maximum Average Repossession Ratios. As of the end of each
quarter, the Company will have a weighted average Cumulative Repossession Ratio
for all securitized Receivables pools of no greater than 27%.
SECTION 3.10 Further Assurances. The Company will from time to time
execute and deliver all such supplements and amendments hereto and all such
financing statements, continuation statements, instruments of further assurance,
and other instruments, and will take such other action as may be necessary or
advisable to maintain or preserve the lien of this Indenture or carry out more
effectively the purposes hereof.
SECTION 3.11 Limitation on Investment Company Status. The Company
shall not take any action, or otherwise permit to exist any circumstance, that
would require the Company to register as an "investment company" under the
Investment Company Act of 1940, as amended.
SECTION 3.12 Compliance Certificate. The Company shall deliver to the
Agent within 45 days after the end of each quarter and within 90 days after the
end of each fiscal year of the Company an Officers' Certificate demonstrating
compliance or noncompliance with respect to the financial covenants contained
herein and stating that in the course of the performance by the signers of their
duties as Officers of the Company they would normally have knowledge of any
Default and whether or not the signers know of any Default that occurred during
such period. If they do, the certificate shall describe the Default, its status
and what action the Company is taking or proposes to take with respect thereto.
SECTION 3.13 Further Instruments and Acts. Upon request of the Agent,
the Company will execute and deliver such further instruments and do such
further acts as may be reasonably necessary or proper to carry out more
effectively the purpose of this Indenture.
ARTICLE 4.
Successor Company
SECTION 4.1 When Company May Merge or Transfer Assets. Subject to
Article 13, the Company shall not consolidate with or merge with or into, or
convey, transfer or lease, in one transaction or a series of related
transactions, all or substantially all its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor
Company") shall be a Person organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia and
the Successor Company (if not the Company) shall expressly assume, by an
indenture supplemental hereto, executed and delivered to the Agent, in form
satisfactory to
22
<PAGE>
<PAGE>
the Agent, all the obligations of the Company under the Securities , this
Indenture, and, if applicable, the Purchase Agreement;
(ii) immediately after giving effect to such transaction (and treating
any Indebtedness which becomes an obligation of the Successor Company or
any Subsidiary as a result of such transaction as having been incurred by
the Successor Company or such Subsidiary at the time of such transaction),
no Default shall have occurred and be continuing (including on a pro forma
basis);
(iii) immediately after giving effect to such transaction, the
Successor Company would be able to incur an additional $1.00 of
Indebtedness pursuant to Section 3.03(a);
(iv) immediately after giving effect to such transaction, the
Successor Company shall have Consolidated Net Worth in an amount which is
not less than the Consolidated Net Worth of the Company immediately prior
to such transaction; and
(v) the Company shall have delivered to the Agent an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with this Indenture.
The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under this Indenture, but the predecessor Company in the case of a
lease of all or substantially all its assets shall not be released from the
obligation to pay the principal of and interest on the Securities.
Notwithstanding the foregoing clauses (ii), (iii) and (iv), any
Restricted Subsidiary may consolidate with, merge into or transfer all or part
of its properties and assets to the Company.
ARTICLE 5.
Defaults and Remedies
SECTION 5.1 Events of Default. An "Event of Default" occurs if:
(1) the Company defaults in any payment of interest on any Security
when the same becomes due and payable, and such default continues for a
period of 5 Business Days;
(2) the Company (i) defaults in the payment of the principal of any
Security when the same becomes due and payable at its Stated Maturity, upon
declaration or otherwise, or (ii) fails to purchase Securities when
required
23
<PAGE>
<PAGE>
pursuant to this Indenture or the Securities;
(3) the Company fails to comply with Section 3.04, 3.05, 3.06, 3.07,
3.08, 3.09(b) or (c), 3.12, or 4.01;
(4) the Company fails to comply with any of its covenants or
agreements in the Securities, this Indenture (other than those referred to
in (1), (2) or (3) above) and such failure continues for 30 days after the
occurrence thereof;
(5) Indebtedness of the Company or any Significant Subsidiary is not
paid within any applicable grace period after final maturity or is
accelerated by the holders thereof because of a default and the aggregate
amount of all such unpaid or accelerated Indebtedness exceeds $1,000,000 or
its foreign currency equivalent at the time;
(6) the Company within the meaning of any Bankruptcy Law:
(A) commences a voluntary case;
(B) is dissolved (other than pursuant to a consolidation, a
malgamation or merger);
(C) becomes insolvent or is unable to pay its debts or fails or
admits in writing its inability generally to pay its debts as they
become due;
(D) has a resolution passed for its winding-up, reorganization or
liquidation (other than pursuant to a consolidation, amalgamation or
merger);
(E) has a secured party take possession of all or substantially
all its assets or has a distress, execution, attachment, sequestration
or other legal process levied, enforced or sued on or against all or
substantially all its assets and such secured party maintains
possession, or any such process is not dismissed, discharged, stayed
or restrained, in each case within 30 days thereafter;
(F) consents to the entry of an order for relief against it in an
involuntary case;
(G) seeks to consents to the appointment of a Custodian of it or
for substantially all of its assets; or
(H) makes a general assignment, arrangement or composition with,
or for the benefit of, its creditors;
24
<PAGE>
<PAGE>
or takes any comparable action under any foreign laws relating to
insolvency;
(7) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that:
(A) is for relief against the Company in an involuntary case;
(B) appoints a Custodian of the Company or for any substantial
part of its property; or
(C) orders the winding up or liquidation of the Company; or any
similar relief is granted under any foreign laws and the order or
decree remains unstayed and in effect for 60 days;
(8) any judgments or decrees for the payment of money in excess of
$1,000,000 in the aggregate (for all such judgments and decrees) or its
foreign currency equivalent at the time is entered against the Company or
any Significant Subsidiary and is not discharged or satisfied and there is
a period of 45 days following the entry of such judgment or decree during
which such judgment or decree is not discharged, satisfied, waived or the
execution thereof stayed; or
(9) if the Agent or any Affiliate of the Agent is a Securityholder,
the material breach of any representation, warranty or covenant of the
Company contained in or the occurrence of a default by the Company under,
the Purchase Agreement, and if such breach or default is susceptible of
cure and the Company is pursuing, and continues to pursue, such cure to the
Agent's reasonable satisfaction, such breach or default remains uncured for
30 days after its occurrence.
The foregoing will constitute Events of Default whatever the reason
for any such Event of Default and whether it is voluntary or involuntary or is
effected by operation of law or pursuant to any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body.
The term "Bankruptcy Law" means Title 11, United States Code, or any
similar Federal or state law for the relief of debtors. The term "Custodian"
means any receiver, Agent, assignee, liquidator, custodian or similar official
under any Bankruptcy Law.
The Company shall deliver to the Agent, promptly, and in any event
within 5 days after the occurrence thereof, written notice in the form of an
Officers' Certificate of any Default, its status and what action the Company is
taking or proposes to take with respect thereto.
SECTION 5.2 Acceleration. If an Event of Default (other than an Event
of Default specified in Section 5.01(6) or (7) with respect to the Company)
occurs
25
<PAGE>
<PAGE>
and is continuing, the Agent by notice to the Company, or the Holders of at
least 25% in principal amount of the Securities by notice to the Company and the
Agent, may declare the principal of and accrued but unpaid interest on all the
Securities to be due and payable. Upon such a declaration, such principal and
interest shall be due and payable immediately. If an Event of Default specified
in Section 5.01(6) or (7) with respect to the Company occurs and is continuing,
the principal of and interest on all the Securities shall ipso facto become and
be immediately due and payable without any declaration or other act on the part
of the Agent or any Securityholders. The Agent or the Holders of a majority in
principal amount of the Securities by notice to the Agent may in their sole
discretion rescind an acceleration and its consequences if the rescission would
not conflict with any judgment or decree and if all existing Events of Default
have been cured or waived except nonpayment of principal or interest that has
become due solely because of acceleration. No such rescission shall affect any
subsequent Default or impair any right consequent thereto.
SECTION 5.3 Other Remedies. If an Event of Default occurs and is
continuing, the Agent may pursue any available remedy to collect the payment of
principal of or interest on and any other amounts due under the Securities or to
enforce the performance of any provision of the Securities or this Indenture,
including remedies available under the Uniform Commercial Code.
The Agent may maintain a proceeding even if it does not possess any of
the Securities or does not produce any of them in the proceeding. A delay or
omission by the Agent or any Securityholder in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative.
SECTION 5.4 Waiver of Past Defaults. The Holders of a majority in
principal amount of the Securities by notice to the Agent may waive an existing
Default and its consequences except (i) a Default in the payment of the
principal of or interest on a Security or (ii) a Default in respect of a
provision that under Section 8.02 cannot be amended without the consent of each
Securityholder affected. When a Default is waived, it is deemed cured, but no
such waiver shall extend to any subsequent or other Default or impair any
consequent right.
SECTION 5.5 Control by Majority. The Holders of a majority in
principal amount of the Securities may direct the time, method and place of
conducting any proceeding for any remedy available to the Agent or of exercising
any power conferred on the Agent. However, the Agent may refuse to follow any
direction that conflicts with law or this Indenture or, subject to Section 6.01,
that the Agent determines is unduly prejudicial to the rights of other
Securityholders or would involve the Agent in personal liability; provided,
however, that the Agent may take any other action deemed proper by the Agent
that is not inconsistent with such direction. Prior to taking any action
hereunder, the Agent shall be entitled to indemnification satisfactory to it in
its sole discretion against all losses and expenses caused by taking or not
taking such action.
SECTION 5.6 Limitation on Suits. A Securityholder may not
26
<PAGE>
<PAGE>
pursue any remedy with respect to this Indenture or the Securities unless:
(1) the Holder gives to the Agent written notice stating that an Event
of Default is continuing;
(2) the Holders of at least 25% in principal amount of the Securities
make a written request to the Agent to pursue the remedy;
(3) such Holder or Holders offer to the Agent reasonable security or
indemnity against any loss, liability or expense;
(4) the Agent does not comply with the request within 60 days after
receipt of the request and the offer of security or indemnity; and
(5) the Holders of a majority in principal amount of the Securities do
not give the Agent a direction inconsistent with the request during such
60-day period.
A Securityholder may not use this Indenture to prejudice the rights of
another Securityholder or to obtain a preference or priority over another
Securityholder.
SECTION 5.7 Rights of Holders To Receive Payment. Notwithstanding any
other provision of this Indenture, the right of any Holder to receive payment of
principal of and interest on and any other amounts due under the Securities held
by such Holder, on or after the respective due dates expressed in the
Securities, or to bring suit for the enforcement of any such payment on or after
such respective dates, shall not be impaired or affected without the consent of
such Holder.
SECTION 5.8 Collection Suit by Agent. If an Event of Default occurs
and is continuing, the Agent may recover judgment in its own name and on behalf
of the Holders against the Company for the whole amount then due and owing
(together with interest on any unpaid interest to the extent lawful) and the
amounts provided for in Section 6.07.
SECTION 5.9 Agent May File Proofs of Claim. The Agent may file such
proofs of claim and other papers or documents as may be necessary or advisable
in order to have the claims of the Agent and the Securityholders allowed in any
judicial proceedings relative to the Company, its creditors or its property and,
unless prohibited by law or applicable regulations, may vote on behalf of the
Holders in any election of a trustee in bankruptcy or other Person performing
similar functions, and any Custodian in any such judicial proceeding is hereby
authorized by each Holder to make payments to the Agent and, in the event that
the Agent shall consent to the making of such payments directly to the Holders,
to pay to the Agent any amount due it for the reasonable compensation, expenses,
disbursements and advances of the Agent, its agents and its counsel, and any
other amounts due the Agent under Section 6.06.
SECTION 5.10 Priorities. If the Agent collects any money or property
pursuant to this Article 5, it shall pay out the money or property in the
following
27
<PAGE>
<PAGE>
order:
FIRST: to the Agent for amounts due under Section 6.07;
SECOND: to Securityholders for amounts due and unpaid on the
Securities, ratably, without preference or priority of any kind, according
to the amounts due and payable on the Securities; and
THIRD: after all amounts due under the Securities have indefeasibly
been paid in full to the Holders, to the Company.
The Agent may fix a record date and payment date for any payment to
Securityholders pursuant to this Section. At least 15 days before such record
date, the Company shall mail to each Securityholder and the Agent a notice that
states the record date, the payment date and amount to be paid.
SECTION 5.11 Undertaking for Costs. In any suit for the enforcement of
any right or remedy under this Indenture or in any suit against the Agent for
any action taken or omitted by it as Agent, a court in its discretion may
require the filing by any party litigant in the suit of an undertaking to pay
the costs of the suit, and the court in its discretion may assess reasonable
costs, including reasonable attorneys' fees, against any party litigant in the
suit, having due regard to the merits and good faith of the claims or defenses
made by the party litigant. This Section does not apply to a suit by the Agent
or by a Holder against the Company,
SECTION 5.12 Waiver of Stay or Extension Laws. The Company (to the
extent it may lawfully do so) shall not at any time insist upon, or plead, or in
any manner whatsoever claim or take the benefit or advantage of, any stay or
extension law wherever enacted, now or at any time hereafter in force, which may
affect the covenants or the performance of this Indenture; and the Company (to
the extent that it may lawfully do so) hereby expressly waives all benefit or
advantage of any such law, and shall not hinder, delay or impede the execution
of any power herein granted to the Agent or to any Holder, but shall suffer and
permit the execution of every such power as though no such law had been enacted.
ARTICLE 6.
Agent
SECTION 6.1 Duties of Agent. (a) If an Event of Default has occurred
and is continuing, the Agent shall exercise such of the rights and powers vested
in it by this Indenture and use the same degree of care and skill in their
exercise as the Agent would exercise or use under the circumstances in the
conduct of the Agent's own affairs.
(b) Except during the continuance of an Event of Default:
28
<PAGE>
<PAGE>
(1) the Agent undertakes to perform such duties and only such duties
as are specifically set forth in this Indenture and no implied covenants or
obligations shall be read into this Indenture against the Agent; and
(2) in the absence of bad faith on its part, the Agent may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions furnished to
the Agent and conforming to the requirements of this Indenture. However,
the Agent shall examine the certificates and opinions to determine whether
or not they conform to the requirements of this Indenture.
(c) The Agent may not be relieved from liability for its own grossly
negligent action, its own grossly negligent failure to act or its own wilful
misconduct, except that:
(1) this paragraph does not limit the effect of paragraph (b) of this
Section;
(2) the Agent shall not be liable for any error of judgment made in
good faith unless it is proved that the Agent was grossly negligent in
ascertaining the pertinent facts; and
(3) the Agent shall not be liable with respect to any action it takes
or omits to take in good faith in accordance with a direction received by
it pursuant to Section 5.05.
(d) Every provision of this Indenture that in any way relates to the
Agent is subject to paragraphs (a), (b) and (c) of this Section.
(e) The Agent shall not be liable for interest on any money received
by it.
(f) Money held in trust by the Agent need not be segregated from other
funds except to the extent required by law.
(g) No provision of this Indenture shall require the Agent to expend
or risk its own funds or otherwise incur financial liability in the performance
of any of its duties hereunder or in the exercise of any of its rights or
powers, if it shall have reasonable grounds to believe that repayment of such
funds or adequate indemnity against such risk or liability is not reasonably
assured to it.
(h) Every provision of this Indenture relating to the conduct or
affecting the liability of or affording protection to the Agent shall be subject
to the provisions of this Section.
SECTION 6.2 Rights of Agent. (a) The Agent may rely on any
29
<PAGE>
<PAGE>
document reasonably believed by it to be genuine and to have been signed or
presented by the proper Person. The Agent need not investigate any fact or
matter stated in the document.
(b) Before the Agent acts or refrains from acting, it may require an
Officers' Certificate or an Opinion of Counsel. The Agent shall not be liable
for any action it takes or omits to take in good faith in reliance on the
Officers' Certificate or Opinion of Counsel.
(c) The Agent may act through agents or employees.
(d) The Agent shall not be liable for any action it takes or omits to
take in good faith which it believes to be authorized or within its rights or
powers; provided, however, that the Agent's conduct does not constitute wilful
misconduct or gross negligence.
(e) The Agent may consult with counsel with respect to legal matters
relating to this Indenture and the Securities shall be fully and completely
protected from liability in respect to any action taken, omitted or suffered by
it hereunder in good faith and in accordance with the advice or opinion of such
counsel.
SECTION 6.3 Individual Rights of Agent. The Agent in its individual or
any other capacity may become the owner or pledgee of Securities and may
otherwise deal with the Company or its Affiliates with the same rights it would
have if it were not Agent. Any Paying Agent, Registrar, co-registrar or
co-paying agent may do the same with like rights. However, the Agent must comply
with Section 6.09.
SECTION 6.4 Agent's Disclaimer. The Agent shall not be responsible for
and makes no representation as to the validity or adequacy of this Indenture or
the Securities, it shall not be accountable for the Company's use of the
proceeds from the Securities, and it shall not be responsible for any statement
of the Company in the Indenture or in any document issued in connection with the
sale of the Securities or in the Securities other than the Agent's certificate
of authentication.
SECTION 6.5 Notice of Defaults. If a Default occurs and is continuing
and if the Agent receives written notice thereof, the Agent shall mail to each
Securityholder notice of the Default within 90 days after it occurs. Except in
the case of a Default in payment of principal of or interest on any Security
(including payments pursuant to purchase provisions of such Security, if any),
the Agent may withhold the notice if and so long as it in good faith determines
that withholding the notice is in the interests of Securityholders.
SECTION 6.6 Compensation and Indemnity. If neither the Agent nor any
of its Affiliates is a Securityholder, the Company shall pay to the Agent from
time to time reasonable compensation for its services. The Company shall
reimburse the Agent upon request for all reasonable out-of-pocket expenses
incurred or made by it, including costs of collection, in addition to the
compensation for its services in connection with its performance of its duties
under this Indenture. Such expenses shall
30
<PAGE>
<PAGE>
include the reasonable compensation and expenses, disbursements and advances of
the Agent's agents, counsel, accountants and experts. The Company shall
indemnify the Agent against any and all loss, liability or reasonable expense
(including reasonable attorneys' fees) incurred by it in connection with the
administration of this agreement and the performance of its duties hereunder.
The Agent shall notify the Company promptly of any claim for which it may seek
indemnity. Failure by the Agent to so notify the Company shall not relieve the
Company of its obligations hereunder. The Company shall defend the claim and the
Agent may have separate counsel but the fees and expenses of such counsel shall
be at the expense of the Agent unless (i) the employment of such counsel shall
have been authorized in writing by the Company, (ii) the Company shall not have
employed counsel to have charge of the defense of such action within 10 days
after notice of commencement of the action, or (iii) the Agent shall have
reasonably concluded that there may be defenses available to it which are
different from or additional to the those available to the Company, in any of
which events such fees and expenses shall be paid by the Company. The Company
shall not be liable for any settlement of any claim or action except with its
written consent, which consent shall not be unreasonably withheld. The Company
need not reimburse any expense or indemnify against any loss, liability or
expense to the extent incurred by the Agent through the Agent's own wilful
misconduct, negligence or bad faith.
To secure the Company's payment obligations in this Section, the Agent
shall have a lien prior to the Securities on all money or property held or
collected by the Agent other than money or property held in trust to pay amounts
due under particular Securities.
The Company's payment obligations pursuant to this Section shall
survive the discharge of this Indenture. When the Agent incurs expenses after
the occurrence of a Default specified in Section 5.01(6) or (7) with respect to
the Company, the expenses are intended to constitute expenses of administration
under the Bankruptcy Law.
SECTION 6.7 Replacement of Agent. The Agent may resign at any time by
so notifying the Company. If the Agent fails to discharge its obligations
hereunder despite at least 60 days written notice from (or on behalf of) the
Holders of a majority in principal amount of the Securities, such Holders may
remove the Agent by so notifying the Agent and the Company, and such Holders may
appoint a successor Agent. The Company shall remove the Agent if:
(1) the Agent fails to comply with Section 6.09;
(2) the Agent is adjudged bankrupt or insolvent;
(3) a receiver or other public officer takes charge of the Agent or
its property; or
(4) the Agent otherwise becomes incapable of acting.
If the Agent resigns, is removed by the Company or by the Holders of a
31
<PAGE>
<PAGE>
majority in principal amount of the Securities and such Holders do not
reasonably promptly appoint a successor Agent, or if a vacancy exists in the
office of Agent for any reason (the Agent in such event being referred to herein
as the retiring Agent), the Company shall promptly appoint a successor Agent.
A successor Agent shall deliver a written acceptance of its
appointment to the retiring Agent and to the Company. Thereupon the resignation
or removal of the retiring Agent shall become effective, and the successor Agent
shall have all the rights, powers and duties of the Agent under this Indenture.
The successor Agent shall mail a notice of its succession to Securityholders.
The retiring Agent shall promptly transfer all property held by it as Agent to
the successor Agent, subject to the lien provided for in Section 6.07.
If a successor Agent does not take office within 60 days after the
retiring Agent resigns or is removed, the retiring Agent or the Holders of 10%
in principal amount of the Securities may petition any court of competent
jurisdiction for the appointment of a successor Agent.
If the Agent fails to comply with Section 6.09, any Securityholder may
petition any court of competent jurisdiction for the removal of the Agent and
the appointment of a successor Agent.
Notwithstanding the replacement of the Agent pursuant to this Section,
the Company's obligations under Section 6.06 shall continue for the benefit of
the retiring Agent.
SECTION 6.8 Successor Agent by Merger. If the Agent consolidates with,
merges or converts into, or transfers all or substantially all its corporate
trust business or assets to, another corporation or banking association, the
resulting, surviving or transferee corporation without any further act shall be
the successor Agent.
SECTION 6.9 Eligibility; Disqualification. The Agent shall have a
combined capital and surplus of at least $10,000,000 as set forth in its most
recent published annual report of condition.
ARTICLE 7.
Discharge of Indenture
SECTION 7.1 Discharge of Liability on Securities. (a) When all
outstanding Securities have become due and payable and the Company irrevocably
and indefeasibly deposits with the Agent immediately available funds sufficient
to pay at maturity all outstanding Securities, including interest thereon to
maturity and any applicable premiums and other amounts due thereunder and
payable hereunder by the Company, then this Indenture shall, subject to Section
7.01(b), cease to be of further effect. After such irrevocable and indefeasible
payment, the Agent shall acknowledge satisfaction and discharge of this
Indenture, other than those surviving obligations set
32
<PAGE>
<PAGE>
forth in Section 7.01(b), on demand of the Company accompanied by an Officers'
Certificate and an Opinion of Counsel and at the cost and expense of the
Company.
(b) Notwithstanding clause (a) above, the Company's obligations in
Sections 2.03, 2.04, 2.05, 2.06, 2.07, 6.06 and 6.07 and this Article 7 shall
survive until the Securities have been paid in full. Thereafter, the Company's
obligations in Sections 6.06, 7.04 and 7.05 shall survive.
SECTION 7.2 Repayment to Company. The Agent and the Paying Agent shall
promptly turn over to the Company upon request any excess money or securities
held by them at any time.
Subject to any applicable abandoned property law and the right of the
Agent to publish or mail notice to Securityholders prior to making such payment
to the Company, the Agent and the Paying Agent shall pay to the Company upon
request any money held by them for the payment of principal or interest that
remains unclaimed for two years, and, thereafter, Securityholders entitled to
the money must look to the Company for payment as general creditors.
ARTICLE 8.
Optional Conversion of Securities
SECTION 8.1 Optional Conversion Privilege and Conversion Price.
Subject to and upon compliance with the provisions of this Article, at
the option of the Holder thereof, any Series B Security or any portion of the
principal amount thereof which is $1,000 or an integral multiple of $1,000 may
be converted at the principal amount thereof (without premium), or of such
portion thereof, into fully paid and nonassessable shares (calculated as to each
conversion to the nearest 1/100 of a share) of voting, or at the Holder's
option, nonvoting Common Stock of the Company, at the conversion price,
determined as hereinafter provided, in effect at the time of conversion. Such
conversion right commences on and after July 31, 1998 and shall expire upon the
indefeasible repayment in full of the Series B Securities. For the purposes
hereof, any amounts required to be paid by a Holder to the holder of Senior
Indebtedness pursuant to Article 9 hereof shall nevertheless be deemed to remain
outstanding under the Series B Securities unless and until subsequently repaid
or reimbursed to such Holder. In case a Series B Security or portion thereof is
called for redemption, such conversion right in respect of the Series B Security
or portion so called shall expire at the close of business on the Redemption
Date, unless the Company defaults in making the payment due upon redemption (or
the Holder is not indefeasibly entitled to retain such payment).
The price at which shares of Common Stock shall be delivered upon
conversion (herein called the "conversion price") shall be initially $3.30 per
share of
33
<PAGE>
<PAGE>
Common Stock. The Conversion Price shall be adjusted in certain instances as
provided in paragraphs (1), (2), (3), (4), (7) and (8) of Section 8.04.
SECTION 8.2 Exercise of Optional Conversion Privilege.
In order to exercise the conversion privilege, the Holder of any
Series B Security to be converted shall surrender such Series B Security, duly
endorsed or assigned to the Company or in blank, at any office or agency of the
Company maintained for that purpose accompanied by written notice to the Company
at such office or agency that the Holder elects to convert such Series B
Security or, if less than the entire principal amount thereof is to be
converted, the portion thereof to be converted.
Series B Securities shall be deemed to have been converted immediately
prior to the close of business on the day of surrender of such Series B
Securities for conversion in accordance with the foregoing provisions, and at
such time the rights of the Holders of such Series B Securities as Holders shall
cease, and the Person or Persons entitled to receive the Common Stock issuable
upon conversion shall be treated for all purposes as the record holder or
holders of such Common Stock at such time. As promptly as practicable on or
after the conversion date, the Company shall issue and shall deliver at such
office or agency a certificate or certificates for the number of full shares of
Common Stock issuable upon conversion, together with payment in lieu of any
fraction of a share, as provided in Section 8.03.
In the case of any Series B Security which is converted in part only,
upon such conversion the Company shall execute and deliver to the Holder
thereof, at the expense of the Company, a new Series B Security or Series B
Securities of authorized denominations in aggregate principal amount equal to
the unconverted portion of the principal amount of such Series B Security.
SECTION 8.3 Fractions of Shares.
No fractional shares of Common Stock shall be issued upon conversion
of Series B Securities. If more than one Series B Security shall be surrendered
for conversion at one time by the same Holder, the number of full shares which
shall be issuable upon conversion thereof shall be computed on the basis of the
aggregate principal amount of the Series B Securities (or specified portions
thereof) so surrendered. Instead of any fractional share of Common Stock which
would otherwise be issuable upon conversion of any Series B Security or Series B
Securities (or specified portions thereof), the Company shall pay a cash
adjustment in respect of such fraction in an amount equal to the same fraction
of the market price per share of Common Stock (as determined by the Board of
Directors or in any manner prescribed by the Board of Directors) at the close of
business on the day of conversion.
SECTION 8.4 Adjustment of Conversion Price.
(1) In case the Company shall pay or make a dividend or other
distribution on any class of capital stock of the Company in Common
34
<PAGE>
<PAGE>
Stock, the conversion price in effect at the opening of business on
the day following the date fixed for the determination of stockholders
entitled to receive such dividend or other distribution shall be
reduced by multiplying such conversion price by a fraction of which
the numerator shall be the number of shares of Common Stock
outstanding at the close of business on the date fixed for such
determination and the denominator shall be the sum of such number of
shares and the total number of shares constituting such dividend or
other distribution, such reduction to become effective immediately
after the opening of business on the day following the date fixed for
such determination. For the purposes of this paragraph (1), the number
of shares of Common Stock at any time outstanding shall not include
shares held in the treasury of the Company but shall include shares
issuable in respect of scrip certificates issued in lieu of fractions
of shares of Common Stock. The Company will not pay any dividend or
make any distribution on shares of Common Stock held in the treasury
of the Company.
(2) In case the Company shall issue or sell to any Person shares
of Common Stock or rights or warrants entitling such Person to
subscribe for or purchase shares of Common Stock at a price per share
less than the Current Market Price per share (determined as provided
in paragraph (6) of this Section) of the Common Stock on the date
fixed for the determination of stockholders entitled to receive such
rights or warrants (or, in the case of rights or warrants not
exercisable until the occurrence of a contingent event other than the
passage of time or other event that is certain to occur, on the date
that such contingent event occurs), the conversion price in effect at
the opening of business on the day following the date fixed for such
determination or the date such contingent event occurs, as the case
may be, shall be reduced by multiplying such conversion price by a
fraction of which the numerator shall be the number of shares of
Common Stock outstanding at the close of business on the date fixed
for such determination or the date such contingent event occurs, as
the case may be, plus the number of shares of Common Stock which the
aggregate of the offering price of the total number of shares of
Common Stock so offered for subscription or purchase would purchase at
such Current Market Price and the denominator shall be the number of
shares of Common Stock outstanding at the close of business on the
date fixed for such determination or the date such contingent event
occurs, as the case may be, plus the number of shares of Common Stock
so offered for subscription or purchase, such reduction to become
effective immediately after the opening of business on the day
following the date fixed for such determination or the date such
contingent event occurs, as the case may be. For the purposes of this
paragraph (2), the number of shares of Common Stock at any time
outstanding shall not include shares held in the treasury of the
Company but shall include shares issuable in respect of scrip
certificates issued in lieu of fractions of shares of Common Stock.
The Company will not issue any rights or warrants in respect of shares
of
35
<PAGE>
<PAGE>
Common Stock held in the treasury of the Company.
(3) In case outstanding shares of Common Stock shall be
subdivided into a greater number of shares of Common Stock, the
conversion price in effect at the opening of business on the day
following the day upon which such subdivision becomes effective shall
be proportionately reduced, and, conversely, in case outstanding
shares of Common Stock shall each be combined into a smaller number of
shares of Common Stock, the conversion price in effect at the opening
of business on the day following the day upon which such combination
becomes effective shall be proportionately increased, such reduction
or increase, as the case may be, to become effective immediately after
the opening of business on the day following the day upon which such
subdivision or combination becomes effective.
(4) In case the Company shall, by dividend or otherwise,
distribute to all holders of its Common Stock evidences of its
indebtedness or assets (including securities, but excluding any rights
or warrants referred to in paragraph (2) of this Section, any dividend
or distribution paid in cash out of the retained earnings of the
Company and any dividend or distribution referred to inn paragraph (1)
of this Section), the conversion price shall be adjusted so that the
same shall equal the price determined by multiplying the conversion
price in effect immediately prior to the close of business on the date
fixed for the determination of stockholders entitled to receive such
distribution by a fraction of which the numerator shall be the Current
Market Price per share (determined as provided in paragraph (6) of
this Section) of the Common Stock on the date fixed for such
determination less the then fair market value (as determined in good
faith by the Board of Directors, whose determination shall be
supported by a fairness opinion by a nationally recognized investment
banking firm and described in a Board Resolution filed with the Agent)
of the portion of the assets or evidences of indebtedness so
distributed applicable to one share of Common Stock and the
denominator shall be such Current Market Price per share of the Common
Stock, such adjustment to become effective immediately prior to the
opening of business on the day following the date fixed for the
determination of stockholders entitled to receive such distribution.
(5) The reclassification of Common Stock into securities
including other than Common Stock (other than any reclassification
upon a consolidation or merger to which Section 8.11 applies) shall be
deemed to involve (a) a distribution of such securities other than
Common Stock to all holders of Common stock (and the effective date of
such reclassification shall be deemed to be "the date fixed for the
determination of stockholders entitled to receive such distribution"
and "the date fixed for such determination" within the meaning of
paragraph (4) of this Section), and (b) a subdivision or combination,
as the case may be, of the number of shares of Common Stock
outstanding immediately prior to such
36
<PAGE>
<PAGE>
reclassification into the number of shares of Common Stock outstanding
immediately thereafter (and the effective date of such
reclassification shall be deemed to the "the day upon which such
subdivision becomes effective" or "the day upon which such combination
becomes effective", as the case may be, and "the day upon which such
subdivision or combination becomes effective" within the meaning of
paragraph (3) of this Section).
(6) For the purpose of any computation under paragraphs (2) and
(4) of this Section, the current market price per share of Common
Stock on any date (the "Current Market Price") shall be deemed to be
the average of the daily closing prices per share of the Company's
Common Stock for the 30 consecutive trading days immediately before
the day in question; provided, however, that in the case of (i) a
primary underwritten public offering at a price in excess of the then
current conversion price, the Current Market Price shall be deemed the
price to the underwriter set forth in the prospectus, and (ii) stock
options issued to employees and directors pursuant to a plan adopted
by the Company's Board of Directors, the Current Market Price shall be
the exercise price of such options. The closing price for each day
shall be the last reported sale price regular way or, in case no such
reported sale takes place on such day, the average of the reported
closing bid and asked prices regular way, on the principal national
securities exchange on which the Common Stock is listed or admitted to
trading or stock market if the Common Stock is not listed or admitted
to trading on any national securities exchange or stock market, the
average of the closing bid and asked prices in the over-the-counter
market as reported by NASDAQ or, if not quoted by NASDAQ on such day,
as furnished by any registered broker/dealer selected for that
purpose.
(7) The Company may make such reductions in the conversion price,
in addition to those required by paragraphs (1),(2),(3) and (4) of
this Section, as it considers to be advisable in order that any event
treated for Federal income tax purposes as a dividend of stock or
stock rights shall not be taxable to the recipients.
(8) No adjustment in the conversion price shall be required
unless such adjustment would require an increase or decrease of at
least 1% in the conversion price; provided, however, that any
adjustments which by reason of this paragraph (8) are not required to
be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations shall be made to the nearest
cent or to the nearest one-thousandth of a share, as the case may be.
SECTION 8.5 Notice of Adjustments of Conversion Price.
Whenever the conversion price is adjusted as herein provided:
(a) the Company shall compute the adjusted conversion price in
37
<PAGE>
<PAGE>
accordance with Section 8.04 and shall prepare a certificate signed by
the Treasurer of the Company setting forth the adjusted conversion
price and showing in reasonable detail the facts upon which such
adjustment is based, and such certificate shall forthwith be filed
(with a copy to the Agent) at each office or agency maintained for the
purpose of conversion of Series B Securities; and
(b) a notice stating that the conversion price has been adjusted
and setting forth the adjusted conversion price shall forthwith be
required, and as soon as practicable after it is required, such notice
shall be mailed by the Company to all Holders at their last addresses
as they shall appear in the Security Register.
SECTION 8.6 Notice of Certain Corporate Action.
In case:
(a) the Company shall declare a dividend (or any other
distribution) on its Common Stock payable otherwise than in cash out
of its retained earnings; or
(b) the Company shall authorize the granting to the holders of
its Common Stock of rights or warrants to subscribe for or purchase
any shares of capital stock of any class or of any other rights; or
(c) of any reclassification of the Common Stock of the Company
(other than a subdivision or combination of its outstanding shares of
Common Stock), or of any consolidation or merger to which the Company
is a party and for which approval of any stockholders of the Company
is required, or of the sale or transfer of all or substantially all of
the assets of the Company; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company;
then the Company shall cause to be filed with the Agent and at each office or
agency maintained for the purpose of conversion of Series B Securities, and
shall cause to be mailed to all Holders at their last addresses as they shall
appear in the Security Register, at least 20 days prior to the applicable record
or effective date hereinafter specified, a notice stating (x) the date on which
a record is to be taken for the purpose of such dividend, distribution, rights
or warrants, or, if a record is not to be taken, the date as of which the
holders of Common Stock of record to be entitled to such dividend, distribution,
rights or warrants are to be determined, or (y) the date on which such
reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding up is expected to become effective, and the date as of
which it is expected that holders of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up.
38
<PAGE>
<PAGE>
SECTION 8.7 Company to Reserve Common Stock.
The Company shall at all times reserve and keep available, free from
pre-emptive rights, out of its authorized but unissued non-voting and voting
Common Stock, for the purpose of effecting the conversion of Series B
Securities, the full number of shares of Common Stock then issuable upon the
conversion of all outstanding Series B Securities.
SECTION 8.8 Taxes on Conversions.
The Company will pay any and all taxes that may be payable in respect
of the issue or delivery of shares of Common Stock on conversion of Series B
Securities pursuant hereto. The Company shall not, however, be required to pay
any tax which may be payable in respect of any transfer involved in the issue
and delivery of shares of Common Stock in a name other than that of the Holder
of the Series B Security or Series B Securities to be converted, and no such
issue or delivery shall be made unless and until the Person requesting such
issue has paid to the Company the amount of any such tax, or has established to
the satisfaction of the Company that such tax has been paid.
SECTION 8.9 Covenant as to Common Stock; Accounting Treatment of
Consideration.
The Company covenants that all shares of Common Stock which may be
issued upon conversion of Series B Securities will upon issue by fully paid and
nonassessable and, except as provided in Section 8.08, the Company will pay all
taxes, liens and charges with respect to the issue thereof.
The Company covenants that, upon conversion of Series B Securities as
herein provided, there will be credited to Common Stock par capital from the
consideration for which the shares of Common Stock issuable upon such conversion
are issued an amount per share of Common Stock so issued as determined by the
Board of Directors, which amount shall not be less than the amount required by
law and by the Company's certificate of incorporation, as amended, as in effect
on the date of such conversion. For the purposes of this covenant the net
proceeds received by the Company from the issuance and sale of the Series B
Securities converted, less any cash paid in respect of fractional share
interests upon such conversion, shall be deemed to be the amount of
consideration for which the shares of Common Stock issuable upon such conversion
are issued.
SECTION 8.10 Cancellation of Converted Series B Securities.
All Series B Securities delivered for conversion shall be delivered to
the Company to be canceled.
SECTION 8.11 Provisions in Case of Consolidation, Merger or Sale of
Assets.
39
<PAGE>
<PAGE>
In case of any consolidation of the Company with, or merger of the
Company into, any other Person, any merger of another Person into the Company
(other than a merger which does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock of the Company)
or any sale or transfer of all or substantially all of the assets of the
Company, the Person formed by such consolidation or resulting from such merger
or which acquires such assets, as the case may be, shall execute and deliver to
the Agent a supplemental indenture providing that the Holder of each Series B
Security then outstanding shall have the right thereafter, during t he period
such Series B Security shall be convertible as specified in Section 8.01, to
convert such Series B Security only into the kind and amount of securities, cash
and other property receivable upon such consolidation, merger, sale or transfer
by a holder of the number of shares of Common Stock of the Company in which such
Series B Security might have been converted immediately prior to such
consolidation, merger, sale or transfer, assuming such holder of Common Stock of
the Company (i) is not a Person with which the Company consolidated or into
which the Company merged or which merged into the Company or to which such sale
or transfer was made, as the case may be ("constituent Person"), or an Affiliate
of a constituent Person and (ii) failed to exercise his rights of election, if
any, as to the kind or amount of securities, cash and other property receivable
upon such consolidation, merger, sale or transfer (provided that if the kind or
amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer is not the same for each share of Common
Stock of the Company held immediately prior to such consolidation, merger, sale
or transfer by others than a constituent Person or an Affiliate thereof and in
respect of which such rights of election shall not have been exercised
("non-electing share"), then for the purpose of this Section the kind and amount
of securities, cash and other property receivable upon such consolidation,
merger, sale or transfer by each non-electing share shall be deemed to be the
kind and amount so receivable per share by a plurality of the nonelecting
shares). Such supplemental indenture shall provide for adjustments which, for
events subsequent to the effective date of such supplemental indenture, shall be
as nearly equivalent as may be practicable to the adjustments provided for in
this Article. The above provisions of this Section shall similarly apply to
successive consolidations, mergers, sales or transfers.
SECTION 8.12 Registration and Listing of Shares.
The Company covenants that if any shares of Common Stock, required to
be reserved for purposes of conversion of Series B Securities hereunder, require
registration with or approval of any governmental authority under any Federal,
State or District of Columbia law before such shares may be issued upon
conversion, the Company will in good faith and as expeditiously as possible
endeavor to cause such shares to be duly registered or approved, as the case may
be. The Company further covenants that so long as the Common Stock of the
Company is listed on the NASDAQ Stock Market or any national securities
exchange, the Company will, if permitted by the rules of NASDAQ or such
exchange, list and keep listed on such exchange,, upon official notice of
issuance, all shares of Common Stock issuable upon conversion of Series B
Securities.
40
<PAGE>
<PAGE>
SECTION 8.13. Agent and Conversion Agents Not Liable.
Neither the Agent nor any conversion agent shall at any time be under
any duty or responsibility to any Holder or Series B Securities to determine
whether any facts exist which may require any adjustment of the conversion rate,
or with respect to the nature or extent of any such adjustment when made, or
with respect to the method employed, or herein or in any supplemental indenture
provided to be employed, in making the same. Neither the Agent nor any
conversion agent shall be accountable with respect to the validity or value (or
the kind or amount) of any shares of Common Stock or of any securities or cash
or other property which may at any time be issued or delivered upon the
conversion of any Series B Security, or makes any representation with respect
thereto. Neither the Agent nor any conversion agent shall be responsible for any
failure of the Company to make any cash payment or to issue, transfer or deliver
any shares of Common Stock or stock certificates or other securities or property
upon the surrender of any Series B Security for the purpose of conversion, or
subject to Section 6.01, to comply with any of the covenants of the Company
contained in this Article Eight.
SECTION 8.14. Regulatory Restrictions.
(a) No Holder of Series B Securities which is a bank holding company
or a subsidiary of a bank holding company (a "Bank Affiliate") as defined in the
Bank Holding Company Act of 1956, as amended, or other applicable banking laws
of the United States of America and the rules and regulations promulgated
thereunder (the "Bank Holding Company Act") shall acquire voting Common Stock,
if, after giving effect to such acquisition, the Bank Affiliate, together with
its Affiliates, would own more than five percent (5%) of the outstanding voting
securities of the Company. Notwithstanding the foregoing, shares of Common Stock
may otherwise be acquired or held by the Initial Purchaser or any other Bank
Affiliate which is a Small Business Investment Company consistent with and
subject to the limitations contained in the Small Business Act and, to the
extent not inconsistent with the Bank Holding Company Act, shares of Common
Stock may be acquired in the event that:
(i) the Company shall vote to merge or consolidate with or into any
other Person and after giving effect to such merger or consolidation the
Bank Affiliate would not own more than five percent (5%) of the outstanding
voting securities of the surviving corporation; or
(ii) the Common Stock issuable upon conversion of the Series B
Securities is covered by an effective registration statement.
(b) Small Business Act. No Person which is a Small Business Investment
Company, as defined in the Small Business Act, shall exercise "put" rights as a
holder of Series B Securities, hereunder if the exercise thereof shall violate
any of the rules or regulations of the Small Business Act.
(c) Statement of Compliance. For purposes of this Indenture, a written
statement of the Initial Purchaser or any of its Affiliates acquiring Common
Stock, or
41
<PAGE>
<PAGE>
exercising "put" or conversion rights with respect to Series B Securities,
delivered to the Company upon acquisition of any shares of Common Stock or
delivery of any conversion notice, to the effect that the Initial Purchaser or
such Affiliate, as the case may be, is legally entitled to exercise its rights
to purchase securities of the Company and that such exercise will not violate or
contravene any law or regulation or any judgment, decree or order of any
governmental authority then applicable to the Initial Purchaser or such
Affiliate, as the case may be, shall be conclusive and binding upon the Company
and shall absolutely obligate and bind the Company to deliver, in accordance
with the other terms and provisions hereof, certificates or other appropriate
instruments representing the securities so purchased.
ARTICLE 9.
Subordination of Securities
SECTION 9.1 Securities Subordinate to Senior Indebtedness.
The Company covenants and agrees, and each Holder of a Security by
this acceptance thereof, likewise covenants and agrees, that, to the extent and
in the manner hereinafter set forth in this Article, the indebtedness
represented by the Securities and the payment of the principal of and interest
on each and all of the Securities are hereby expressly made subordinate and
subject in right of payment to the prior payment in full of all Senior
Indebtedness permitted to be incurred pursuant to the terms of this Indenture.
SECTION 9.2 Payment Over of Proceeds Upon Dissolution, Etc.
Upon any distribution of assets of the Company in the event (a) any
insolvency or bankruptcy case or proceeding, or any receivership, liquidation,
reorganization or other similar case or proceeding in connection therewith
relative to the Company or to its creditors, as such, or to its assets, or (b)
any liquidation, dissolution or other winding up of the Company, whether
voluntary or involuntary and whether or not involving insolvency or bankruptcy,
or (c) any assignment for the benefit of creditors or any other marshaling of
assets and liabilities of the Company, then and in any such event the holders of
Senior Indebtedness shall be entitled to receive payment in full of all amounts
due or to become due on or in respect of all Senior Indebtedness, or provision
shall be made for such payment in money or money's worth, before the Holders of
the Securities are entitled to receive any payment on account of principal of or
interest on the Securities, and to that end the holders of Senior Indebtedness
shall be entitled to receive, for application to the payment thereof, any
payment or distribution of any kind or character, whether in cash, property or
securities, including any such payment or distribution which may be payable or
deliverable by reason of the payment of any other indebtedness of the Company
being subordinated to the payment of the Securities, which may be payable or
deliverable in respect of the Securities in any such case, proceeding,
dissolution, liquidation or other winding up or event.
In the event that, notwithstanding the foregoing provisions of this
Section the Agent or the Holder of any Security shall have received any payment
or distribution of
42
<PAGE>
<PAGE>
assets of the Company of any kind or character, whether in cash, property or
securities, including any such payment or distribution which may be payable or
deliverable by reason of the payment of any other indebtedness of the Company
being subordinated to the payment of the Securities, before all Senior
Indebtedness is paid in full or payment thereof provided for, and if such fact
shall then have been made known to the Agent, or, as the case may be, such
Holder, then and in such event such payment or distribution shall be paid over
or delivered forthwith to the trustee in bankruptcy, receiver, liquidating
trustee, custodian, assignee, agent or other Person making payment or
distribution of assets of the Company for application to the payment of all
Senior Indebtedness remaining unpaid, to
the extent necessary to pay all Senior Indebtedness in full, after giving effect
to any concurrent payment or distribution to or for the holders of Senior
Indebtedness.
For purposes of this Article only, the words "cash, property
or securities" shall not be deemed to include shares of stock of the Company as
reorganized or readjusted, or securities of the Company or any other corporation
provided for by a plan or reorganization or readjustment the payment of which is
for by a plan or reorganization or readjustment the payments of which is
subordinated at least to the extent provided in this Article with respect to the
Securities to the payment of all Senior Indebtedness which may at the time be
outstanding; provided, however, that (i) Senior Indebtedness is assumed by the
new corporation, if any, resulting from any such reorganization or readjustment,
and (ii) the rights of the holders, altered by such reorganization or
readjustment. The consolidation of the Company with, or the merger of the
Company into, another corporation or the liquidation or dissolution of the
Company following the conveyance or transfer of its properties and assets
substantially as an entirety to another Person upon the terms and conditions set
forth in Article Eight shall not be deemed a dissolution, winding up,
liquidation, reorganization, assignment for the benefit of creditors or
marshaling of assets and liabilities of the Company for the purposes of this
Section if the corporation formed by such consolidation or into which the
Company is merged or the Person which acquires by conveyance or transfer such
properties and assets substantially as an entirety, as the case may be, shall,
as a part of such consolidation, merger, conveyance or transfer, comply with the
conditions set forth in Article Eight.
SECTION 9.3 Prior Payment to Senior Indebtedness Upon Acceleration of
Securities.
In the event that any Securities are declared due and payable before
their Stated Maturity due to the occurrence of an Event of Default, then and in
such event the holders of the Senior Indebtedness outstanding at the time such
Securities so become due and payable shall be entitled to receive payment in
full of all amounts due or to become due on or in respect of all such Senior
Indebtedness, or provision shall be made for such payment in money or money's
worth, before the Holders of the Securities are entitled to receive any payment
(including any payment which may be payable by reason of the payment of any
other indebtedness of the Company being subordinated to the payment of the
Securities) by the Company on account of the principal of or interest on the
Securities or on account of the purchase or other acquisition of Securities.
43
<PAGE>
<PAGE>
In the event that, notwithstanding the foregoing, the Company shall
make any payment to the Agent or the Holder of any Securities prohibited by the
foregoing provisions of this Section, and if such fact shall then have been made
known to the Agent or, as the case may be, such Holder, then and in such event
such payment shall be paid over and delivered forthwith to the Company for the
benefit of the holders of Senior Indebtedness.
SECTION 9.4 No Payment When Senior Indebtedness in Default.
(a) In the event and during the continuation of any default in the
payments of principal of or interest on any Senior Indebtedness beyond any
applicable grace period with respect thereto, or in the event that any event of
default with respect to any Senior Indebtedness shall have occurred and be
continuing and the holders of such Senior Indebtedness (or an agent on behalf of
the holders thereof) have declared such Senior Indebtedness due and payable
prior to the date on which it would otherwise have become due and payable,
unless and until such event of default shall have been cured or waived or shall
have ceased to exist and such acceleration shall have been rescinded or
annulled, or (b) in the event any judicial proceeding shall be pending with
respect to any such default in payment or event of default, then no payment
(including any payment which may be payable by reason of the payment of any
other indebtedness of the Company being subordinated to the payment of the
Securities) shall be made by the Company on account of principal of or interest
on the Securities or on account of the purchase or other acquisition of
Securities; provided, however, (i) that on and after the 90th day after such
default on Senior Indebtedness, payments hereunder to Securityholders may
resume; (ii) nothing herein shall prevent or delay the Agent or Holders, as the
case may be, from commencing the exercise of their legal rights and remedies
arising from any Event of Default; and (iii) there may not be more than two
payment blockages hereunder during any 12 month period.
In the event that, notwithstanding the foregoing, the Company shall
make any payment to the Agent or the Holder of any Security prohibited by the
foregoing provisions of this Section, and if such fact shall then have been made
known to the Agent or, as the case may be, such Holder, then and in such event
such payment shall be paid over and delivered forthwith to the Company for the
benefit of the holders of Senior Indebtedness.
SECTION 9.5 Payment Permitted if No Default.
Nothing contained in this Article or elsewhere in this Indenture or in
any of the Securities shall prevent (a) the Company, at any time except during
the pendency of any case, proceeding, dissolution, liquidation or other winding
up, assignment for the benefit of creditors or other marshaling of assets and
liabilities of the Company referred to in Section 5.01(6) or (7) or under the
conditions described in Section 9.03 or 9.04, from making payments at any time
of principal of
44
<PAGE>
<PAGE>
or interest on the Securities, or (b) the application by the Agent or the
indefeasible retention thereof by the Holders of any money deposited with it
hereunder to the payment of or on account of the principal of or interest on or
any other amounts under the Securities if, at the time of such application, the
Agent did not have knowledge that such payment would have been prohibited by the
provisions of this Article.
SECTION 9.6 Subrogation to Rights of Holders of Senior Indebtedness.
Subject to the payment in full of all Senior Indebtedness, the Holders
of the Securities shall be subrogated to the extent of the payments or
distribution made to the holders of such Senior Indebtedness pursuant to the
provisions of this Article to the rights of the holders of such Senior
Indebtedness to receive payments or distribution of cash, property or securities
applicable to the Senior Indebtedness (and any and all collateral therefor)
until the principal of and interest on the Securities shall be paid in full. For
purposes of such subrogation, no payments or distributions to the holders of the
Senior Indebtedness of any cash, property or securities to which the Holders of
the Securities or the Agent, shall, as between the Company, its creditors other
than holders of Senior Indebtedness and the Holders of the Securities, be deemed
to be payment or distribution by the Company to or on account of Senior
Indebtedness.
SECTION 9.7 Provisions Solely to Define Relative Rights.
The provisions of this Article are and are intended solely for the
purpose of defining the relative rights of the Holders of the Securities, on the
one hand, and the holders of Senior Indebtedness, on the other hand. Nothing
contained in this Article or elsewhere in this Indenture or in the Securities is
intended to or shall impair, as between the Company, its creditors other than
the holders of Senior Indebtedness and the Holders of the Securities, the
obligation of the Company, which is absolute and unconditional, to pay to the
Holders of the Securities the principal of and interest on the Securities as and
when the same shall become due and payable in accordance with their terms and
which subject to the rights under this Article of the holders of Senior
Indebtedness, is intended to rank equally with all other general obligations of
the Company, or is intended to or shall affect the relative rights against the
Company of the Holders of the Securities and creditors of the Company other than
the holders of Senior Indebtedness, nor shall anything herein or therein prevent
the Agent or the Holder of any Security from exercising all remedies otherwise
permitted by applicable law upon default under this Indenture, subject to the
rights, if any, under this Article of the holders of Senior Indebtedness to
receive cash, property or securities otherwise payable or deliverable to the
Agent or such Holder.
SECTION 9.8 Agent to Effectuate Subordination.
Each Holder of a Security by such Holder's acceptance thereof
authorizes and directs the Agent on such Holder's behalf to take such action as
may be necessary or appropriate to effectuate the subordination provided in this
Article and appoint the Agent his attorney-in-fact for any and all such
purposes.
SECTION 9.9 No Waiver of Subordination Provisions.
45
<PAGE>
<PAGE>
No right of any present or future holder of any Senior Indebtedness to
enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Company
or by any act or failure to act, in good faith, by any such holder, or by any
noncompliance by the Company with the terms, provisions and covenants of this
Indenture, regardless of any knowledge thereof any such holder may have or be
otherwise charged with.
Without in any way limiting the generality of the foregoing paragraph,
the holders of Senior Indebtedness may, at any time and from time to time,
without the consent of or notice to the Agent or the Holders of the Securities
without incurring responsibility to the Holders of the Securities and without
impairing or releasing the subordination provided in this Article or the
obligations hereunder of the Holders of the Securities to the holders of Senior
indebtedness, do any one or more of the following: (i) change the manner place
or terms of payment or extend the time of payments of, or renew or alter Senior
Indebtedness, or otherwise amend or supplement in any manner Senior Indebtedness
or any instrument evidencing the same or any agreement under which Senior
Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with
any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii)
release any person liable in any manner for the collection of Senior
Indebtedness; and (iv) exercise or refrain from exercising any rights against
the Company and any other Person.
SECTION 9.10 Notice to Agent.
The Company shall give prompt written notice to the Agent of any fact
known to the Company which would prohibit the making of any payment to or by the
Agent in respect of the Securities. Failure to give such notice shall not affect
the subordination of the Securities to Senior Indebtedness. Notwithstanding the
provisions of this Article or any other provision of this Indenture, the Agent
shall not be charged with knowledge of the existence of any facts which would
prohibit the making of any payment to or by the Agent in respect of the
Securities, unless and until the Agent shall have received written notice
thereof from the Company or a holder of Senior Indebtedness or from any agent
therefor; and, prior to the receipt of any such written notice the Agent,
subject to the provisions of Section 6.01, shall be entitled in all respects to
assume that no such facts exist; provided, however, that if the Agent shall not
have received, at least five Business Days prior to the date upon which by the
terms hereof any such money may become payable for any purpose (including,
without limitation, the payment of the principal of or interest on any
Security), the notice with respect to such money provided for in this Section,
then, anything herein contained to the contrary notwithstanding, the Agent shall
have full power and authority to receive such money and to apply the same to the
purpose for which such money was received and shall not be affected by any
notice to the contrary which may be received by it within five Business Days
prior to such date.
Subject to the provisions of Section 6.01, the Agent shall be entitled
to rely on the delivery to it of a written notice by a Person representing
himself to be a holder of Senior Indebtedness (or an agent on behalf of such
holder) to establish that such notice has been given by a holder of Senior
Indebtedness (or an agent on behalf of any
46
<PAGE>
<PAGE>
such holder). In the event that the Agent determines in good faith that further
evidence is required with respect to the right of any Person as a holder of
Senior Indebtedness to participate in any payment or distribution pursuant to
this Article, the Agent may request such Person to furnish evidence to the
reasonable satisfaction of the Agent as to the amount of Senior Indebtedness
held by such Person, the extent to which such Person is entitled to participate
in such payment or distribution and any other facts pertinent to the rights of
such Person under this Article, and if such evidence is not furnished, the Agent
may defer any payment to such Person pending judicial determination as to the
right of such Person to receive such payment.
SECTION 9.11 Reliance on Judicial Order or Certificate of Liquidating
Agent.
Upon any payment or distribution of assets of the Company referred to
in this Article, the Agent, subject to the provisions of Section 6.01, and the
Holders of the Securities shall be entitled to rely upon any order or decree
entered by any court of competent jurisdiction in which such insolvency,
bankruptcy, receivership, liquidation, reorganization, dissolution, winding up
or similar case or proceeding is pending, or a certificate of the Agent in
bankruptcy, liquidating Agent, custodian, receiver, assignee for the benefit of
creditors, agent or other Person making such payment or distribution, delivered
to the Agent or to the Holders of Securities, for the purpose of ascertaining
the Persons entitled to participate in such payment or distribution, the holders
of the Senior Indebtedness and other indebtedness of the Company, the amount
thereof or payable thereon, the amount or amounts paid or distributed thereon
and all other facts pertinent thereto or to this Article.
SECTION 9.12 Agent Not Fiduciary for Holders of Senior Indebtedness.
The Agent shall not be deemed to owe any fiduciary duty to the holders
of Senior Indebtedness and shall not be liable to any such holders if it shall
in good faith mistakenly pay over or distribute to Holders or Securities or to
the Company or to any other Person cash, property or securities to which any
holders of Senior Indebtedness shall be entitled by virtue of this Article or
otherwise.
SECTION 9.13 Rights of Agent as Holder of Senior Indebtedness;
Preservation of Agent's Rights.
The Agent in its individual capacity shall be entitled to all the
rights set forth in this Article with respect to any Senior Indebtedness which
may at any time be held by it, to the same extent as any other holder of Senior
Indebtedness, and nothing in this Indenture shall deprive the Agent of any of
its rights as such holder.
Nothing in this Article shall apply to claims of, or payments to, the
Agent under or pursuant to Section 6.06.
47
<PAGE>
<PAGE>
SECTION 9.14 Article Applicable to Paying Agents.
In case at any time any Paying Agent other than the Agent shall have
been appointed by the Company and be then acting hereunder, the term "Agent" as
used in this Article shall in such case (unless the context otherwise requires)
be construed as extending to and including such Paying Agent, within its meaning
as fully for all intents and purposes as if such Paying Agent were named in this
Article in addition to or in place of the Agent; provided, however, that Section
9.13 shall not apply to the Company or any Affiliate of the Company if it or
such Affiliate acts as Paying Agent.
SECTION 9.15 Certain Conversions Deemed Payment.
For the purposes of this Article only, (1) the issuance and delivery
of junior securities upon conversion of Securities in accordance with Article
Eight shall not be
deemed to constitute a payment or distribution on account of the principal of or
interest on Securities or on account of the purchase or other acquisition of
Securities, and (2) the payment, issuance or delivery of cash, property or
securities (other than cash paid in lieu of fractional shares and other than
junior securities) upon conversion of a Security shall be deemed to constitute
payment on account of the principal of such Security. For the purposes of this
Section, the term "junior securities" means (a) shares of any stock of any class
of the Company and (b) securities of the Company which are subordinated in right
of payment to all Senior Indebtedness which may be outstanding at the time of
issuance or delivery of such securities to the same extent as, or to a greater
extent than, the Securities are subordinated as provided in this Article.
Nothing contained in this Article or elsewhere in this Indenture or in the
Securities is intended to or shall impair, as among the Company, its creditors
other than holders of Senior Indebtedness and the Holders of the Securities, the
right, which is absolute and unconditional, of the Holder of any Security to
convert such Security in accordance with Article Thirteen.
ARTICLE 10.
Amendments
SECTION 10.1 Without Consent of Holders. The Company, when authorized
by a resolution of its Board of Directors, and the Agent may amend this
Indenture or the Securities without notice to or consent of any Securityholder:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to comply with Article 4;
(3) to add guarantees with respect to the Securities or to secure the
Securities;
(4) to add to the covenants of the Company for the benefit of the
Holders or to surrender any right or power herein conferred upon the
Company; or
48
<PAGE>
<PAGE>
(5) to make any change that does not adversely affect the rights of
any Securityholder.
After an amendment under this Section becomes effective, the Company
shall mail to Securityholders a notice briefly describing such amendment. The
failure to give such notice to all Securityholders, or any defect therein, shall
not impair or affect the validity of an amendment under this Section.
SECTION 10.2 With Consent of Holders. The Company, when authorized by
a resolution of its Board of Directors, and the Agent may amend this Indenture
or the Securities without notice to any Securityholder but with the written
consent of the Holders of at least a majority in principal amount of the
Securities. However, without the consent of each Securityholder affected, an
amendment may not:
(1) reduce the amount of Securities whose Holders must consent to an
amendment;
(2) reduce the rate of or extend the time for payment of interest on
any Security;
(3) reduce the principal of or extend the Stated Maturity of any
Security;
(4) make any Security payable in money other than that stated in the
Security; or
(5) make any change in Section 5.04 or 5.07 or the second sentence of
this Section.
It shall not be necessary for the consent of the Holders under this
Section to approve the particular form of any proposed amendment, but it shall
be sufficient if such consent approves the substance thereof.
After an amendment under this Section becomes effective, the Company
shall mail to Securityholders a notice briefly describing such amendment. The
failure to give such notice to all Securityholders, or any defect therein, shall
not impair or affect the validity of an amendment under this Section.
SECTION 10.3 Revocation and Effect of Consents and Waivers. A consent
to an amendment or a waiver by a Holder of a Security shall bind the Holder and
every subsequent Holder of that Security or portion of the Security that
evidences the same debt as the consenting Holder's Security, even if notation of
the consent or waiver is not made on the Security. However, any such Holder or
subsequent Holder may revoke the consent or waiver as to such Holder's Security
or portion of the Security if the Agent receives the notice of revocation before
the date the amendment or waiver becomes effective. After an amendment or waiver
becomes effective, it shall bind every Securityholder.
49
<PAGE>
<PAGE>
The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Securityholders entitled to give their consent or
take any other action described above or required or permitted to be taken
pursuant to this Indenture. If a record date is fixed, then notwithstanding the
immediately preceding paragraph, those Persons who were Securityholders at such
record date (or their duly designated proxies), and only those Persons, shall be
entitled to give such consent or to revoke any consent previously given or to
take any such action, whether or not such Persons continue to be Holders after
such record date. No such consent shall be valid or effective for more than 120
days after such record date.
SECTION 10.4 Notation on or Exchange of Securities. If an amendment
changes the terms of a Security, the Agent may require the Holder of the
Security to deliver it to the Agent. The Agent may place an appropriate notation
on the Security regarding the changed terms and return it to the Holder.
Alternatively, if the Company or the Agent so determines, the Company in
exchange for the Security shall issue new Security that reflects the changed
terms. Failure to make the appropriate notation or to issue a new Security shall
not affect the validity of such amendment.
SECTION 10.5 Agent To Sign Amendments. The Agent shall sign any
amendment authorized pursuant to this Article 10 if the amendment does not
adversely affect the rights, duties, liabilities or immunities of the Agent. If
it does, the Agent may but need not sign it. In signing such amendment the Agent
shall be entitled to receive indemnity reasonably satisfactory to it and to
receive, and (subject to Section 6.01) shall be fully protected in relying upon,
an Officers' Certificate and an Opinion of Counsel stating that such amendment
is authorized or permitted by this Indenture.
SECTION 10.6 Payment for Consent. Neither the Company nor any
Affiliate of the Company shall, directly or indirectly, pay or cause to be paid
any consideration, whether by way of interest, fee or otherwise, to any Holder
for or as an inducement to any consent, waiver or amendment of any of the terms
or provisions of this Indenture or the Securities unless such consideration is
offered to be paid to all Holders that so consent, waive or agree to amend in
the time frame set forth in solicitation documents relating to such consent,
waiver or agreement.
ARTICLE 11.
Miscellaneous
SECTION 11.1 Notices. Any notice or communication shall be in writing
and delivered in person or mailed by first-class mail, overnight delivery by a
nationally recognized overnight delivery service, or sent by facsimile
transmission addressed as follows:
if to the Company: 301 Congress Avenue 9th Floor
Austin, Texas 78701
50
<PAGE>
<PAGE>
Attn: Chairman
if to the Agent: BankBoston, N.A.
100 Federal Street
Boston, Massachusetts 02110
Attn: Deirdre Holland (MS01-10-08)
Fax: 617-434-1096
copy to: Riemer & Braunstein
Three Center Plaza
Boston, Massachusetts 02108
Attn: Ronald Braunstein, Esq.
if to Initial Holder: BancBoston Investments, Inc.
175 Federal Street
` Boston, Massachusetts 02110
Attn: Mary Reilly, Vice President
(MS75-10-01)
Fax:
The Company or the Agent by notice to the other may designate
additional or different addresses for subsequent notices or communications.
Any notice or communication mailed to a Securityholder shall be mailed
to the Securityholder at the Securityholder's address as it appears on the
registration books of the Registrar and shall be sufficiently given if so mailed
within the time prescribed.
Failure to mail a notice or communication to a Securityholder or any
defect in it shall not affect its sufficiency with respect to other
Securityholders. If a notice or communication is given in the manner provided
above, it is duly given, upon receipt or (a) for mail, three Business Days
thereafter, and (b) for overnight delivery on the following Business Day.
SECTION 11.2 Certificate and Opinion as to Conditions Precedent. Upon
any request or application by the Company to the Agent to take or refrain from
taking any action under this Indenture, the Company shall furnish to the Agent:
(1) an Officers' Certificate in form and substance reasonably
satisfactory to the Agent stating that, in the opinion of the signers, all
conditions precedent, if any, provided for in this Indenture relating to
the proposed action have been complied with; and
(2) an Opinion of Counsel in form and substance reasonably
51
<PAGE>
<PAGE>
satisfactory to the Agent stating that, in the opinion of such counsel, all
such conditions precedent have been complied with.
SECTION 11.3 Statements Required in Certificate or Opinion. Each
certificate or opinion with respect to compliance with a covenant or condition
provided for in this Indenture shall include:
(1) a statement that the individual making such certificate or opinion
has read such covenant or condition;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of such individual, he has made
such examination or investigation as is necessary to enable him to express
an informed opinion as to whether or not such covenant or condition has
been complied with; and
(4) a statement as to whether or not, in the opinion of such
individual, such covenant or condition has been complied with.
SECTION 11.4 When Securities Disregarded. In determining whether the
Holders of the required principal amount of Securities have concurred in any
direction, waiver or consent, Securities owned by the Company or by any Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with the Company shall be disregarded and deemed not to be
outstanding, except that, for the purpose of determining whether the Agent shall
be protected in relying on any such direction, waiver or consent, only
Securities which the Agent knows are so owned shall be so disregarded. Also,
subject to the foregoing, only Securities outstanding at the time shall be
considered in any such determination.
SECTION 11.5 Legal Holidays. A "Legal Holiday" is a Saturday, a Sunday
or a day on which banking institutions are not required to be open in the State
of New York or in Boston, Massachusetts. If a payment date is a Legal Holiday,
payment shall be made on the next succeeding day that is not a Legal Holiday,
and no interest shall accrue for the intervening period. If a regular record
date is a Legal Holiday, the record date shall not be affected.
SECTION 11.6 Governing Law. This Indenture and the Securities shall be
governed by, and construed in accordance with, the laws of the State of New York
but without giving effect to applicable principles of conflicts of law to the
extent that the application of the laws of another jurisdiction would be
required thereby.
SECTION 11.7 No Recourse Against Others. A director, officer, employee
or stockholder, as such, of the Company shall not have any liability for any
obligations of the Company under the Securities or this Indenture or for any
claim based
52
<PAGE>
<PAGE>
on, in respect of or by reason of such obligations or their creation. By
accepting a Security, each Securityholder shall waive and release all such
liability. The waiver and release shall be part of the consideration for the
issue of the Securities.
SECTION 11.8 Successors. All agreements of the Company in this
Indenture and the Securities shall bind its successors. All agreements of the
Agent in this Indenture shall bind its successors.
SECTION 11.9 Multiple Originals . The parties may sign any number of
copies of this Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement. One signed copy is enough to prove this
Indenture.
SECTION 11.10 Table of Contents; Headings. The table of contents,
cross-reference sheet and headings of the Articles and Sections of this
Indenture have been inserted for convenience of reference only, are not intended
to be considered a part hereof and shall not modify or restrict any of the terms
or provisions hereof.
ARTICLE 12.
Redemption of Securities
SECTION 12.1 Right of Redemption. The Securities may be redeemed, as a
whole or from time to time in part, at any time on or after July 1, 1999, at the
Redemption Prices specified in the form of Security, together with accrued
interest to the Redemption Date.
SECTION 12.2 Applicability of Article. Redemption of Securities at the
election of the Company or otherwise, as permitted or required by any provision
of this Indenture, shall be made in accordance with such provision and this
Article.
SECTION 12.3 Election to Redeem; Notice to Agent. The election of the
Company to redeem any Securities pursuant to Section 12.01 shall be evidenced by
a Board Resolution. In case of any redemption at the election of the Company of
less than all the Securities, the Company shall, at least 20 days prior to the
Redemption Date fixed by the Company (unless a shorter notice shall be
satisfactory to the Agent), notify the Agent of such Redemption Date and of the
principal amount of Securities to be redeemed and shall deliver to the Agent
such documentation and records as shall enable the Agent to select the
Securities to be redeemed.
SECTION 12.4 Selection by Agent of Securities to Be Redeemed. If less
than all the Securities are to be redeemed, the particular Securities to be
redeemed shall be selected not more than 20 days prior to the Redemption Date by
the Agent, from the outstanding Securities not previously called for redemption,
by such method as the Agent shall deem fair and appropriate (so long as such
method is acceptable to the securities exchange or exchanges, if any, on which
the Securities are listed) and which may provide for the selection for
redemption of portions (equal to $250,000 or any
53
<PAGE>
<PAGE>
integral multiple of $50,000 in excess thereof) of the principal amount of
Securities of a denomination larger than $500,000.
If any Security selected for partial redemption is converted in part
before termination of the conversion right with respect to the portion of the
Security so selected, the converted portion of such Security shall be deemed (so
far as may be) to be the portion selected for redemption. Securities which have
been converted during a selection of Securities to be redeemed shall be treated
by the Agent as Outstanding for the purpose of such selection.
The Agent shall promptly notify the Company and each Security
Registrar in writing of the Securities selected for redemption and, in the case
of any Securities selected for partial redemption, the principal amount thereof
to be redeemed.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to the redemption of Securities shall relate,
in the case of any Securities redeemed or to be redeemed only in part, to the
portion of the principal amount of such Security which has been or is to be
redeemed.
SECTION 12.5 Notice of Redemption. Notice of redemption shall be given
by the Company first-class mail, postage prepaid, mailed not less than 20 or
more than 60 days prior to the Redemption Date, to each Securityholder to be
redeemed, at his address appearing in the Security Register. Such notice shall
be presumed to have been given when so mailed.
All notices of redemption shall state:
(1) the Redemption Date.
(2) the Redemption Price,
(3) if less than all the Outstanding Securities are to be redeemed,
the identification (and, in the case of partial redemption, the principal
amounts) of the particular Securities to be redeemed,
(4) that on the Redemption Date the Redemption Price will become due
and payable upon each such Security to be redeemed and that interest
thereon will cease to accrue on and after said date,
(5) the conversion price, the date on which the right to convert the
principal of the Securities to be redeemed will terminate and the place or
places where such Securities may be surrendered for conversion, and
(6) the place or places where such Securities are to be surrendered
for payment of the Redemption Price.
Notice of redemption of Securities to be redeemed at the election of
the
54
<PAGE>
<PAGE>
Company shall be given by the Company (with a copy to the Agent).
SECTION 12.6 Deposit of Redemption Price. On or before any Redemption
Date, the Company shall deposit with the Agent in immediately available funds an
amount of money sufficient to pay the Redemption Price of, and (except if the
Redemption Date shall be an Interest Payment Date) accrued interest on, all the
Securities which are to be redeemed on that date other than any Securities
called for redemption on that date which have been converted prior to the date
of such deposit.
If any Security called for redemption is converted, any money
deposited with the Agent for the redemption of such Security shall be paid to
the Company upon Company Request.
SECTION 12.7 Securities Payable on Redemption Date. Notice of
redemption having been given as aforesaid, the Securities so to be redeemed
shall, on the Redemption Date, become due and payable at the Redemption Price
therein specified, and from and after such date (unless the Company shall
default in the payment of the Redemption Price and accrued interest) such
Securities shall cease to bear interest. Upon surrender of any such Security for
redemption in accordance with said notice, such Security shall be paid by the
Company at the Redemption Price, together with accrued interest to the
Redemption Date.
If any Security called for redemption shall not be so paid upon
surrender thereof for redemption, at the Holder's option, such redemption shall
be deemed rescinded or such failure shall constitute an Event of Default
hereunder.
SECTION 12.8 Securities Redeemed in Part. Any Security which is to be
redeemed only in part shall be surrendered at an office or agency of the Company
designated for that with, if the Company or the Agent so requires, due
endorsement by, or a written instrument of transfer in form satisfactory to the
Company and the Agent duly executed by, the Holder thereof or his attorney duly
authorized in writing), and the Company shall execute and deliver to the Holder
of such Security without service charge, a new Security or Securities, of any
authorized denomination as requested by such Security holder in an aggregate
principal amount equal to and in exchange for the unredeemed portion of the
principal of the Security so surrendered.
ARTICLE 13.
Right to Require Repurchase
SECTION 13.1 Right to Require Repurchase. In the event that there
shall occur a Change in Control of the Company, then each Holder shall have the
right, at such Holder's option, to require the Company to purchase, and upon the
exercise of such right the Company shall purchase, all or any part of such
Holder's Securities on the date (the "Repurchase Date") that is 30 days after
the date of such Change in Control at a price (the "Repurchase Price") equal to
100% of the principal amount thereof, together with accrued and unpaid interest
to the Repurchase Date.
55
<PAGE>
<PAGE>
SECTION 13.2 Notice; Method of Exercising Repurchase Right. (a) On or
before the 10th day after the earlier of (i) Change in Control or (ii) the
reaching of a definitive agreement with respect to the occurrence of a Change in
Control, the Company, or at the request of the Company, the Agent (in the name
and at the expense of the Company), shall give notice of the occurrence of the
Change in Control and of the repurchase right set forth herein arising as a
result thereof by first-class mail, postage prepaid, to each Holder of the
Securities at such Holder's address appearing in the Security Register. The
Company shall also deliver a copy of such notice of a repurchase right to the
Agent and the Company shall deliver in the name of the Holder a new Security or
Securities in the aggregate principal amount of the unrepurchased portion of
such surrendered Security.
SECTION 13.3 Deposit of Repurchase Price. Prior to the Repurchase
Date, the Company shall deposit with the Agent in immediately available funds an
amount of money sufficient to pay the Repurchase Price of the Securities which
are to be repaid on the Repurchase Date.
SECTION 13.4 Securities Not Repaid on Repurchase Date. If any Security
surrendered for repurchase shall not be so paid on the Repurchase Date, the
principal shall, until paid, bear interest to the extent permitted by applicable
law from the Repurchase Date at the default rate borne by the Security, and an
Event of Default shall be deemed to have occurred hereunder.
SECTION 13.5 Securities Repurchased in Part. Any Security which is to
be repurchased only in part shall be surrendered at any office or agency of the
Company designated for that (with, if the Company or the Agent so requires, due
endorsement by, or a written instrument of transfer in form satisfactory to the
Company and the Agent duly executed by, the Holder thereof or his attorney duly
authorized in writing), and the Company shall execute and deliver to the Holder
of such Security without service charge, a new Security or Securities, of any
authorized denomination as requested by such Holder, in aggregate principal
amount equal to and in exchange for the unrepurchased portion of the principal
of the Security so surrendered.
56
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Indenture to be duly
executed as of the date first written above.
AUTOBOND ACCEPTANCE CORPORATION
By:
----------------------------------
Name:
Title:
BANKBOSTON, N.A.
By:
----------------------------------
Name:
Title:
57
<PAGE>
<PAGE>
Execution Copy
================================================================================
AUTOBOND ACCEPTANCE CORPORATION
15% Senior Subordinated Notes Due 2001
15% Convertible Subordinated Notes Due 2001
-----------------------
INDENTURE
Dated as of January 30, 1998
-----------------------
BANKBOSTON, N.A.,
Agent
================================================================================
<PAGE>
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1.
Definitions and Incorporation by Reference........1
SECTION 1.01 Definitions ............................................1
SECTION 1.02 Other Definitions .....................................15
SECTION 1.03 Rules of Construction .................................15
ARTICLE 2.
The Securities...................................16
SECTION 2.01 Form and Dating .......................................16
SECTION 2.02 Execution and Authentication ..........................16
SECTION 2.03 Registrar and Paying Agent ............................16
SECTION 2.04 Paying Agent ..........................................17
SECTION 2.05 Securityholder Lists ..................................17
SECTION 2.06 Transfer and Exchange .................................17
SECTION 2.07 Replacement Securities ................................17
SECTION 2.08 Outstanding Securities ................................18
SECTION 2.09 Temporary Securities ..................................18
SECTION 2.10 Cancellation ..........................................18
SECTION 2.11 Defaulted Interest ....................................18
SECTION 2.12 Special Transfer Provisions ...........................18
ARTICLE 3.
Covenants.......................................19
SECTION 3.01 Payment of Securities .................................19
SECTION 3.02 SEC Reports ...........................................19
SECTION 3.03 Limitation on Indebtedness ............................19
SECTION 3.04 Limitation on Indebtedness and Preferred Stock of
Restricted Subsidiaries................................19
SECTION 3.05 Limitation on Restricted Payments .....................20
SECTION 3.06 Limitation on Restrictions on Distributions from
Restricted Subsidiaries................................21
SECTION 3.07 Limitation on Sales of Assets and Subsidiary Stock ....21
SECTION 3.08 Limitation on Liens ...................................21
SECTION 3.09 Financial Covenants. ..................................21
SECTION 3.10 Further Assurances. ...................................22
SECTION 3.11 Limitation on Investment Company Status ...............22
SECTION 3.12 Compliance Certificate ................................22
SECTION 3.13 Further Instruments and Acts ..........................22
i
<PAGE>
<PAGE>
ARTICLE 4.
Successor Company................................22
SECTION 4.01 When Company May Merge or Transfer Assets 23
ARTICLE 5.
Defaults and Remedies............................23
SECTION 5.01 Events of Default .....................................24
SECTION 5.02 Acceleration ..........................................26
SECTION 5.03 Other Remedies ........................................26
SECTION 5.04 Waiver of Past Defaults ...............................26
SECTION 5.05 Control by Majority ...................................26
SECTION 5.06 Limitation on Suits ...................................27
SECTION 5.07 Rights of Holders To Receive Payment ..................27
SECTION 5.08 Collection Suit by Agent ..............................27
SECTION 5.09 Agent May File Proofs of Claim ........................27
SECTION 5.10 Priorities ............................................28
SECTION 5.11 Undertaking for Costs .................................28
SECTION 5.12 Waiver of Stay or Extension Laws ......................28
ARTICLE 6.
Agent............................................29
SECTION 6.01 Duties of Agent .......................................29
SECTION 6.02 Rights of Agent .......................................30
SECTION 6.03 Individual Rights of Agent ............................30
SECTION 6.04 Agent's Disclaimer ....................................30
SECTION 6.05 Notice of Defaults ....................................30
SECTION 6.06 Compensation and Indemnity ............................31
SECTION 6.07 Replacement of Agent ..................................31
SECTION 6.08 Successor Agent by Merger .............................32
SECTION 6.09 Eligibility; Disqualification .........................32
ARTICLE 7.
Discharge of Indenture...........................33
SECTION 7.01 Discharge of Liability on Securities ..................33
SECTION 7.02 Repayment to Company ..................................33
ARTICLE 8.
Optional Conversion of Securities................33
SECTION 8.01 Optional Conversion Privilege and Conversion Price ....33
SECTION 8.02 Exercise of Optional Conversion Privilege .............34
SECTION 8.03 Fractions of Shares ...................................34
SECTION 8.04 Adjustment of Conversion Price ........................35
SECTION 8.05 Notice of Adjustments of Conversion Price .............38
SECTION 8.06 Notice of Certain Corporate Action ....................38
ii
<PAGE>
<PAGE>
SECTION 8.07 Company to Reserve Common Stock .......................39
SECTION 8.08 Taxes on Conversions ..................................40
SECTION 8.09 Covenant as to Common Stock; Accounting Treatment
of Consideration ......................................40
SECTION 8.10 Cancellation of Converted Series B Securities .........40
SECTION 8.11 Provisions in Case of Consolidation, Merger or
Sale of Assets ........................................40
SECTION 8.12 Registration and Listing of Shares ....................41
SECTION 8.13 Agent and Conversion Agents Not Liable ................41
ARTICLE 9.
Subordination of Securities......................43
SECTION 9.01 Securities Subordinate to Senior Indebtedness .........43
SECTION 9.02 Payment Over of Proceeds Upon Dissolution, Etc. .......43
SECTION 9.03 Prior Payment to Senior Indebtedness Upon
Acceleration of Securities ............................44
SECTION 9.05 Payment Permitted if No Default. ......................45
SECTION 9.06 Subrogation to Rights of Holders of
Senior Indebtedness ...................................45
SECTION 9.10 Notice to Agent .......................................47
ARTICLE 10.
Amendments.......................................49
SECTION 10.01 Without Consent of Holders ...........................49
SECTION 10.02 With Consent of Holders ..............................50
SECTION 10.03 Revocation and Effect of Consents and Waivers ........50
SECTION 10.04 Notation on or Exchange of Securities ................51
SECTION 10.05 Agent To Sign Amendments .............................51
SECTION 10.06 Payment for Consent ..................................51
ARTICLE 11.
Miscellaneous....................................51
SECTION 11.01 Notices ..............................................51
SECTION 11.02 Certificate and Opinion as to Conditions Precedent ...52
SECTION 11.03 Statements Required in Certificate or Opinion ........52
SECTION 11.04 When Securities Disregarded ..........................53
SECTION 11.05 Legal Holidays .......................................53
SECTION 11.06 Governing Law ........................................53
SECTION 11.07 No Recourse Against Others ...........................53
SECTION 11.08 Successors ...........................................53
SECTION 11.09 Multiple Originals ...................................54
SECTION 11.10 Table of Contents; Headings ..........................54
ARTICLE 12.
Redemption of Securities.........................54
SECTION 12.01 Right of Redemption ..................................54
iii
<PAGE>
<PAGE>
SECTION 12.02 Applicability of Article ............................54
SECTION 12.03 Election to Redeem; Notice to Agent .................54
SECTION 12.04 Selection by Agent of Securities to Be Redeemed .....54
SECTION 12.05 Notice of Redemption ................................55
SECTION 12.06 Deposit of Redemption Price. ........................55
SECTION 12.07 Securities Payable on Redemption Date ...............56
SECTION 12.08 Securities Redeemed in Part. ........................56
ARTICLE 13.
Right to Require Repurchase.....................56
SECTION 13.01 Right to Require Repurchase .........................56
SECTION 13.02 Notice; Method of Exercising Repurchase Right .......56
SECTION 13.03 Deposit of Repurchase Price .........................57
SECTION 13.04 Securities Not Repaid on Repurchase Date ............57
SECTION 13.05 Securities Repurchased in Part ......................57
Exhibit A - Form of Series A Note
Exhibit B - Form of Series B Note
Exhibit C - Form of Transferee Letter
Exhibit D - Form of Investment Letter
iv
<PAGE>
<PAGE>
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. BY ITS ACCEPTANCE
HEREOF, EACH PURCHASER REPRESENTS AND AGREES THAT THIS NOTE MAY NOT BE OFFERED,
SOLD, PLEDGED OR OTHERWISE TRANSFERRED, EXCEPT IN COMPLIANCE WITH THE
REGISTRATION PROVISIONS OF THE SECURITIES ACT AND ANY APPLICABLE PROVISIONS
UNDER STATE SECURITIES LAWS OR PURSUANT TO AN AVAILABLE EXEMPTION FROM SUCH
PROVISIONS. THE TRANSFER OF THIS NOTE IS SUBJECT TO CERTAIN CONDITIONS SET FORTH
IN THE INDENTURE REFERRED TO HEREIN.
15% Senior Subordinated Note due 2001
15% Convertible Subordinated Note due 2001
No. R-1 $ 7,500,000
-------------- ------------
AutoBond Acceptance Corporation, a corporation duly organized and
existing under the laws of Texas (herein called the "Company", which term
includes any successor corporation under the Indenture hereinafter referred to);
for value received, hereby promises to pay to BancBoston Investments, Inc., or
registered assigns, the principal sum of $7,500,000 on January 31, 2001, and to
pay interest thereon from January 30, 1998 or from the most recent Interest
Payment Date to which interest has been paid, quarterly on February 1, May 1,
August 1, and November 1 in each year, commencing May 1, 1998 (and upon the
Stated Maturity), in arrears at the rate of 15% per annum (17% after Stated
Maturity), until the principal hereof is paid. Payment of the principal of (and
premium, if any) and interest on this Security will be made by wire transfer in
immediately available funds to the Holder. Interest shall be computed on the
basis of actual days elapsed and a 360-day year consisting of twelve 30-day
months.
This Security is one of a duly authorized issue of Securities of the
Company designated as its 15% Senior Subordinated Notes due 2001 and its 15%
Convertible Subordinated Notes due 2001 (herein called the "Securities"),
limited in aggregate principal amount to $7,500,000 (subject to increase at the
option of the Holder, as provided in the Indenture, up to $10,000,000 aggregate
principal amount), issued under an Indenture, dated as of January 30, 1998
(herein called the "Indenture"), between the Company and BankBoston, N.A., as
agent (herein called the "Agent", which term includes any successor agent under
the Indenture), to which Indenture and all indentures supplemental thereto
reference is hereby made for a statement of the respective rights, limitations
of rights, duties and immunities thereunder of the Company, the Agent, the
holders of Senior Indebtedness and the Holders of the Securities and of the
terms upon which the Securities are, and are to be, authenticated and delivered.
<PAGE>
<PAGE>
Optional Conversion. Subject to and upon compliance with the
provisions of the Indenture, the Holder of this Security is entitled, at such
Holder's option, at any time on or before the close of business on January 31,
2001, or in case this Security or a portion hereof is called for redemption,
then in respect of this Security or such portion hereof until and including, but
(unless the Company defaults in making the payment due upon redemption) not
after, the close of business on the Redemption Date, to convert up to
$1,215,924.60 in principal amount of this Security (or any portion of the
principal amount hereof which is $1,000 or an integral multiple thereof), at the
principal amount hereof, or of such portion, into fully paid and nonassessable
shares (calculated as to each conversion to the nearest 1/100 of a share) of
Common Stock of the Company at a conversion price equal to $3.30 in aggregate
principal amount of Securities for each share of Common Stock (or at the current
adjusted conversion price if an adjustment has been made as provided in the
Indenture) by surrender of this Security, duly endorsed or assigned to the
Company or in blank, to the Company, accompanied by written notice to the
Company that the holder hereof elects to convert this Security and the portion
hereof to be converted. Accrued and unpaid interest to the date of conversion
will be payable by the Company to the holder. No payment or adjustment is to be
made on conversion for dividends on the Common Stock issued on conversion. No
fractions of shares or scrip representing fractions of shares will be issued on
conversion, but instead of any fractional interest the Company shall pay a cash
adjustment as provided in the Indenture. The conversion price is subject to
adjustment as provided in the Indenture. In addition, the Indenture provides
that in case of certain consolidations or mergers to which the Company is a
party or the transfer of substantially all of the assets of the Company, the
Indenture shall be amended, without the consent of any holders of Securities, so
that this Security, if then outstanding, will be convertible thereafter, during
the period this Security shall be convertible as specified above, only into the
kind and amount of securities, cash and other property receivable upon the
consolidation, merger or transfer by a holder of the number of shares of Common
Stock into which this Security might have been converted immediately prior to
such consolidation, merger or transfer (assuming such holder of Common Stock
failed to exercise any rights of election and received per share the kind and
amount of securities, cash or other property received per share by a plurality
of non-electing shares).
The Securities are subject to redemption upon not less than 20 days'
notice by mail, at any time on or after July 1, 1999, as a whole or in part, at
the election of the Company, at the following Redemption Prices (expressed as
percentages of the principal amount): if redeemed during the 3-month period
beginning,
Date Redemption Price
---- ----------------
July 1, 1999 105%
October 1, 1999 104%
January 1, 2000 103%
May 1, 2000 102%
August 1, 2000 101%
and thereafter at a Redemption Price equal to 100% of the principal amount,
together in the case
2
<PAGE>
<PAGE>
of any such redemption with accrued interest to the Redemption Date.
In the event of redemption or conversion of this Security in part
only, a new Security or Securities for the unredeemed or unconverted portion
hereof will be issued in the name of the Holder hereof upon the cancellation
hereof, with accrued and unpaid interest being carried forward to the
replacement Security as such.
The indebtedness evidenced by the Securities is, to the extent and in
the manner provided in the Indenture, expressly subordinate and subject in right
of payment to the prior payment in full of any Senior Indebtedness of the
Company or provision for such payment, whether outstanding at the date of the
Indenture or thereafter incurred (to the extent permitted in the Indenture), and
each Holder of this Security, by such Holder's acceptance hereof, agrees to and
shall be bound by such provisions of the Indenture and authorizes and directs
the Agent in such Holder's behalf to take such action as may be necessary or
appropriate to effectuate such subordination and appoints the Agent such
Holder's attorney-in-fact or any and all such purposes.
In the event there shall occur any Change in Control (as defined in
the Indenture) with respect to the Company, each Holder of Securities shall have
the right, at such Holder's option, to require the Company to purchase on the
Repurchase Date all or any part of such Holder's Securities at a Repurchase
Price equal to the 100% of the principal amount on the Repurchase Date, together
with accrued interest to the Repurchase Date and in the manner specified in the
Indenture.
If an Event of Default shall occur and be continuing, the principal of
all the Securities and all other amounts due hereunder may be declared due and
payable in the manner and with the effect provided in the Indenture.
The Indenture permits, with certain exceptions as therein provided,
the amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Securities under the Indenture at
any time by the Company and the Agent with the consent of the Holders of not
less than a majority in aggregate principal amount of the Securities at the time
outstanding. The Indenture also contains provisions permitting the Holders of
specified percentages in aggregate principal amount of the Securities at the
time outstanding, on behalf of the Holders of all the Securities, to waive
compliance by the Company with certain provisions of the Indenture and certain
past defaults under the Indenture and their consequences. Any such consent or
waiver by the Holder of this Security shall be conclusive and binding upon such
Holder and upon all future Holders of this Security and of any security issued
upon the registration of transfer hereof or in exchange herefor or in lieu
hereof, whether or not notation of such consent or waiver is made upon this
Security.
No reference herein to the Indenture and no provision of this Security
or of the Indenture shall alter or impair the right of the Holder, which is
absolute and unconditional, to receive payment of the principal of (and premium,
if any) and interest on this Security at the times, place and rate, and in the
coin or currency (i.e., U.S. Dollars), herein prescribed or to convert this
Security as provided in the Indenture.
3
<PAGE>
<PAGE>
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Security is registrable in the Security
Register, upon surrender of this Security for registration of transfer at the
office or agency of the Company, duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Company and the Security
Registrar duly executed by, the Holder hereof or his attorney duly authorized in
writing, and thereupon one or more new Securities, of authorized denominations
and for the same aggregate principal amount, will be issued to the designated
transferee or transferees.
The Securities are issuable only in registered form without coupons in
denominations of $100,000 and any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein set forth, Securities are
exchangeable for a like aggregate principal amount of Securities of a different
authorized denomination, as requested by the Holder surrendering the same.
No service charge shall be made for any such registration of transfer
or exchange, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of
transfer, the Company, the Agent and any agent of the Company or the Agent may
treat the Person in whose name this Security is registered as the owner hereof
for all purposes, whether or not this Security be overdue, and neither the
Company, the Agent nor any such agent shall be affected by notice to the
contrary.
This Security shall be governed by the laws of the State of New York
(without reference to choice of law rules) and this Security is subject to that
certain Purchase Agreement dated as of January 30, 1998, between the Company and
BancBoston Investments, Inc.
All terms used in this Security which are defined in the Indenture
shall have the meanings assigned to them in the indenture.
4
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.
Dated: January 30, 1998
AUTOBOND ACCEPTANCE CORPORATION
By
------------------------------------
Name: William O. Winsauer
Title: Chairman
5
<PAGE>
<PAGE>
[Form of Election to Convert]
To AutoBond Acceptance Corporation:
The undersigned owner of this Security hereby irrevocably exercises
the option to convert this Security, or the portion below designated, into
shares of Common Stock of AutoBond Acceptance Corporation in accordance with the
terms of the Indenture referred to in this Security, and directs that the shares
issuable and deliverable upon conversion, together with any check in payment for
fractional shares, be issued in the name of and delivered to the undersigned
registered Holder hereof, unless a different name has been indicated in the
assignment below. If shares are to be issued in the name of a person other than
the undersigned, the undersigned will pay all transfer taxes payable with
respect thereto. Any amount required to be paid by the undersigned on account of
interest accompanies this Security.
Dated:
Portion of Security to be converted
($1,000 or an integral multiple thereof):
$
------------------------------------
--------------------------------------
Signature ( for conversion only) If
shares of Common Stock are to be
issued and registered otherwise than
to the registered Holder named above,
please print or typewrite name and
address, including zip code, and
social security or other taxpayer
identifying number.
--------------------------------------
--------------------------------------
--------------------------------------
6
<PAGE>
<PAGE>
Neither this Warrant nor the shares of Common Stock to be issued upon exercise
hereof have been registered under the Securities Act (as defined below), and
this Warrant has been, and the shares of Common Stock to be issued upon exercise
hereof will be, acquired for investment and not with a view to, or for release
in connection with, any distribution thereof. No such sale or other disposition
may be made without an effective registration statement under the Securities Act
or unless an exemption from such a registration is available.
Warrant No. 98-B
WARRANT
to Purchase
Common Stock
of
AUTOBOND ACCEPTANCE CORPORATION
THIS IS TO CERTIFY THAT BancBoston Investments, Inc.
("Warrantholder"), is entitled, at any time and from time to time from (and
including) the Start Date (as defined below) until 5:00 P.M., New York City
time, on the Warrant Expiration Date (as defined below), to purchase from
AUTOBOND ACCEPTANCE CORPORATION, a Texas corporation (the "Company"), 368,462
Shares, each one of which represents initially one share of Common Stock
(adjusted as provided below), in whole or in part, at the Purchase Price Per
Share set forth herein, all on the terms and conditions and pursuant to the
provisions hereinafter provided.
Section 1. DEFINITIONS. The terms defined in this Section 1, whenever
used in this Warrant, shall, unless the context otherwise requires, have the
respective meanings hereinafter specified.
"Additional Shares of Nonpreferred Stock" means all shares of
Nonpreferred Stock issued by the Company after the date hereof, other than the
Warrant Stock.
"Affiliate" has the meaning attributed to it under the Securities Act.
"Board" means the Board of Directors of the Company.
"Business Day" means a day other than a Saturday, a Sunday or a day on
which commercial banks in the State of Texas or Commonwealth of Massachusetts
are permitted or required by law to close.
"Call Option" means the right of the Company to redeem the Warrants
pursuant to Section 8.
"Commission" means the Securities and Exchange Commission or any other
<PAGE>
<PAGE>
governmental body then administering the Securities Act.
"Common Stock" means the Company's authorized voting Common Stock, no
par value, as constituted on the date of original issuance of this Warrant, or
at the Warrantholder's option, the Company's nonvoting Common Stock, and any
shares of stock into which such class of Common Stock may thereafter be changed,
or that may be issued in respect of, in exchange for, or in substitution for,
such Common Stock by reason of any stock splits, stock dividends, distributions,
mergers, consolidations or other like events and shall also include stock of the
Company of any other class issued to the holders of shares of Common Stock upon
any reclassification thereof.
"Company" means AutoBond Acceptance Corporation., a Texas corporation,
and any successor corporation whether by merger or otherwise.
"Convertible Securities" means evidences of indebtedness, shares of
stock or other securities which are convertible into or exchangeable for
Additional Shares of Nonpreferred Stock, either immediately or upon the arrival
of a specified date or the happening of a specified event.
"Current Market Price" per share of Common Stock for the purposes of
any provision of this Agreement at the date herein specified shall mean, for any
date after the initial public offering of the Company's Common Stock:
(i) if the Common Stock is listed on a domestic exchange or quoted on
NASDAQ, the average of the daily market prices of the Common Stock over a
period of 30 consecutive trading days prior to the day on which Current
Market Price is being determined.
As used in this clause (i), "market price" for each such Business Day
shall be the average of the closing prices on such day of the Common Stock
on all domestic primary national securities exchanges on which the Common
Stock is then listed, or, if there shall have been no sales on any such
exchange on such day, the average of the highest bid and lowest asked
prices on all such exchanges at the end of such day, or if the Common Stock
shall not be so listed, the average of the representative bid and asked
prices at the end of such Business Day as reported by NASDAQ; or
(ii) if the Common Stock shall not be listed on any domestic exchange
or quoted on NASDAQ, then the Current Market Price shall be Fair Market
Value (of the Company as a whole) divided by the number of shares of Common
Stock (on a fully diluted basis) outstanding;
provided, however, that in the case of (i) a primary underwritten public
offering at a price in excess of the then current exercise price, the
Current Market Price shall be deemed the price to the underwriter set forth
in the prospectus, and (ii) stock options issued to employees and directors
pursuant to a plan adopted by the Company's Board of Directors, the Current
Market Price shall be the exercise price of such options.
2
<PAGE>
<PAGE>
"Current Warrant Price" per share of Common Stock for the purpose of
any provision of this Warrant at the date herein specified, shall mean the
product of (i) the Purchase Price Per Share in effect on such date, and (ii) the
number of Shares for which this Warrant is exercisable on such date.
"date hereof", "date of original issuance of this Warrant" and similar
references mean the date identified at the foot of this Warrant beside the name
of the Company.
"Exchange Act" means the Securities Exchange Act of 1934 (including
any rules and regulations promulgated thereunder), as the same shall be amended
and in effect from time to time.
"Fair Market Value" means the highest price for which the Company and
its subsidiaries could be sold as a going concern in an arm's length transaction
to an independent third party within 12 months after the Valuation Date (as
defined below), as determined by agreement or appraisal in accordance with the
procedures described below.
Within ten (10) calendar days after the date of the occurrence of any
event requiring the determination of Fair Market Value pursuant to this Warrant
(a "Valuation Date"), the Company on the one hand, and the Majority Holders on
the other hand, shall each designate a representative and such two (2)
representatives will meet and use their best efforts to reach an agreement on
the Company's Fair Market Value. If such representatives have been unable to
reach such agreement, the Company on the one hand, and the Majority Holders on
the other hand, will use their best efforts to agree within 20 calendar days
after the Valuation Date upon the selection of an independent appraiser
experienced in valuing businesses of this type. Such appraiser will have 20
calendar days in which to determine the Company's Fair Market Value, and its
determination thereof will be final and binding on all parties concerned. If the
Company and the Majority Holders are unable to reach an agreement as to an
independent appraiser within 20 calendar days after the Valuation Date, the
Company on the one hand, and the Majority Holders on the other hand, will each
within five (5) calendar days thereafter select one independent appraiser
experienced in valuing businesses of this type. The Company, and the Majority
Holders, will each cause the appraiser selected by them respectively to
determine independently the Company's Fair Market Value within 20 calendar days
after their appointment. If the lesser of the two (2) appraised values (the "Low
Value") exceeds or is equal to 90% of the greater of the two (2) appraised
values (the "High Value"), the Company's Fair Market Value will be the average
of the two (2) appraisals. If the Low Value is less than 90% of the High Value,
the two (2) appraisers will themselves appoint a third independent appraiser
experienced in valuing businesses of this type within five (5) calendar days
after the two (2) appraisals have been rendered. Such third appraiser will have
20 calendar days in which to determine independently the Company's Fair Market
Value. The Company's Fair Market Value in such case will be the mean of the two
(2) appraised values which are closest to each other; provided, however, that in
the event the high and the low appraised values are equidistant from the middle
such value, the middle such value shall be deemed the Fair Market Value. The
Company will provide each appraiser with all information about the Company and
its Subsidiaries which any
3
<PAGE>
<PAGE>
such appraiser reasonably deems necessary for determining the Fair Market Value.
The expenses of the appraisal process will be paid by the Company.
"Financial Statement" means the annual audited financial statements,
prepared in accordance with GAAP, which the Company provides to its
shareholders.
"GAAP" means generally accepted accounting principles.
"Holder" means a holder of this Warrant.
"Majority Holders" means the holders of Warrants entitling the holders
thereof to exercise a majority of the Warrant Stock.
"NASDAQ" means, the National Association of Securities Dealers
Automated Quotation System.
"Nonpreferred Stock" means the Common Stock and shall also include all
stock of the Company of any other class unless senior in respect of the right to
participate in dividends and distributions of assets.
"Permitted Transferee" means an "accredited investor" within the
meaning of Rule 501 under the Securities Act, or a "qualified institutional
buyer" within the meaning of Rule 144A under the Securities Act.
"Person" means any individual, corporation, partnership, association,
trust, joint venture or other entity or organization, including a government or
political subdivision or an agency or instrumentality thereof.
"Purchase Price Per Share" means the price at which the Holder is
entitled to purchase a Share from the Company pursuant to this Warrant, such
price being $3.30 per Share, subject to adjustment as provided for herein.
"Put Option" means the right of a Warrantholder to require the Company
to repurchase Warrants pursuant to Section 9.
"Redemption Date" has the meaning set forth in Section 8.1.
"Redemption Price" means the greater of (a) the Current Market Price
less the Current Warrant Price, and (b) that price which represents a rate of
return of 10% per annum (compounded annually), accruing through the Redemption
Date, on a deemed investment of $7,500,000 as of the date of original issuance
of this Warrant.
"Repurchase Date" has the meaning set forth in Section 9.1.
"Repurchase Price" means the Current Market Price less the Current
Warrant Price.
4
<PAGE>
<PAGE>
"Securities Act" means the Securities Act of 1933 (including any rules
and regulations promulgated thereunder), as the same shall be amended and in
effect from time to time.
"Share" means one share of Common Stock, as such stock was constituted
on the date of original issuance of this Warrant, and thereafter shall mean such
number of shares (including any fractional share) of Common Stock and other
securities, cash or property as shall result from the adjustments provided for
herein, to such one share, specified in Section 4.
"Start Date" means January 31, 2001.
"Triggering Event" means the occurrence of any of the following: (a)
an offering or placement of the Company's Common Stock for cash at least equal
to $10 per share, in an aggregate amount at least equal to $50 million; or (b)
an agreement in principle with respect to the sale, transfer or other
disposition by the Company or any affiliate of Common Stock in an amount at
least equal to 51% of the Company's outstanding Common Stock; or (c) an
agreement in principle with respect to a merger or consolidation of the Company
or the sale of the assets of Company substantially as an entirety; provided,
however, that an agreement in principle under (b) or (c) above shall cease to
constitute a Triggering Event if not consummated within 60 days.
"Warrant" means this warrant and each warrant issued in replacement of
or substitution herefor or therefor in accordance herewith or therewith, whether
as a result of transfer, division or combination.
"Warrant Expiration Date" means the earlier to occur of (i) January
30, 2005 and (ii) the occurrence of a Repurchase Date or a Redemption Date with
respect to all of the Outstanding Warrants (provided that the repurchase
required on such date has been consummated on the terms provided herein).
"Warrant Shares" means the Common Stock issuable, from time to time,
upon exercise of the Warrants.
"Warrant Stock" means the shares of Common Stock purchasable by the
Holder upon the exercise of this Warrant.
Section 2. EXERCISE OF WARRANT.
A. Manner of Exercise. This Warrant may be exercised at any time or
from time to time from the Start Date until 5:00 P.M., New York City time, on
the Warrant Expiration Date for all or any part of the Shares. In order to
exercise this Warrant, in whole or in part, the Holder shall deliver to the
Company at its office or agency maintained for this purpose pursuant to Section
13: (i) a written notice of the Holder's election to exercise this Warrant,
which notice shall specify the number of Shares to be purchased, (ii) either (a)
a certified or official bank check or checks drawn on a New York Clearing House
bank payable to the order of the Company
5
<PAGE>
<PAGE>
or (b) an electronic funds transfer of immediately available funds in an amount
equal to the aggregate Purchase Price Per Share for all Shares as to which this
Warrant is exercised. Such notice shall be in the form of Exhibit A. Upon any
exercise of this Warrant, in whole or in part, the Holder may (instead of the
payment described in the preceding sentence) elect to pay the aggregate Purchase
Price Per Share for the number of Shares to be purchased (collectively, the
"Exercise Shares") by surrendering its rights to a number of Exercise Shares
having a Current Market Price immediately prior to the exercise of this Warrant
(based upon the number of shares of Common Stock for which such Exercise Shares
are then exercisable) equal to or greater than the required aggregate Purchase
Price Per Share, in which case the holder hereof would receive the number of
Exercise Shares to which it would otherwise be entitled upon such exercise, less
the surrendered Shares. Upon receipt thereof, the Company shall, as promptly as
practicable, and in any event within five (5) Business Days thereafter, execute
or cause to be executed, and deliver to the Holder a certificate or certificates
representing the aggregate number of shares of Warrant Stock issuable upon such
exercise (i.e., the number of shares of Common Stock then represented by one
Share multiplied by the number of Shares than being exercised). The stock
certificate or certificates so delivered shall be registered in the name of the
Holder or, such other name as shall be designated in such notice. Unless
otherwise specified in such notice, one certificate representing the aggregate
number of shares of Warrant Stock issued upon such exercise shall be so
delivered. This Warrant shall be deemed to have been exercised and such
certificate or certificates shall be deemed to have been issued, and the Holder
or any other person so designated to be named therein shall be deemed to have
become a holder of record of such shares for all purposes, as of the date such
notice, together with such check or checks or other form of payment, and this
Warrant are received by the Company as aforesaid. If this Warrant shall have
been exercised and/or surrendered in part, the Company shall, at the time of
delivery of the certificate or certificates representing Warrant Stock issuable
upon such exercise, deliver to or on the order of the Holder a new Warrant
evidencing the right of the Holder to purchase the unpurchased and/or
unsurrendered Shares called for by this Warrant, which new Warrant shall in all
other respects be identical with this Warrant, or, at the request of the Holder,
appropriate notation may be made on this Warrant and the same returned to the
Holder.
B. Payment of Taxes, etc. All shares of Warrant Stock shall be validly
issued, fully paid and non-assessable, and the Company shall pay all expenses
(including any stamp or like taxes) in connection with, or that may be imposed
in respect of, the issue or delivery thereof; provided, however, that the Holder
shall pay all income, franchise and transfer taxes in connection with such issue
and delivery. The Company shall not be required to pay any tax or other charge
imposed in connection with any transfer involved in the issue of any certificate
for shares of Warrant Stock in any name other than that of the registered Holder
of this Warrant (or any Affiliate thereof), and in such case the Company shall
not be required to issue or deliver any stock certificate until such tax or
other charge has been paid or it has been established to the Company's
reasonable satisfaction that no such tax or other charge is due.
Section 3. TRANSFER, DIVISION AND COMBINATION. This Warrant and all
rights hereunder are transferable (i) only to Permitted Transferees, (ii) in
whole or in part, and (iii) on the books of the Company to be maintained for
such purpose, upon surrender of this Warrant at the office or agency of the
Company maintained for the purpose pursuant to Section
6
<PAGE>
<PAGE>
13, together with a written assignment (in whole or in part) of this Warrant
duly executed by the Holder or its agent or attorney. Upon surrender the Company
shall execute and deliver a new warrant or warrants in the name of the assignee
or assignees (including, if such assignment is only a partial assignment by the
Holder, in the name of the Holder), and each such warrant shall be identical in
form and substance (including its date) to this Warrant except for the warrant
number (which shall be as determined by the Company), the name of the named
holder of the warrant (if an assignee of the Holder), and the actual number of
Shares (each of which shall be as specified by the Holder), and this Warrant
shall promptly be canceled.
This Warrant may be divided or combined with other Warrants upon
presentation hereof (and thereof, in the case of combination) at the aforesaid
office or agency of the Company, together with a written notice specifying the
names and denominations in which new warrants are to be issued, signed by the
Holder or its agent or attorney. Subject to compliance with the preceding
paragraph as to any transfer which may be involved in such division or
combination, the Company shall execute and deliver a new warrant or warrants in
exchange for the warrant or warrants to be divided or combined in accordance
with such notice.
The Company shall pay all expenses and other charges payable in
connection with the preparation, issuance and delivery of Warrants under this
Section 3. The holder of a Warrant shall pay all taxes (other than any stamp or
like taxes, which shall be paid by the Company) in connection with such issuance
and delivery.
The Company agrees to maintain, at the office or agency of the Company
maintained for the purpose pursuant to Section 13, books for the registration
and transfer of the Warrant.
Section 4. ADJUSTMENT OF SHARES. The number of shares of Common Stock
comprising a Share shall be subject to adjustment from time to time as set forth
in this Section 4.
A. Stock Dividends, Subdivisions and Combinations. In case at any time
or from time to time the Company shall:
(1) take a record of the holders of its Nonpreferred Stock for the
purpose of entitling them to receive a dividend payable in, or other
distribution of, Nonpreferred Stock, or
(2) subdivide its outstanding shares of Nonpreferred Stock into a
larger number of shares of Nonpreferred Stock, or
(3) combine its outstanding shares of Nonpreferred Stock into a
smaller number of shares of Nonpreferred Stock,
then the number of shares of Common Stock comprising a Share immediately after
the happening of any such event shall be adjusted so as to consist of the number
of shares of Common Stock which a record holder of the number of shares of
7
<PAGE>
<PAGE>
Common Stock comprising a Share immediately prior to the happening of such event
would own or be entitled to receive after the happening of such event; provided,
however, that in no event shall the Company take any action referred to in
Section 4.A(3) if the effect would be that a share after giving effect thereto
and to any corresponding adjustment of Shares would collectively constitute less
than one share of Common Stock.
B. Issuance of Additional Shares of Nonpreferred Stock. In case at any
time or from time to time the Company shall (except as hereinafter provided)
issue any Additional Shares of Nonpreferred Stock at a price per share that is
lower than the Current Market Price per share of Common Stock on the date of
such issuance, then the number of shares of Common Stock thereafter comprising a
Share shall be adjusted to that number determined by multiplying the number of
shares of Common Stock comprising a Share immediately prior to such adjustment
by a fraction (i) the numerator of which shall be the number of shares of
Nonpreferred Stock outstanding immediately after such issuance of such shares of
Additional Shares of Nonpreferred Stock, and (ii) the denominator of which shall
be an amount equal to the sum of (x) the number of shares of Nonpreferred Stock
outstanding immediately prior to the issuance of such shares of Additional
Shares of Nonpreferred Stock plus (y) the number of shares of Nonpreferred Stock
which the aggregate consideration received by the Company for the total number
of such Additional Shares of Nonpreferred Stock (as determined in accordance
with Section 4.F) so issued would then purchase at the Current Market Price per
share of Common Stock. No adjustment to the number of shares of Common Stock
comprising a Share shall be made under this Section 4.B upon the issuance of any
Additional Shares of Nonpreferred Stock which are issued pursuant to the
exercise of any warrants or other subscription or purchase rights or pursuant to
the exercise of any conversion or exchange rights in any Convertible Securities,
if any such adjustment shall previously have been made upon the issuance of such
warrants or other rights or upon the issuance of such Convertible Securities (or
upon the issuance of any warrant or other rights therefor) pursuant to Sections
4.C or D.
C. Issuance of Warrants or Other Rights. In case at any time or from
time to time the Company shall issue any warrants or other rights to subscribe
for or purchase (i) any Additional Shares of Nonpreferred Stock or (ii) any
Convertible Securities and the consideration per share for which Additional
Shares of Nonpreferred Stock may at any time thereafter be issuable pursuant to
such warrants or other rights or pursuant to the terms of such Convertible
Securities shall be less than the Current Market Price per share of Common
Stock, then the number of shares of Common Stock thereafter comprising a Share
shall be adjusted (as at the applicable date specified in the last sentence of
this Section 4.C) as provided in Section 4.B on the basis that (i) the maximum
number of Additional Shares of Nonpreferred Stock issuable pursuant to all such
warrants or other rights or necessary to effect the conversion or exchange of
all such Convertible Securities shall be deemed to have been issued as of the
date for the determination of the Current Market Price per share of Common Stock
as hereinafter provided, and (ii) the aggregate consideration for such maximum
number of Additional Shares of Nonpreferred Stock shall be deemed to be the
minimum consideration received and receivable by the Company for the issuance of
such Additional Shares of Nonpreferred Stock pursuant to such warrants or other
rights or pursuant to the terms of such Convertible Securities. For purposes of
8
<PAGE>
<PAGE>
this Section 4.C, the date as of which the Current Market Price per share of
Common Stock shall be computed shall be the earlier of (a) the date on which the
Company shall enter into a firm contract for the issuance of such warrants or
other rights or (b) the date of actual issuance of such warrants or other
rights.
D. Issuance of Convertible Securities. In case at any time or from
time to time the Company shall issue any Convertible Securities and the
consideration per share for which Additional Shares of Nonpreferred Stock may at
any time thereafter be issuable pursuant to such Convertible Securities shall be
less than the Current Market Price per share of Common Stock, then the number of
shares of Common Stock thereafter comprising a Share shall be adjusted (as at
the applicable date specified in the penultimate sentence of this Section 4.D)
as provided in Section 4.B on the basis that (i) the maximum number of
Additional Shares of Nonpreferred Stock necessary to effect the conversion or
exchange of all such Convertible Securities shall be deemed to have been issued
as of the date for the determination of the Current Market Price per share of
Common Stock as hereinafter provided, and (ii) the aggregate consideration for
such maximum number of Additional Shares of Nonpreferred Stock shall be deemed
to be the minimum consideration received and receivable by the Company for the
issuance of such Additional Shares of Nonpreferred Stock pursuant to the terms
of such Convertible Securities. For purposes of this Section 4.D, the date as of
which the Current Market Price per share of Common Stock shall be computed shall
be the earlier of (a) the date on which the Company shall enter into a firm
contract for the issuance of such Convertible Securities, or (b) the date of
actual issuance of such Convertible Securities. No adjustment of the number of
shares of Common Stock comprising a Share shall be made under this Section 4.D
upon the issuance of any Convertible Securities which are issued pursuant to the
exercise of any warrants or other subscription or purchase rights therefor, if
any such adjustment shall previously have been made upon the issuance of such
warrants or other rights pursuant to Section 4.C.
E. Superseding Adjustment of Shares. If, any time after any adjustment
of the number of shares comprising a Share shall have been made pursuant to
Section 4.C or Section 4.D on the basis of the issuance of warrants or other
rights or the issuance of other Convertible Securities, or after any new
adjustment of the number of shares comprising a Share shall have been made
pursuant to this Section 4.D (but before the Warrant has been exercised), such
warrants or rights or the right of conversion or exchange in such other
Convertible Securities shall expire, and a portion of such warrants or rights,
or the rights of conversion or exchange in respect of a portion of such other
Convertible Securities, as the case may be, shall not have been exercised, such
previous adjustment shall be rescinded and annulled and the Additional Shares of
Nonpreferred Stock which were deemed to have been issued by virtue of the
computation made in connection with the adjustment so rescinded and annulled
shall no longer be deemed to have been issued by virtue of such computation.
Thereupon, a recomputation shall be made of the effect of such rights or options
or other Convertible Securities on the basis of
(1) treating the number of Additional Shares of Nonpreferred Stock, if
any, theretofore actually issued or issuable pursuant to the previous
exercise of such warrants or rights or such right of conversion or
exchange, as having been issued on the date or
9
<PAGE>
<PAGE>
dates of such exercise, and
(2) treating any such warrants or rights or any such other Convertible
Securities which then remain outstanding as having been granted or issued
immediately after the time of the last date of such exercise,
and, if and to the extent called for by the foregoing provisions of this Section
4 on the basis of the aforesaid, a new adjustment of the number of shares
comprising a Share shall be made, which new adjustment shall supersede the
previous adjustment so rescinded and annulled.
If the exercise price provided for in any warrant or right, or the
rate at which any Convertible Securities referred to in Section 4.C or Section
4.D are convertible into or exchangeable for Additional Shares of Nonpreferred
Stock, shall change or a different exercise price or rate shall become effective
at any time or from time to time (other than under or by reason of provisions
designed to protect against dilution) then, upon such change becoming effective,
the number of shares comprising a Share shall forthwith be increased or
decreased to such number as would have obtained had the adjustments made and
required to be made upon the issuance of such rights or options or Convertible
Securities been made upon the basis of (a) the issuance of the number of
Additional Shares of Nonpreferred Stock theretofore actually delivered upon the
exercise of such options or rights or upon the conversion or exchange of such
Convertible Securities and (b) the original issuance at the time of such change
of any such options, rights and Convertible Securities then still outstanding.
If the exercise price provided for in any right or option, or the rate at which
any Convertible Securities referred to in Section 4.C or Section 4.D are
convertible into or exchangeable for Additional Shares of Nonpreferred Stock,
shall decrease at any time under or by reason of provisions with respect thereto
designed to protect against dilution, then in the case of the delivery of
Additional Shares of Nonpreferred Stock upon the exercise of any such right or
option or upon the conversion or exchange of any Convertible Securities, the
number of shares comprising a Share shall forthwith be increased to such number
as would have obtained had the adjustments made upon issuance of such right or
option or such Convertible Securities been made upon the basis of the issuance
of (and with respect to total consideration received for) the Additional Shares
of Nonpreferred Stock delivered as aforesaid. In no event shall any adjustment
provided for in this Section 4.E have retroactive effect relative to Shares as
to which the Warrant has been previously exercised.
F. Other Provisions Applicable to Adjustments Under this Section 4.
The following provisions shall be applicable to the making of adjustments of the
number of shares of Common Stock comprising a Share provided for in this Section
4:
(1) Treasury or Company Stock. The sale or other disposition of any
issued shares of Nonpreferred Stock owned or held by or for the account of
the Company shall be deemed an issuance thereof for purposes of this
Section 4.
(2) Computation of Consideration. To the extent that any Additional
Shares of Nonpreferred Stock or any Convertible Securities shall be issued
for a cash consideration, the consideration received by the Company
therefor shall be deemed to be
10
<PAGE>
<PAGE>
the amount of the cash received by the Company therefor, or, if such
Additional Shares of Nonpreferred Stock or Convertible Securities are
offered by the Company for subscription, the subscription price, or, if
such Additional Shares of Nonpreferred Stock or Convertible Securities are
sold to underwriters or dealers for public offering without a subscription
offering, the initial public offering price, in any such case excluding any
amounts paid or receivable for accrued interest or accrued dividends and
without deduction of any compensation, discounts or expenses paid or
incurred by the Company for and in the underwriting of, or otherwise in
connection with, the issuance thereof. To the extent that such issuance
shall be for a consideration other than cash, then, except as herein
otherwise expressly provided, the amount of such consideration shall be
deemed to be the fair value of such consideration at the time of such
issuance as determined in good faith by the Board. The consideration for
any Additional Shares of Nonpreferred Stock issuable pursuant to any
warrants or other rights to subscribe for or purchase the same shall be the
consideration received or receivable by the Company for issuing such
warrants or other rights, plus the additional consideration payable to the
Company upon the exercise of such warrants or other rights. The
consideration for any Additional Shares of Nonpreferred Stock issuable
pursuant to the terms of any Convertible Securities shall be the
consideration received or receivable by the Company for issuing any
warrants or other rights to subscribe for or purchase such Convertible
Securities, plus the consideration paid or payable to the Company in
respect of the subscription for or purchase of such Convertible Securities,
plus the additional consideration, if any, payable to the Company upon the
exercise of the right of conversion or exchange in such Convertible
Securities. In case of the issuance at any time of any Additional Shares of
Nonpreferred Stock or Convertible Securities in payment or satisfaction of
any dividend upon any class of stock other than Nonpreferred Stock, the
Company shall be deemed to have received for such Additional Shares of
Nonpreferred Stock or Convertible Securities a consideration equal to the
amount of such dividend so paid or satisfied.
(3) When Adjustments to be Made. The adjustments required by Section 4
shall be made whenever and as often as any specified event requiring an
adjustment shall have occurred. For the purpose of any adjustment, any
specified event shall be deemed to have occurred at the close of business
on the date of its occurrence.
(4) When Adjustments Not Required. If the Company shall take a record
of the holders of its Nonpreferred Stock for the purpose of entitling them
to receive a dividend or distribution or subscription or purchase rights
and shall, thereafter and before the distribution thereof to shareholders,
legally abandon its plan to pay or deliver such dividend, distribution,
subscription or purchase rights, then thereafter no adjustment shall be
required by reason of the taking of such record and any such adjustment
previously made in respect thereof shall be rescinded and annulled.
G. Merger, Consolidation or Disposition of Assets. The Company shall
not consolidate or merge with another Person, or sell, transfer or otherwise
dispose of all or substantially all of its assets to another Person unless the
Company shall have notified the Holder no less than 20 days prior to the
effective date of such consolidation, merger, sale, transfer or
11
<PAGE>
<PAGE>
disposal, and shall have given the Holder the right to exercise all its rights
under this Warrant and participate fully in such transaction as a holder of
shares of Common Stock. Such notice may disclose nonpublic information.
Alternatively, if at the Company's option, such transaction shall be effected in
such a way that all holders of Nonpreferred Stock shall be entitled to receive
stock, securities or assets with respect to or in exchange for Nonpreferred
Stock, then, as a condition of such consolidation, merger or sale, the Company
or such successor or purchasing corporation, as the case may be, shall assume
the obligations of the Company under this Warrant and execute an agreement
providing that the Holder shall have the right thereafter and until the
expiration hereof to exercise this Warrant for the kind and amount of stock,
securities or assets receivable upon such consolidation, merger or sale by a
holder of the number of shares of Common Stock for which this Warrant might have
been exercised immediately prior to such consolidation, merger or sale, subject
to adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 4.
H. Other Action Affecting Common Stock. If the Company takes any
action affecting its Common Stock after the date hereof, other than an action
described in any of Sections 4.A through 4.G, inclusive, which would have an
adverse effect upon the rights of the holder of this Warrant hereunder, then the
number of shares of Common Stock comprising a Share shall be adjusted in such
manner and at such time as the Board shall in good faith determine to be
equitable under the circumstances.
I. Conversions of the Company's Convertible Notes. The amount of
Warrant Shares available for exercise hereunder shall be reduced by the number
of shares of Common Stock issued upon conversion of the Company's 15%
Subordinated Convertible Notes due 2001.
Section 5. NOTICES TO WARRANT HOLDERS.
A. Notice of Adjustment of Share. Whenever the composition of a Share
shall be adjusted pursuant to Section 4, the Company shall forthwith obtain a
certificate signed by the Company's chief financial officer setting forth, in
reasonable detail, the event requiring the adjustment and the method by which
such adjustment was calculated (including a description of the basis on which
the Board determined the Current Market Price pursuant to Sections 4.B, C or D
or the fair value of any evidences of indebtedness, shares of stock, other
securities or property or warrants or other subscription or purchase rights
referred to in Section 4.F) and specifying the number of shares of Common Stock
comprising a Share and (if such adjustment was made pursuant to Section 4.G or
Section 4.H) describing the number and kind of any other indebtedness, shares of
stock or other securities or property or warrants or other subscription or
purchase rights comprising a Share, and any change in the purchase price or
prices thereof, after giving effect to such adjustment or change. The Company
shall promptly, and in any case within 10 calendar days after the making of such
adjustment, cause a signed copy of such certificate to be delivered to the
Holder in accordance with Section 14. The Company shall keep at its office or
agency, maintained for the purpose pursuant to Section 13, copies of all such
certificates and cause the same to be available for inspection at said office
during normal business hours by the Holder or any prospective purchaser of all
or part of this Warrant designated by the Holder.
12
<PAGE>
<PAGE>
B. Notice of Certain Corporate Action. In case the Company shall
propose (a) to pay any dividend payable in stock of any class to the holders of
its Nonpreferred Stock or to make any other distribution to the holders of its
Nonpreferred Stock, or (b) to offer to the holders of its Nonpreferred Stock
rights to subscribe for or to purchase any Additional Shares of Nonpreferred
Stock or shares of stock of any class or any other securities, rights or
options, or (c) to effect any reclassification of its Nonpreferred Stock (other
than a reclassification involving only the subdivision, or combination, of
outstanding shares of Nonpreferred Stock), or (d) to effect any capital
reorganization, or (e) to effect any consolidation, merger or sale, transfer or
other disposition of all or substantially all of its property, assets or
business, or (f) to effect the liquidation, dissolution or winding up of the
Company, or (g) to effect or be subject to any Triggering Event, then in each
such case, the Company shall give to each holder of a Warrant, in accordance
with Section 14, a notice of such proposed action, which shall specify the date
on which a record is to be taken for purposes of such stock dividend,
distribution or offer of rights, or the date on which such reclassification,
reorganization, consolidation, merger, sale, transfer, disposition, liquidation,
dissolution, or winding up is to take place and the date of participation
therein by the holders of Nonpreferred Stock, if any such date is to be fixed,
and shall also set forth such facts with respect thereto as shall be reasonably
necessary to indicate the effect of such action on the Nonpreferred Stock and
the number and kind of any other property which will comprise a Share, and the
purchase price or prices thereof, after giving effect to any adjustment which
will be required as a result of such action. Such notice shall be so given in
the case of any action covered by clause (a) or (b) above at least 20 calendar
days prior to the record date for determining holders of the Nonpreferred Stock
for purposes of such action, and in the case of any other such action, at least
20 calendar days prior to the date of the taking of such proposed action or the
date of participation therein by the holders of Nonpreferred Stock, whichever
shall be the earlier.
Section 6. RESERVATION AND AUTHORIZATION OF NONPREFERRED STOCK;
REGISTRATION WITH OR APPROVAL OF ANY GOVERNMENTAL AUTHORITY. The Company shall
at all times reserve and keep available for issuance upon the exercise of the
Warrant such number of its authorized but unissued shares of Common Stock as
will be sufficient to permit the exercise in full of the Warrant. All shares of
Common Stock which shall be so issuable, when issued upon exercise of this
Warrant, shall be duly authorized, validly issued, fully paid and nonassessable,
free and clear of all liens, security interests, charges and other encumbrances
or restrictions (other than encumbrances or restrictions imposed by this Warrant
or the Warrant Agreement).
Before taking any action which would cause an adjustment reducing the
Purchase Price Per Share below the then par value, if any, of the shares of
Common Stock issuable upon exercise of this Warrant, the Company shall take any
corporate action which may, in the opinion of its counsel, be necessary in order
that the Company may validly and legally issue fully paid and nonassessable
shares, free and clear of all liens, security interests, charges and other
encumbrances or restrictions (other than encumbrances or restrictions imposed by
this Warrant or the Warrant Agreement), of such Common Stock at such adjusted
Current Warrant Price.
Before taking any action which would result in an adjustment in the
number of
13
<PAGE>
<PAGE>
shares of Common Stock comprising a Share or in the Current Warrant Price per
share of Common Stock, the Company shall obtain all such authorizations or
exceptions thereof, or consents thereto, as may be necessary from any public
regulatory body or bodies having jurisdiction thereof.
Section 7. REGISTRATION RIGHTS.
7.1 Demand Registration. (a) Any Warrantholder may, in writing,
request that the Company effect the registration under the Securities Act of all
(but not less than all) of such holder's Warrant Shares and specifying the
number of Warrant Shares to be registered and the intended method of disposition
thereof (a "Registration Request"). The Company will promptly, and in no event
more than 10 Business Days after receipt of such Registration request, give
written notice (a "Notice of Requested Registration") of such request to all
other holders of Warrant Shares, and thereupon will use its best efforts to
effect the registration (a "Demand Registration") under the Securities Act of:
(i) the Warrant Shares which the Company has been so requested to
register by such Holder; and
(ii) all other Warrant Shares the holders of which have made written
requests to the Company for registration thereof within 20 days after the
giving of the Notice of Requested Registration (which requests shall
specify the intended method of disposition thereof) (the "Other Holders"),
all to the extent requisite to permit the disposition (in accordance with
the intended methods thereof) of the Warrant Shares so to be registered. If
requested by the Majority Holders requested to be included in any Demand
Registration, the method of disposition of all Warrant Shares included in
such registration shall be an underwritten offering effected in accordance
with Section 7.3 hereof. Subject to Section 7.1(d) hereof, the Company may
include in such registration other securities for sale for its own account
or for the account of any other Person. If any security holders of the
Company (other than the holders of Warrant Shares in such capacity)
register securities of the Company in a Requested Registration in
accordance with this Section 7.1, such holders shall pay the fees and
expenses of their counsel and their pro rata share, on the basis of the
respective amounts of the securities included in such registration on
behalf of each such holder, of the Registration Expenses if the
Registration Expenses for such registration are not paid by the Issuer for
any reason.
(b) Notwithstanding anything herein to the contrary, the Warrantholder
shall have the right to make one such Demand Registration for an underwritten
offering on Form S-1, unless the Warrantholder could not register all of its
Warrant Shares following such a demand by reason of the managing underwriter's
written opinion that inclusion of all such Warrant Shares in such Demand
Registration would materially and adversely affect the marketing of the
securities to be sold therein, in which case the Warrantholder shall be able to
make one such additional Demand Registration. The Warrantholder shall have the
right to make unlimited Demand Registrations on Form S-3 (or any successor
short-form registration statement).
14
<PAGE>
<PAGE>
(c) Demand registrations shall be on such appropriate registration
form promulgated by the Commission as shall be selected by the Company, shall be
reasonably acceptable to the Majority Holders, and shall permit the disposition
of such Warrant Shares in accordance with the intended method or methods
specified in their request for such registration.
(d) If the number of Warrant Shares included in a Demand Registration
is reduced pursuant to Section 7.1(b), the Company will include in any such
registration, to the extent of the number which the Managing Underwriter advises
the Company can be sold in such offering, first, the Warrant Shares requested to
be included in such registration by the Warrantholder, second, not less than 50%
of any shares registered in such registration (other than Warrant Shares of the
Warrantholder) shall be Warrant Shares of Other Holders requested to be included
in such registration (which shall be included pro rata according to the number
of Warrant Shares requested by such other Holders to be included in such
registration), and third, other securities of the Company proposed to be
included in such registration, allocated among the holders thereof in accordance
with the priorities then existing among the Company and the holders of such
other securities; and any securities so excluded shall be withdrawn from and
shall not be included in such Demand Registration.
7.2 Incidental Registration. (a) If the Company at any time proposes
to register any of its Common Stock under the Securities Act for sale to the
public (other than with respect to the initial public offering of its Common
Stock), whether for its own account or for the account of security holders or
both (excluding any registration statement on Form S-4, S-8 or another form not
available for registering the Warrant Shares for sale to the public), each such
time it will give written notice to all Incidental Rights Holders (as defined
below) of its intention so to do. For purposes of this Section 7, the term
"Warrant Shares" shall not include any shares which have been (x) effectively
registered under the Securities Act and disposed of in accordance with any
registration statement covering such shares or (y) sold pursuant to Rule 144 (or
any similar provision then in force) and may be further sold without limitation
and an "Incidental Rights Holder" shall mean any Holder in connection with the
registration statement giving rise to the benefits of this Section 7.1. Upon the
written request of any such Incidental Rights Holder, received by the Company
within 20 days after the giving of any such notice by the Company, to register
any of its Warrant Shares and/or Warrant Shares issuable upon exercise of a
Warrant held by such Holder, the Company will use its best efforts to cause the
Warrant Shares as to which registration shall have been so requested to be
included in the registration statement proposed to be filed by the Company, all
to the extent requisite to permit the sale or other disposition by the
Incidental Rights Holder (in accordance with its written request) of such
Warrant Shares. Alternatively, the Company may include the Warrant Shares as to
which registration shall have been requested by an Incidental Rights Holder
under this subsection (a) in a separate registration statement to be filed
concurrently with the registration statement proposed to be filed by the
Company. In the event that any registration statement filed pursuant to this
Section 7.2 shall be in whole or in part, in connection with an underwritten
public offering, the number of Warrant Shares to be included in such
registration statement may be reduced or no Incidental Rights Holders may be
included in such registration, subject to and in accordance with
15
<PAGE>
<PAGE>
subsection (b) below, if and to the extent that the managing underwriter(s)
shall give their written opinion that such inclusion would materially and
adversely affect the marketing of the securities to be sold therein by the
Company. Except as set forth above, there shall be no limit to the number of
registrations that may be requested pursuant to this Section 7.2.
(b) Any reduction in the number of Warrant Shares owned by Incidental
Rights Holders requested to be included in a registration statement pursuant to
subsection (a) above, or the exclusion of such shares therefrom, shall be
subject to the following conditions:
(i) No such reduction or exclusion shall be made if any securities
are to be included in such registration statement for the account
of any person other than the Company or the Holders.
(ii) Any such reduction in the number of Warrant Shares owned by
Incidental Rights Holders otherwise permitted under this
subsection (b) shall be made pro rata among the requesting
Incidental Rights Holders based upon the number of Warrant Shares
requested to be registered by such remaining Incidental Rights
Holders in accordance with this Section 7.2.
(c) In the event that a distribution of Common Shares covered by a
registration statement referred to in subsection (a) above is to be
underwritten, then the distribution of Warrant Shares for the account of the
Incidental Rights Holders shall be underwritten by the same underwriters who are
underwriting the distribution of the securities for the account of the Company
and/or any other persons whose securities are covered by such registration
statement, and the Holders that are selling Warrant Shares pursuant to such
registration statement shall enter into the agreement with such underwriters
contemplated under Section 7.3.
7.3 Registration Procedures. If and whenever the Company is required
by the provisions of this Section 7 to use its best efforts to effect the
registration of any Warrant Shares under the Securities Act, the Company will,
as expeditiously as possible:
(a) prepare and file with the Commission a registration statement
which, in the case of an underwritten public offering, shall be on such form of
general applicability satisfactory to the managing underwriter selected as
herein provided and shall include the Warrant Shares and use its best efforts to
cause such registration statement to become and remain effective for the period
of the distribution contemplated thereby (determined as hereinafter provided);
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
the period specified in paragraph (a) above and comply with the provisions of
the Securities Act with respect to the disposition of all Warrant Shares covered
by such registration statement in accordance with the Holder's intended method
of disposition set forth in such registration statement for such period;
16
<PAGE>
<PAGE>
(c) furnish to each seller of Warrant Shares and to each
underwriter such number of copies of the registration statement and the
prospectus included therein (including each preliminary prospectus) as such
persons reasonably may request in order to facilitate the public sale or other
disposition of the Warrant Shares covered by such registration statement;
(d) use its best efforts to register or qualify the Warrant
Shares covered by such registration statement under the securities or "blue sky"
laws of such jurisdictions as each seller of Warrant Shares or, in the case of
an underwritten public offering, the managing underwriter shall reasonably
request, and do any and all other acts and things which may be necessary under
such securities or blue sky laws to enable such seller to consummate the public
sale or other distribution in such jurisdiction to be sold by such seller,
except that the Company shall not for any such purpose be required to qualify
generally to transact business as a foreign corporation in any jurisdiction
where it is not so qualified or to consent to general service of process or
subject itself to taxation in any such jurisdiction;
(e) use its best efforts to list the Warrant Shares covered by such
registration statement with any securities exchange or automated quotation
system on which any security of the Company is then listed;
For purposes of Section 7.3(a) and 7.3(b), the period of distribution
of Warrant Shares in a firm commitment underwritten public offering shall be
deemed to extend until each underwriter has completed the distribution of all
securities purchased by it, and the period of distribution of Warrant Shares in
any other registration shall be deemed to extend until the earlier of the sale
of all Warrant Shares covered thereby or 120 days after the effective date
thereof.
In connection with each registration pursuant to this Section 7, the
sellers of Warrant Shares will furnish to the Company in writing such
information with respect to themselves and the proposed distribution by them as
reasonably shall be necessary and shall be requested by the Company in order to
assure compliance with federal and applicable state securities laws.
In connection with each registration pursuant to Sections 7.1 covering
an underwritten public offering, if such underwriting agreement contains
restrictions upon the sale of securities of the Company, other than the
securities which are to be included in the proposed distribution, then such
restrictions shall be binding upon the sellers of Warrant Shares for a period
not exceeding 120 days (or such longer time as is customary and required) from
the effective date of the registration statement and, if requested by the
Company, such sellers shall enter into a written agreement to that effect. In
the event of the Company's initial public offering, if requested by the
Company's underwriters, the holders of Warrants and Warrant Shares agree not to
sell, pledge or otherwise transfer their Warrants or Warrant Shares for a period
not exceeding 120 days (or such longer time as is customary and required).
7.4 Expenses. All expenses incurred by the Company in complying with
Sections 7.1 and 7.2, including, without limitation, all registration and filing
fees, printing
17
<PAGE>
<PAGE>
expenses, fees and disbursements of counsel and independent public accountants
for the Company, fees and expenses (including reasonable counsel fees) incurred
in connection with complying with state securities or "blue sky" laws, fees of
the National Association of Securities Dealers, Inc., fees of a national
securities exchange or the Nasdaq National Market, transfer taxes, fees of
transfer agents and registrants, costs of insurance and but excluding any
Selling Expenses, are called "Registration Expenses." "Selling Expenses" as used
herein means all underwriting discounts and selling commissions applicable to
the sale of Warrant Shares. The Company will pay all Registration Expenses and
the sellers of Warrant Shares will pay all Selling Expenses in connection with
each registration statement prepared or filed under Sections 7.1 or 7.2.
7.5 Indemnification and Contribution. (a) In the event of a
registration of any Warrant Shares under the Securities Act pursuant to Section
7.1 or 7.2, the Company shall indemnify and hold harmless, to the full extent
permitted by law, each seller of such Warrant Shares thereunder and each
partner, officer, trustee, director, employee, agent or Affiliate of such seller
(collectively, for purposes of this Section 7.5, a "seller"), against any
losses, claims, damages, liabilities or expenses, joint or several, to which
such seller may become subject under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in any registration statement under which such
Warrant Shares were registered under the Securities Act pursuant to Sections
7.1, any preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereof, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and shall
pay or reimburse each such seller for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the Company shall
not be liable in any such case to a seller, if and to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with information pertaining to such seller
furnished in writing to the Company by such seller specifically for use in such
registration statement, prospectus, amendment or supplement.
7.6 Rule 144 Reporting. With a view to making available the benefits
of certain rules and regulations of the Commission which may at any time permit
the sale of the Warrant Shares to the public without registration, on and after
the completion of the Company's initial public offering, the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144;
(b) use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act; and
18
<PAGE>
<PAGE>
(c) furnish to each Holder forthwith upon request a written statement
by the Company as to its compliance with the reporting requirements of such Rule
144 and of the Securities Act and the Exchange Act, a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
so filed by the Company as such Holder may reasonably request in availing itself
of any rule or regulation of the Commission allowing such Holder to sell and
Warrant Shares without registration.
Section 8. REDEMPTION OF WARRANTS.
8.1 Right of Redemption. So long as no Triggering Event has occurred
prior to January 30, 2003 (except to the extent the Warrantholder was precluded
from participating in such Triggering Event, despite its request), the Warrants
may be redeemed, as a whole, at any time on or after January 30, 2003 (the
"Redemption Date"), at the Redemption Price.
8.2 Notice of Redemption. Notice of redemption shall be given by the
Company by first-class mail, postage prepaid, mailed not less than 20 or more
than 60 days prior to the Redemption Date, to each Warrantholder to be redeemed,
at his address appearing in the Company's records. Such notice shall be presumed
to have been given when so mailed.
All notices of redemption shall state:
(1) the Redemption Date,
(2) the Redemption Price,
(3) the exercise price and the date on which the right to convert the
Warrants to be redeemed will terminate, and
(4) the place or places where such Warrants are to be surrendered for
payment of the Redemption Price.
8.3 Redemption Price Payable on Redemption Date. Notice of redemption
having been given as aforesaid, the Warrants so to be redeemed shall, on the
Redemption Date, become due and payable at the Redemption Price therein
specified.
If any Warrant called for redemption shall not be paid upon surrender
thereof for redemption, such Warrant shall remain outstanding.
Section 9. RIGHT TO REQUIRE REPURCHASE.
9.1 Right to Require Repurchase. So long as no Triggering Event has
occurred prior to January 31, 2001 (except to the extent the Warrantholder was
precluded from participating in such Triggering Event, despite its request),
then each Holder shall have the right, at such Holder's option, to require the
Company to purchase, and upon the exercise of such right the Company shall
purchase, all of such Holder's Warrants (or the Common Stock issued upon
exercise of such Warrants) on any Business Day (the "Repurchase Date") on or
after January 31,
19
<PAGE>
<PAGE>
2001, at the Repurchase Price.
9.2 Right to Put Warrants or Warrant Stock. Any Holder desiring to
exercise the option granted in Section 9.1 above, (a "Tendering Holder") shall
give written notice to the Company (a "Put Notice"). Promptly upon its receipt
of a Put Notice, the Company shall give written notice of the particulars
thereof to each (if any) other Holder of Warrants and, if any such other Holder
delivers a Put Notice ot the Company within 10 days after its receipt of such
notice from the Company, the Holders of all Warrants or Warrant Stock shall be
entitled to close their put of such Warrants or Warrant Stock on, but not
before, the date scheduled pursuant to Section 9.3 for the closing of the put
pursuant to this Section 9.2. For all purposes of this Section 9, each Warrant
shall be treated as the number of shares of Warrant Stock for which it is then
exercisable.
9.3 Put Closing. The put closing, except as otherwise provided in this
Section 9, shall take place on a date (a) not more than sixty (60) days after
the date a Put Notice is received by the Company as the Company shall specify by
notice to the Tendering Holders, or (b) at such other time and place as the
Tendering Holders and the Company may agree upon (a "Put Closing Date"). At the
put closing, the Tendering Holders will deliver to the Company a certificate or
certificates evidencing the Warrant Stock and Warrants then to be purchased by
the Company (properly endorsed or accompanied by stock powers or, in the case of
any Warrant, assignments) against payment of the Repurchase Price to the
Tendering Holders in the manner specified in Section 9.4 hereof (together with a
certificate or certificates evidencing any shares of Warrant Stock, and Warrants
of like tenor evidencing the right to purchase any shares of Warrant Stock,
presented to the Company but not then being purchased by the Company). Except to
the extent prohibited by applicable law, prior to the Put Closing Date, the
Company will provide the Tendering Holders with all available information that
may be material to the exercise of the Tendering Holders' rights under this
Section 9, including any plans or proposals for any mergers, sales of assets,
acquisitions and substantial sales of stock by its stockholders.
9.4 Payment. The Company shall pay the Repurchase Price at any closing
under Section 9.3 hereof out of funds legally available therefor in cash or
immediately available funds. In the event that any portion of the Repurchase
Price is not paid as a result of any insufficiency of legally available funds or
otherwise, either (a) the Tendering Holders may rescind their Put Notice, or (b)
the Company shall pay to the Tendering Holders that portion of the aggregate
Repurchase Price which the Company is able to pay pro rata to each such
Tendering Holder based on the ratio of the Repurchase Price payable to such
Tendering Holder to the aggregate Repurchase Price payable to all such Tendering
Holders, and such Tendering Holders shall retain a contract claim for the unpaid
balance of the Repurchase Price and shall retain all their respective rights
hereunder and under and in connection with the Warrants and Warrant Stock as to
that number of shares of Warrant Stock or portion of the Warrants exercisable
for that number of shares as such unpaid portion represents (the "Unrepurchased
Securities"), until such time as the unpaid portion of the Repurchase Price and
interest thereon, determined as set forth below, shall be paid to the Tendering
Holders in full. The unpaid portion of the Repurchase Price allocable to the
Unrepurchased Securities shall remain an obligation of the Company and shall
become due and payable, in cash or immediately available funds, as soon
20
<PAGE>
<PAGE>
as there are funds legally available therefor, and the Tendering Holders shall
be entitled to pursue whatever legal remedies may be available to them under
applicable law. Interest shall accrue from the Put Closing Date on any unpaid
portion of the Repurchase Price at the rate of 18% per annum, compounded on a
monthly basis to the extent permitted by law, and payable on demand.
Section 10. NO IMPAIRMENT. The Company shall not take any action,
including, without limitation, by amendment of its certificate of incorporation
or by-laws or through any consolidation, merger or arrangement, reorganization,
transfer of assets, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of this Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such action as may be
necessary or appropriate to protect the rights of the holder of this Warrant
against dilution or other impairment. Without limiting the generality of the
foregoing, the Company (a) will take such action as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and nonassessable shares of Warrant Stock on the exercise of this Warrant, (b)
will not take any action which results in any adjustment pursuant to Section 4
of this Warrant if the total number of shares of Common Stock issuable after
such action would exceed the total number of shares of Common Stock then
authorized by the Company's certificate of incorporation and available for the
purpose of issue upon such exercise, and (c) use its best efforts to obtain all
such authorizations, exemptions or consents from any public regulatory body
having jurisdiction thereof as may be necessary to enable the Company to perform
its obligations under this Warrant.
Section 11. TAKING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS. (a) In
case of all dividends or other distributions by the Company to the holders of
its Nonpreferred Stock with respect to which provisions of Section 4 refers to
the taking of a record of such holders, the Company will in each such case take
such a record and will take such record as of the close of business on a
Business Day. The Company will not at any time, except upon dissolution,
liquidation or winding up of the Company, close its stock transfer books or
warrant transfer books so as to result in preventing or delaying the exercise or
transfer of this Warrant.
(b) If this Warrant is divided between or among more than one Holder,
any time any action, waiver or consent of the Holder of this Warrant is called
for, such action, waiver or consent shall be binding if taken or given by the
Majority Holders (provided that any Warrants owned by the Company or any of its
Affiliates shall not be counted).
Section 12. LOSS OR MUTILATION. Upon receipt by the Company of
evidence satisfactory to it (in the exercise of reasonable discretion) of the
ownership of and the loss, theft, destruction or mutilation of this Warrant and
(in case of loss, theft or destruction) of indemnity satisfactory to it, and in
case of mutilation, upon surrender and cancellation hereof, the Company will
execute and deliver in lieu hereof a new warrant of like tenor and date.
Section 13. OFFICE OF THE COMPANY. As long as this Warrant remains
outstanding, the Company shall maintain an office or agent at Austin, Texas,
where this Warrant
21
<PAGE>
<PAGE>
may be presented for exercise, registration, transfer, division or combination
as in this Warrant provided. Such office or agent shall be maintained at said
address unless and until the Company shall designate and maintain another office
or agent for such purposes and give written notice thereof to the Holder.
Section 14. NOTICES GENERALLY. No notice or other communication shall
be deemed given hereunder unless sent in any of the manners, and to the persons,
specified in this Section 14. All notices and other communications hereunder
will be in writing and will be deemed given (a) upon receipt if delivered
personally, mailed by registered or certified mail, or sent by overnight courier
or (b) upon dispatch if transmitted by telex, telegraph, telecopy or other means
of facsimile, in any case to the Holder at the Holder's last known address
appearing on the books of the Company or to the Company at its address (or at
such other address for a party as will be specified by like notice).
Section 15. LIMITATION OF LIABILITY. No provision hereof, in the
absence of affirmative action by the Holder to purchase shares of Common Stock,
and no mere enumeration herein of the rights or privileges of the Holder hereof,
shall give rise to any liability of the Holder for the purchase price or as a
stockholder of the Company, whether such liability is asserted by the Company or
by creditors of the Company or by anyone else.
Section 16. SURVIVAL. All covenants and agreements of the Company, and
all rights and duties of the Holder from time to time of this Warrant or any
Common Stock issued pursuant to exercise of this Warrant, shall be deemed to
survive any surrender hereof to the Company upon exercise hereof by the Holder
as contemplated by Section 2 or expiration of the right of the Holder to
exercise any unexercised balance hereof on the Warrant Expiration Date.
Section 17. CERTAIN WARRANTS DEEMED NOT OUTSTANDING. For the purposes
of determining whether the Holder entitled to purchase a requisite number of
Shares at any time has taken any action, any Warrants owned by the Company or
any Affiliate of the Company, shall be deemed not to be outstanding.
Section 18. AUTHORITY; EXECUTION AND DELIVERY. The Company hereby
represents and warrants that the Company has full corporate power and authority
to enter into this Agreement and to issue the Warrants and the Warrant Shares in
accordance with the terms hereof. The execution, delivery and performance of
this Agreement by the Company have been duly and effectively authorized by the
Company. This Agreement has been duly executed and delivered by the Company and
constitutes the legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms.
Section 19. REGULATORY RESTRICTIONS.
(a) No Warrantholder which is a bank holding company or a subsidiary
of a bank holding company (a "Bank Affiliate") as defined in the Bank Holding
Company Act of 1956, as amended, or other applicable banking laws of the United
States of America and the rules and regulations promulgated thereunder (the
"Bank Holding Company Act") shall acquire voting
22
<PAGE>
<PAGE>
Common Stock, if, after giving effect to such acquisition, the Bank Affiliate,
together with its Affiliates, would own more than five percent (5%) of the
outstanding voting securities of the Company. Notwithstanding the foregoing,
shares of Common Stock may otherwise be acquired or held by the Initial
Purchaser or any other Bank Affiliate which is a Small Business Investment
Company consistent with and subject to the limitations contained in the Small
Business Act and, to the extent not inconsistent with the Bank Holding Company
Act, shares of Common Stock may be acquired in the event that:
(i) the Company shall vote to merge or consolidate with or into any
other Person and after giving effect to such merger or consolidation the
Bank Affiliate would not own more than five percent (5%) of the outstanding
voting securities of the surviving corporation; or
(ii) the Common Stock issuable upon exercise of this Warrant is
covered by an effective registration statement.
(b) Small Business Act. No person which is a Small Business Investment
Company, as defined in the Small Business Act, shall exercise "put" rights as a
holder of Warrants or Warrant Stock, hereunder if the exercise thereof shall
violate any of the rules or regulations of the Small Business Act.
(c) Statement of Compliance. For purposes of this Warrant, a written
statement of the Holder or any of its Affiliates acquiring Common Stock, or
exercising "put" or conversion rights with respect to this Warrant, delivered to
the Company upon acquisition of any shares of Common Stock or delivery of any
Exercise Notice, to the effect that Bank or its Affiliate, as the case may be,
is legally entitled to exercise its rights to purchase securities of the Company
and that such exercise will not violate or contravene any law or regulation or
any judgment, decree or order of any governmental authority then applicable to
the Holder or such Affiliate, as the case may be, shall be conclusive and
binding upon the Company and shall absolutely obligate and bind the Company to
deliver, in accordance with the other terms and provisions hereof, certificates
or other appropriate instruments representing the securities so purchased.
Section 20. GOVERNING LAW. This Warrant shall be governed by and
construed in accordance with the laws of the State of New York without giving
effect to the conflict of laws rules therein.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed.
Dated as of January 30, 1998 AUTOBOND ACCEPTANCE CORPORATION
By:
----------------------------
23
<PAGE>
<PAGE>
Name:
Title:
24
<PAGE>
<PAGE>
PURCHASE AGREEMENT
DATED AS OF
JANUARY 30, 1998
BY AND BETWEEN
AUTOBOND ACCEPTANCE CORPORATION,
AS THE ISSUER,
AND
BANCBOSTON INVESTMENTS, INC.
AS THE PURCHASER
<PAGE>
<PAGE>
PURCHASE AGREEMENT
AGREEMENT, dated as of January 30, 1998, between AutoBond Acceptance
Corporation (the "Company") and BANCBOSTON INVESTMENTS, INC. (the "Purchaser").
The parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION I.1. DEFINITIONS. The following terms, as used herein, have the
following meanings:
"Additional Closing Date" means the date after the initial Closing Date
agreed between the Company and the Purchaser.
"Affiliate" means, with respect to any Person (the "Subject Person"),
(i) any other Person (a "Controlling Person") that directly, or indirectly
through one or more intermediaries, Controls the Subject Person or (ii) any
other Person (other than the Subject Person or a Consolidated Subsidiary of the
Subject Person) which is Controlled by or is under common Control with a
Controlling Person.
"Agreement" means this Purchase Agreement, as amended, supplemented or
otherwise modified from time to time in accordance with its terms.
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in the State of Texas or the Commonwealth of
Massachusetts are authorized or required by law to close.
"Closing Date" means the date on which all of the conditions set forth
in Sections 5.1 and 5.2 shall have been satisfied and the Securities have been
issued by the Company and the Purchase Price paid by the Purchaser.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission or any entity
succeeding to all of its material functions.
"Common Stock" means the common stock, no par value per share, of the
Company.
"Company" means AutoBond Acceptance Corporation, a corporation
incorporated under the laws of Texas, and its successors.
"Company Corporate Documents" means the certificate of incorporation and
by-laws of the Company.
<PAGE>
<PAGE>
"Consolidated Subsidiary" means at any date with respect to any Person
any Subsidiary or other entity, the accounts of which would be consolidated with
those of such Person in its consolidated financial statements if such statements
were prepared as of such date.
"Control" (including, with correlative meanings, the terms
"Controlling," "Controlled by" and under "common Control with"), as used with
respect to any Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of that
Person, whether through the ownership of voting securities, by contract or
otherwise .
"Convertible Notes" means the Company's 15% Subordinated Convertible
Notes due 2001, issued pursuant to the Indenture.
"Directors" means the individuals then serving on the board of directors
or similar such management council of the Company.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Finance Contracts" means fixed rate, closed end consumer installment
finance contracts acquired by the Company in the ordinary course of its business
arising from the sale of new and used automobiles, vans and light-duty trucks.
"Financing Documents" means this Agreement, the Warrant, the Indenture,
and the Notes and any document, instrument, certificate or other agreement
executed, delivered or contemplated by the foregoing.
"GAAP" has the meaning set forth in Section 1.2.
"Guarantee" by any Person means any obligation, contingent or otherwise,
of such Person
"Indenture" means the Indenture, dated as of January 30, 1998, between
the Company and BankBoston, N.A., as agent.
"Investment" means any investment in any Person, whether by means of
share purchase, partnership interest, capital contribution, loan, time deposit
or otherwise.
"Lien" means, any lien, mechanic's lien, materialmen's lien, lease,
easement, charge, encumbrance, mortgage, conditional sale agreement, title
retention agreement, agreement to sell or convey, option, claim, title
imperfection, encroachment or other survey defect, pledge, restriction, security
interest, collateral assignment or other adverse claim, whether arising by
contract or under law or otherwise (including, without limitation, any financing
lease having substantially the same economic effect as any of the foregoing, and
the filing of any financing statement under the Uniform Commercial Code or
comparable law of any jurisdiction in respect of any of the foregoing).
"Notes" means the Convertible Notes and the Subordinated Notes.
2
<PAGE>
<PAGE>
"Nasdaq Market" means the Nasdaq Stock Market's National Market.
"Officer's Certificate" shall mean a certificate executed by the chief
executive officer or chief operating officer of the Company in the form of
Exhibit B attached hereto.
"Permits" means all domestic and foreign licenses, permits and approvals
required for the full operation of the Company and the Subsidiaries, including
state, federal, city and county permits and approvals.
"Person" means an individual, corporation, partnership, trust,
incorporated or unincorporated association, joint venture, joint stock company,
government (or any agency or political subdivision thereof) or other entity of
any kind.
"Purchase Price" means the purchase price for the Securities set forth
in Section 2.1 hereof.
"Purchaser" means, BancBoston Investments, Inc.
"SEC Reports" shall have the meaning set forth in Section 3.5.
"Securities" means the Subordinated Notes, Convertible Notes, the
Warrants and, as applicable, the shares of Common Stock issuable upon conversion
of the Convertible Notes and the exercise of the Warrants.
"Securities Act" means the Securities Act of 1933, as amended.
"Subordinated Notes" means the Company's 15% Senior Subordinated Notes
due 2001, issued pursuant to the Indenture.
"Subsidiary" means, with respect to any Person, any corporation or other
entity of which a majority of the capital stock or other ownership interests
having ordinary voting power to elect a majority of the board of directors or
other persons performing similar functions are at the time directly or
indirectly owned by such Person. Unless specified to the contrary, "Subsidiary"
means a Subsidiary of the Company.
"Subsidiary Corporate Documents" means the certificates of incorporation
and by-laws of each Subsidiary.
"Taxes" has the meaning set forth in Section 3.6.
"Transfer" means any disposition of Securities that would constitute a
sale thereof under the Securities Act.
"Warrant" means each of the Warrant to be issued to the Purchaser on the
Closing Date to purchase 368,462 shares of Common Stock in the aggregate
(subject to adjustment as set forth therein) , and, at the Purchaser's option,
the Warrant to purchase additional shares of Common
3
<PAGE>
<PAGE>
Stock that may be issued on the Additional Closing Date.
SECTION I.2. ACCOUNTING TERMS AND DETERMINATIONS. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared, in accordance with
generally accepted accounting principles as in effect from time to time, applied
on a consistent basis (except for changes concurred in by the Company's
independent public accountants) ("GAAP"). All references to "dollars," "Dollars"
or "$" are to United States dollars unless otherwise indicated.
ARTICLE II
PURCHASE AND SALE OF SECURITIES
SECTION II.1. COMMITMENT TO PURCHASE. (a) Subject to the terms and
conditions set forth herein, the Company agrees to issue and sell and, subject
to the terms and conditions set forth herein and in reliance on the
representations and warranties of the Company contained herein, the Purchaser
agrees to purchase, the Securities as set forth below.
(b) On the Closing Date, the Purchaser shall acquire the Notes in an
aggregate principal amount of $7,500,000.
(c) In consideration of the Purchaser's agreement to purchase the Notes
specified in this Article II, the Company shall issue and deliver to the
Purchaser, on the Closing Date, the Warrant.
(d) The aggregate consideration to be paid on the Closing Date by the
Purchaser to the Company for the Notes and the Warrants shall be $7,500,100 (the
"Purchase Price").
SECTION II.2. PURCHASE OF SECURITIES. (a) On the Closing Date, subject
to the satisfaction of all terms and conditions set forth herein, each of the
Purchasers shall deliver by wire transfer to the account or accounts specified
by the Company immediately available funds in an amount equal to the Purchase
Price.
(b) On the Closing Date, against payment as set forth in subsection 2.2
(a) above, the Company shall deliver to the Purchaser (i) a single Note for the
Purchaser representing the combined principal amounts of the Convertible Note
and the Subordinated Note acquired by the Purchaser as of the Closing Date, and
(ii) a single Warrant for the Purchaser.
SECTION II.3. PURCHASE ON THE ADDITIONAL CLOSING DATE. (a) At the
Purchaser's option, the Purchaser may increase (i) the aggregate principal
amount of the Subordinated Notes and the Convertible Notes, and (ii) the number
of shares of Common Stock subject to the Warrant, against payment to the Company
of such additional amounts (the "Additional Purchase Price") as may be agreed
between the Purchaser and the Company. The settlement of such transaction shall
take place on the Additional Closing Date.
(b) The Additional Closing Date shall be subject to such terms and
conditions as
4
<PAGE>
<PAGE>
agreed between the parties.
(c) On the Additional Closing Date, at the Purchaser's option, the
Company will issue additional Subordinated Notes, Convertible Notes (or a
combination thereof) and Warrants to the Purchaser in respect of such increased
amounts, or exchange the Purchaser's existing Securities for newly issued
Securities reflecting such increased amounts.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Purchaser as of the Closing
Date as set forth herein.
SECTION III.1. CORPORATE EXISTENCE AND POWER. The Company and each
Subsidiary is a corporation (or other legal entity) duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation and is duly qualified to conduct business as a foreign
corporation, and has all corporate power and all governmental licenses,
authorizations, permits, consents and approvals required to carry on its
business as now conducted and as proposed to be conducted, except where such
failure would not have a material adverse effect on the Company or the ability
of the Company to continue its current operations.
SECTION III.2. AUTHORIZATION AND EXECUTION. The execution, delivery and
performance by the Company of each Financing Document and the issuance by the
Company of the Securities have been duly and validly authorized and are within
its corporate powers. Each Financing Agreement has been duly executed and
delivered by the Company and constitutes the valid and binding agreement of the
Company. Each of the Financing Documents constitutes the valid and binding
obligation of the Company, in each case enforceable against the Company in
accordance with its respective terms, subject to (i) applicable bankruptcy,
insolvency or similar laws affecting the enforceability of creditors rights
generally and (ii) equitable principles of general applicability.
SECTION III.3. GOVERNMENTAL AUTHORIZATION; THE SECURITIES. The execution
and delivery by the Company of the Financing Documents does not and will not,
the issuance and sale by the Company of the Securities does not and will not,
and the consummation of the transactions contemplated hereby and thereby will
not, require any action by or in respect of, or filing with, any governmental
body, agency or governmental official except (a) such actions or filings that
have been undertaken or made by the Company at its sole cost and expense prior
to the date hereof and that will be in full force and effect (or as to which all
applicable waiting periods have expired) on and as of the date hereof or which
are not required to be filed on or prior to the Closing Date, (b) such actions
or filings that, if not obtained, would not in the aggregate impose materially
adverse conditions upon the Company or the Purchaser and (c) listing
applications ("Listing Applications") to be filed by the Company at its sole
cost and expense with the Nasdaq Market or the American Stock Exchange relating
to the shares of Common Stock issuable upon conversion of the Convertible Notes
and exercise of the Warrants.
5
<PAGE>
<PAGE>
Upon conversion in accordance with the terms of the Convertible Notes, or upon
exercise in accordance with the terms of the Warrants (assuming the payment of
the exercise price set forth in the Warrants), the shares of Common Stock when
issued upon conversion or exercise thereof shall be duly and validly issued and
outstanding, fully paid and nonassessable, free and clear of any claims or
pre-emptive rights. Assuming the representations and warranties of the Purchaser
herein are true and correct in all material respects, each of the Securities
will have been issued in material compliance with all applicable U.S. federal
and state securities laws.
SECTION III.4. CONTRAVENTION. The execution and delivery by the Company
of the Financing Documents, the issuance and sale by the Company of the
Securities (and the application of the proceeds thereof as contemplated herein),
and the consummation of the transactions contemplated hereby and thereby will
not contravene or constitute a default under or violation of (i) any provision
of applicable law or regulation, (ii) the Company Corporate Documents or the
Subsidiary Corporate Documents, (iii) any agreement, judgment, injunction,
order, decree or other instrument binding upon the Company or any Subsidiary or
any of their respective assets, or result in the creation or imposition of any
Lien on any asset of the Company or any Subsidiary. The Company and each
Subsidiary is in compliance with all statutes, laws, ordinances, rules,
regulations, orders, restrictions and all other legal requirements of any
domestic or foreign government or any instrumentality thereof having
jurisdiction over the conduct of its businesses or the ownership of its
properties, except where such failure would not have a material adverse effect
on the business, condition (financial or otherwise), operations, performance,
properties or prospects of the Company and its Subsidiaries taken as a whole.
SECTION III.5. FINANCIAL INFORMATION AND SEC REPORTS. The Company has
timely filed all forms, reports and documents with the Commission since November
8, 1996, required to be filed by it under the Exchange Act and the Securities
Act through the date hereof (collectively, the "SEC Reports"). Such SEC Reports,
at the time filed, complied in all material respects with the requirements of
the Exchange Act. None of the SEC Reports, including without limitation any
financial statements or schedules included therein, contained, as of their
respective dates, any untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading. There have been no
adverse changes in the Company's business, properties, results of operations,
condition (financial or otherwise) or prospects since September 30, 1997, other
than as disclosed in Amendment No. 1 to the Company's Registration Statement on
Form S-1 (File No. 333-41257), and except for decreases in the Company's
liquidity, increases in short-term payables (including an increase from
September 30, 1997 of approximately $4 million in short-term payables reflected
as "bank overdraft"), and possible revaluation of Interest-only Strip
Receivables. The Company reasonably expects to report an increase in
shareholder's equity at December 31, 1997 from September 30, 1997, provided that
a securitization within the parameters set forth in its warehouse lending
arrangements is completed prior to March 31, 1998. The audited and unaudited
consolidated balance sheets of the Company and its Subsidiaries contained in the
SEC Reports, and the related consolidated statements of income, changes in
stockholders equity and changes in cash flows, including the footnotes thereto,
except as indicated therein, have been prepared in accordance with GAAP
consistently followed throughout the periods indicated, except that the
unaudited financial statements do not contain complete notes and may be subject
to normal audit adjustments and normal annual adjustments. The consolidated
balance sheets fairly present the financial condition of the Company and its
6
<PAGE>
<PAGE>
Subsidiaries at the date thereof and the related statements of income,
stockholders equity and changes in cash flows fairly present the results of the
operations of the Company and its Subsidiaries and the changes in their
financial position for the periods indicated.
SECTION III.6. LITIGATION. There is no action, suit or proceeding
pending or, to the knowledge of the Company, threatened, against the Company or
any Subsidiary, before any court or arbitrator or any governmental body, agency
or official in which there is a reasonable possibility of an adverse decision
which could materially adversely affect the business, condition (financial or
otherwise), operations, performance, properties or prospects of the Company and
its Subsidiaries taken as a whole, or which challenges the validity of any
Financing Document.
SECTION III.7. TAXES. All United States federal, state, county,
municipality local or foreign income tax returns and all other material tax
returns (including foreign tax returns) which are required to be filed by or on
behalf of the Company and each Subsidiary have been filed and all material taxes
due pursuant to such returns or pursuant to any assessment received by the
Company and each Subsidiary have been paid except those being disputed in good
faith and for which adequate reserves have been established. The charges,
accruals and reserves on the books of the Company and each Subsidiary in respect
of taxes or other governmental charges have been established in accordance with
GAAP.
SECTION III.8. INVESTMENTS, JOINT VENTURES. The Company has no
Subsidiaries or other direct or indirect Investment in any Person, and the
Company is not a party to any partnership, management, shareholders' or joint
venture or similar agreement, other than as indicated in the SEC Reports.
SECTION III.9. NOT AN INVESTMENT COMPANY. Neither the Company nor any
Subsidiary is an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
SECTION III.10. CAPITALIZATION. As of the date hereof, the authorized,
issued and outstanding capital stock of the Company is as set forth in the SEC
Reports. Other than as set forth in the SEC Reports and except for (a) a warrant
to purchase 7,500 shares of Common Stock, and (b) stock options for 150,000
shares of Common Stock issued to the Company's President-elect, there are no
other subscriptions, options, warrants, rights (including, without limitation,
preemptive rights), convertible securities, exchangeable securities or other
agreements or commitments of any character pursuant to which the Company is
required to issue any shares of its capital stock.
SECTION III.11. SOLICITATION. No form of general solicitation or general
advertising was used by the Company or, to the best of its actual knowledge, any
other Person acting on behalf of the Company in connection with the offer and
sale of the Securities. Neither the Company, nor, to its knowledge, any Person
acting on behalf of the Company, has, either directly or indirectly, sold or
offered for sale to any Person (other than the Purchaser) any of the Securities
and the Company represents that neither itself nor any Person authorized to act
on its behalf (except that the Company makes no representation as to the
Purchaser and its Affiliates) will sell or offer for sale any such security to,
or solicit any offers to buy any such security from, or otherwise approach or
negotiate in respect thereof with, any Person or Persons so as thereby to
7
<PAGE>
<PAGE>
cause the issuance or sale of any of the Securities to be in violation of any of
the provisions of Section 5 of the Securities Act.
SECTION III.12. PERMITS. (a) Each of the Company and its Subsidiaries
has all material Permits as are necessary for the conduct of its business as it
has been carried on; (b) all such Permits are in full force and effect, and each
of the Company and its Subsidiaries has fulfilled and performed all material
obligations with respect to such Permits; (c) no event has occurred which
allows, or after notice or lapse of time would allow, revocation or termination
by the issuer thereof or which results in any other material impairment of the
rights of the holder of any such Permit; and (d) the Company has no reason to
believe that any governmental body or agency is considering limiting, suspending
or revoking any such Permit.
SECTION III.13. LEASES. Except as disclosed in the SEC Reports, neither
the Company nor any Subsidiary is a party to any capital lease obligation with a
value greater than $100,000 or to any operating lease with an aggregate annual
rental greater than $100,000 during the life of such lease.
SECTION III.14. ABSENCE OF ANY UNDISCLOSED LIABILITIES OR CAPITAL CALLS.
There are no liabilities of the Company or any Subsidiary of any kind
whatsoever, whether accrued, contingent, absolute, determined, determinable or
otherwise, and there is no existing condition, situation or set of circumstances
which could reasonably be expected to result in such a liability, other than (i)
those liabilities and circumstances disclosed in the SEC Reports, and (ii)
short-term liabilities, a material portion of which will be extinguished with
the proceeds from the sale of the Securities.
SECTION III.15. INSURANCE. The Company and its Subsidiaries maintain,
with financially sound and reputable insurance companies, insurance in at least
such amounts and against such risks such that any uninsured loss would not have
a material adverse effect on the business, condition (financial or otherwise),
operations, performance, properties or prospects of the Company. All insurance
coverages of the Company and its Subsidiaries are in full force and effect and
there are no past due premiums in respect of any such insurance. Upon request of
the Purchaser, the Company will provide copies of all such insurance policies to
the Purchaser.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
SECTION IV.1. PURCHASE FOR INVESTMENT; AUTHORITY; BINDING AGREEMENT. The
Purchaser hereby represents and warrants to the Company that:
(a) the Purchaser is an "accredited investor" within the meaning of Rule
501(a) under the Securities Act and the Securities to be acquired by it pursuant
to this Agreement are being acquired for its own account and not with a view
toward, or for sale in connection with, any distribution thereof, except in
compliance with applicable United States federal and state securities law;
provided that the disposition of the Purchaser's property shall at all times be
and remain within its control;
8
<PAGE>
<PAGE>
(b) the execution, delivery and performance of this Agreement and the
purchase of the Securities pursuant hereto are within the Purchaser's corporate
or partnership powers, as applicable, and have been duly and validly authorized
by all requisite corporate or partnership action;
(c) this Agreement has been duly executed and delivered by the
Purchaser;
(d) the execution and delivery by the Purchaser of the Financing
Documents to which it is a party does not, and the consummation of the
transactions contemplated hereby and thereby will not, contravene or constitute
a default under or violation of (i) any provision of applicable law or
regulation, or (ii) any agreement, judgment, injunction, order, decree or other
instrument binding upon the Purchaser;
(e) Purchaser understands that the Securities have not been registered
under the Securities Act and may not be transferred or sold except as
contemplated by the Financing Documents;
(f) this Agreement constitutes a valid and binding agreement of the
Purchaser enforceable in accordance with its terms, subject to (i) applicable
bankruptcy, insolvency or similar laws affecting the enforceability of creditors
rights generally and (ii) equitable principles of general applicability;
(g) the Purchaser has such knowledge and experience in financial and
business matters so as to be capable of evaluating the merits and risks of its
investment in the Securities and the Purchaser is capable of bearing the
economic risks of such investment;
(h) the Purchaser is knowledgeable, sophisticated and experienced in
business and financial matters; the Purchaser has previously invested in
securities similar to the Securities and fully understands the limitations on
transfer described herein; the Purchaser has been afforded access to information
about the Company and the consolidated financial condition, results of
operations, property, management and prospects of the Company and it
Subsidiaries sufficient to enable it to evaluate its investment in the
Securities; the Purchaser has been afforded the opportunity to ask such
questions as it has deemed necessary of, and to receive answers from,
representatives of the Company concerning the terms and conditions of the
offering of the Securities and the merits and the risks of investing in the
Securities; and the Purchaser has been afforded the opportunity to obtain such
additional information which the Company possesses or can acquire that is
necessary to verify the accuracy and completeness of the information given to
the Purchaser concerning the Company. The foregoing does not in any way relieve
the Company of its representations and other undertakings hereunder, and shall
not limit the Purchasers' ability to rely thereon; and
(i) no part of the source of funds used by the Purchaser to acquire the
Securities constitutes assets allocated to any separate account maintained by
the Purchaser in which any employee benefit plan (or its related trust) has any
interest.
ARTICLE V
9
<PAGE>
<PAGE>
CONDITIONS PRECEDENT TO PURCHASE OF SECURITIES
SECTION V.1. CLOSING. The obligations of the Purchaser to purchase the
Securities to be issued and sold pursuant to this Agreement are subject to the
satisfaction, at or prior to the Closing Date, of the following conditions:
(a) Receipt by the Purchaser of duly executed counterparts of this
Agreement and the Indenture;
(b) The Purchaser shall have received the opinion, dated the Closing
Date, of Jones, Day, Reavis & Pogue, substantially in the form attached as
Exhibit A hereto.
(c) The Notes shall have been duly executed by the Company as provided
in the Indenture;
(d) The Purchaser shall have received an Officer's Certificate executed
by the chief executive officer or chief operating officer of the Company, in the
form attached as Exhibit B hereto.
(e) The Company Corporate Documents and the Subsidiary Corporate
Documents, if any, shall be in full force and effect and no term or condition
thereof shall have been amended, waived or otherwise modified without the prior
written consent of the Purchasers;
(f) The Warrant shall have been duly executed by the Company.
(g) There shall exist no action, suit, investigation, litigation or
proceeding pending or threatened in any court or before any arbitrator or
governmental instrumentality that challenges the validity of or purports to
affect any Financing Document or transaction contemplated hereby or thereby or
that could reasonably be expected to have a material adverse effect on the
business, condition (financial or otherwise), operations, performance,
properties or prospects of the Company and its Subsidiaries, taken as a whole,
the enforceability of the Financing Documents or the Securities or the rights of
the holders of the Securities or the Purchasers hereunder;
(h) The representations and warranties of the Company contained in each
Financing Document shall be true and correct in all respects (in the case of any
representation or warranty containing any materiality qualification) or in all
material respects (in the case of any representation or warranty without any
materiality qualification) and the Company shall have performed and complied
with all covenants and agreements required by such Financing Documents to be
performed or complied with by it at or prior to the Closing Date;
(i) The Purchaser shall have confirmed receipt of the Notes and the
Warrants to be issued, duly executed by the Company in the denominations and
registered in the name or names requested by the Purchaser;
(j) The Purchaser shall have received a duly executed Stockholder's
Agreement, dated January 30, 1998, among the Purchaser, the Company, William O.
Winsauer and John S.
10
<PAGE>
<PAGE>
Winsauer.
(k) There shall not have occurred any disruption or adverse change in
the financial or capital markets generally, or in the market for the Common
Stock, which the Purchaser reasonably deems material in connection with the
purchase of the Securities.
SECTION V.2. CONDITIONS TO THE COMPANY'S OBLIGATIONS. The obligations of
the Company to issue and sell to the Purchaser the Securities to be issued and
sold pursuant to this Agreement are subject to the satisfaction, at or prior to
the Closing Date, of the following conditions:
(a) The representations and warranties of the Purchaser contained herein
shall be true and correct in all material respects on the Closing Date and the
Purchaser shall have performed and complied in all material respects with all
agreements required by this Agreement to be performed or complied with by the
Purchasers at or prior to the Closing Date;
(b) The issue and sale of the Securities by the Company shall not be
prohibited by any applicable law, court order or governmental regulation;
(c) Receipt by the Company of duly executed counterparts of this
Agreement and Indenture; and
(d) The Company shall have received payment of the Purchase Price of the
Notes and Warrant.
ARTICLE VI
COVENANTS
The Company hereby agrees that, from and after the date hereof for so
long as any Securities remain outstanding and for the benefit of the Purchaser:
SECTION VI.1. INFORMATION. The Company will deliver to the Purchaser:
(a) promptly after the filing thereof, copies of all registration
statements (other than the exhibits thereto and any registration statements on
Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their
equivalents) which the Company or any Subsidiary has filed with the Commission;
(b) promptly upon the mailing thereof to the shareholders of the Company
generally, copies of all financial statements, reports and proxy statements so
mailed and any other document generally distributed to shareholders;
(c) promptly following the mailing thereof, monthly administrative and
volume reports;
11
<PAGE>
<PAGE>
(d) the data indicated on Schedule 1 hereto;
(e) as soon as available and in any event within forty-five (45) days
after the close of each of the first, second and third fiscal quarters of the
Company, the consolidated balance sheet of the Company and its Subsidiaries as
at the end of such period and the related consolidated statements of income,
retained earnings and cash flows of the Company and its Subsidiaries for such
period, setting forth in each case in comparative form the figures for the
corresponding periods of the previous fiscal year, all of which shall be
certified by the chief financial officer of the Company to present fairly, in
accordance with GAAP, the consolidated financial position of the Company and its
Subsidiaries as at the date thereof and the results of operations for such
period (subject to normal year-end audit adjustments);
(f) as soon as available and in any event within ninety (90) days after
the end of each fiscal year of the Company, the audited consolidated balance
sheet of the Company and its Subsidiaries as at the end of such fiscal year and
the related audited consolidated statements of income, retained earnings and
cash flows of the Company and its Subsidiaries for such fiscal year, setting
forth in comparative form the figures as at the end of and for the previous
fiscal year, all of which shall be certified by (i) the chief financial officer
of the Company to present fairly, in accordance with GAAP, the financial
position of the Company and its Subsidiaries as at the date thereof and the
result of operations for such period and (ii) the Company's independent
certified public accountants, whose certificate shall be unqualified; and
(g) the information specified for delivery to the Agent in the
Indenture.
SECTION VI.2. INSPECTION OF PROPERTY, BOOKS AND RECORDS. The Company and
each Subsidiary will keep proper books of record and account in which full, true
and correct entries shall be made of all dealings and transactions in relation
to their respective businesses and activities; and will permit, during normal
business hours, the Purchaser, or an affiliate thereof, to visit and inspect any
of their respective properties, upon reasonable prior notice, to examine and
make abstracts from any of their respective books and records and to discuss
their respective affairs, finances and accounts with their respective executive
officers and independent public accountants, all at such reasonable times.
SECTION VI.3. USE OF PROCEEDS. The net proceeds from the issuance and
sale of the Securities by the Company shall be used solely for short term
payables, the provision for repayment of the Company's 18% Convertible Secured
Notes (if necessary) and for working capital. None of the proceeds from the
issuance and sale of Securities by the Company pursuant to this Agreement will
be used directly or indirectly for the purpose, whether immediate, incidental or
ultimate, of purchasing or carrying any "margin stock" within the meaning of
Regulation G of the Board of Governors of the Federal Reserve System.
SECTION VI.4. RESERVED SHARES AND LISTINGS.
(a) The Company will reserve from its authorized but unissued shares of
Common Stock a sufficient number of shares of Common Stock to permit issuance of
the conversion in full of the then outstanding Convertible Notes and the
exercise in full of the then outstanding Warrants; and
12
<PAGE>
<PAGE>
(b) The Company will maintain the listing of its Common Stock on the
Nasdaq Market or any national securities exchange.
SECTION VI.5. NONVOTING COMMON STOCK. The Company agrees to cause the
amendment of its Certificate of Incorporation prior to June 1, 1998, to provide
for the creation of a class of nonvoting Common Stock, which shall otherwise
rank pari passu in all respects with the existing class of voting Common Stock
of the Company, and to reserve from its authorized but unissued shares of such
class of Nonvoting Common Stock a sufficient number of shares of such Common
Stock to permit issuance of such shares upon the conversion in full of the then
outstanding Convertible Notes and Warrants.
SECTION VI.6 RIGHT OF FIRST REFUSAL. The Purchaser, so long as it is the
holder of the Warrant, shall have a right of first refusal to purchase all
future securities to be privately placed by the Company on a pro rata basis and
on the same terms, conditions and price as those securities purchased by other
purchasers; provided however, that the exercise of such right does not, in the
reasonable judgment of the Board of Directors of the Company, adversely impact
the viability of such placement in any material way.
SECTION VI.7 PREFERRED STOCK. The Company agrees to use its best efforts
to complete the offer and sale of up to $10 million of its __% Series A
Cumulative Preferred Stock.
SECTION VI.8 ACCOUNTING.
(a) The Company will not change its independent auditors without
the prior written consent of the Purchaser, which consent shall not unreasonably
be withheld.
(b) The Company will not make any significant change in
accounting treatment or reporting practices, except as required by GAAP (in
which event the Company shall provide the Purchaser with a summary of such
changes and the effect on the Company's financial statements).
ARTICLE VII
LIMITATION ON TRANSFERS
SECTION VII.1. RESTRICTIONS ON TRANSFER. From and after their respective
dates of issuance, none of the Securities shall be transferable except upon the
conditions specified in this Article VII, which conditions are intended to
ensure compliance with the provisions of the Securities Act in respect of the
Transfer of any of such Securities or any interest therein. Each Purchaser will
use its best efforts to cause any proposed transferee of any Securities held by
it to agree to take and hold such Securities subject to the provisions and upon
the conditions specified in this Article VII.
SECTION VII.2. RESTRICTIVE LEGENDS.
(a) Each certificate for Securities issued to a Purchaser or to a
subsequent transferee shall include a legend in substantially the following
form:
13
<PAGE>
<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT").
THE HOLDER HEREOF, BY PURCHASING SUCH SECURITIES, AGREES FOR THE BENEFIT
OF THE CORPORATION THAT SUCH SECURITIES MAY BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED ONLY (A) TO THE CORPORATION, (B) TO QUALIFIED
INSTITUTIONAL BUYERS, (C) PURSUANT TO THE EXEMPTION FROM REGISTRATION
UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER, IF AVAILABLE,
OR (D) IF REGISTERED UNDER THE SECURITIES ACT.
SECTION VII.3. NOTICE OF PROPOSED TRANSFERS. Prior to any proposed
Transfer of the Securities other than a transfer (i) registered under the
Securities Act, (ii) to an affiliate of a Purchaser which is an "accredited
investor" within the meaning of Rule 501(a) under the Securities Act, provided
that any such transferee shall agree to be bound by the terms of this Agreement,
and (iii) to be made in reliance on Rule 144 under the Securities Act, the
holder thereof shall give written notice to the Company of such holder's
intention to effect such Transfer, setting forth the manner and circumstances of
the proposed Transfer, which shall be accompanied by (A) an opinion of counsel
to the transferor, confirming that such transfer does not give rise to a
violation of the Securities Act (which requirement may be waived by the
Company), (B) representation letters in form and substance reasonably
satisfactory to the Company to ensure compliance with the provisions of the
Securities Act and (C) letters in form and substance reasonably satisfactory to
the Company from each such transferee stating such transferee's agreement to be
bound by the terms of this Agreement. Such proposed Transfer may be effected
only if the Company shall have received such notice of transfer, opinion of
counsel, representation letters and other letters referred to in the immediately
preceding sentence, whereupon the holder of such Securities shall be entitled to
Transfer such Securities in accordance with the terms of the notice delivered by
the holder to the Company.
ARTICLE VIII
MISCELLANEOUS
SECTION VIII.1. NOTICES. All notices, demands and other communications
to any party hereunder shall be in writing (including telecopier or similar
writing) and shall be given to such party at its address set forth on the
signature pages hereof, or such other address as such party may hereafter
specify for the purpose to the other parties. Each such notice, demand or other
communication shall be effective (i) if given by telecopy, when such telecopy is
transmitted to the telecopy number specified on the signature page hereof, (ii)
if given by mail, four days after such communication is deposited in the mail
with first class postage prepaid, addressed as aforesaid or (iii) if given by
any other means, when delivered at the address specified in or pursuant to this
Section.
SECTION VIII.2. NO WAIVERS; AMENDMENTS.
(a) No failure or delay on the part of any party in exercising any
right, power or
14
<PAGE>
<PAGE>
remedy hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right, power or remedy preclude any other or
further exercise thereof or the exercise of any other right, power or remedy.
(b) Any provision of this Agreement may be amended, supplemented or
waived if, but only if, such amendment, supplement or waiver is in writing and
is signed by the Company and the Purchaser.
SECTION VIII.3. INDEMNIFICATION. (a)The Company agrees to indemnify and
hold harmless each Purchaser, its affiliates, and each Person, if any, who
controls such Purchaser, or any of its affiliates, within the meaning of the
Securities Act or the Exchange Act (a Controlling Person"), and the respective
partners, agents, employees, officers and directors of the Purchasers, their
affiliates and any such Controlling Person (each an Indemnified Party" and
collectively, the "Indemnified Parties"), from and against any and all losses,
claims, damages, liabilities and expenses (including, without limitation and as
incurred, reasonable costs of investigating, preparing or defending any such
claim or action, whether or not such Indemnified Party is a party thereto,
provided that the Company shall not be obligated to advance such costs to any
Indemnified Party other than the Purchasers unless it has received from such
Indemnified Party an undertaking to repay to the Company the costs so advanced
if it should be determined by final judgment of a court of competent
jurisdiction that such Indemnified Party was not entitled to indemnification
hereunder with respect to such costs) which may be incurred by such Indemnified
Party in connection with any investigative, administrative or judicial
proceeding brought or threatened that relates to or arises out of, or is in
connection with any activities contemplated by any Financing Document or any
other services rendered in connection herewith; provided that the Company will
not be responsible for any claims, liabilities losses, damages or expenses that
are determined by final judgment of a court of competent jurisdiction to result
solely from such Indemnified Party's gross negligence, willful misconduct or bad
faith or its breach of the obligations of it or any Affiliate under any
Financing Document.
If any action shall be brought against an Indemnified Party with respect
to which indemnity may be sought against the Company under this Agreement, such
Indemnified Party shall promptly notify the Company in writing and the Company,
at its option, may, assume the defense thereof, including the employment of
counsel reasonably satisfactory to such Indemnified Party and payment of all
reasonable fees and expenses. The failure to so notify the Company shall not
affect any obligations the Company may have to such Indemnified Party under this
Agreement or otherwise unless the Company is materially adversely affected by
such failure. Such Indemnified Party shall have the right to employ separate
counsel in such action and participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Party,
unless: (i) the Company has failed to assume the defense and employ counsel or
(ii) the named parties to any such action (including any impleaded parties)
include such Indemnified Party and the Company, and such Indemnified Party shall
have been advised by counsel that there may be one or more legal defenses
available to it which are different from or additional to those available to the
Company, in which case, if such Indemnified Party notifies the Company in
writing that it elects to employ separate counsel at the expense of the Company,
the Company shall not have the right to assume the defense of such action or
proceeding on behalf of such Indemnified Party, provided, however, that the
Company shall not, in connection with any one such action or proceeding or
separate but substantially
15
<PAGE>
<PAGE>
similar or related actions or proceedings in the same jurisdiction arising out
of the same general allegations or circumstances, be responsible hereunder for
the reasonable fees and expenses of more than one such firm of separate counsel,
in addition to any local counsel, which counsel shall be designated by the
Purchasers. The Company shall not be liable for any settlement of any such
action effected without the written consent of the Company (which shall not be
unreasonably withheld) and the Company agrees to indemnify and hold harmless
each Indemnified Party from and against any loss or liability by reason of
settlement of any action effected with the consent of the Company. In addition,
the Company will not, without the prior written consent of the Purchasers,
settle or compromise or consent to the entry of any judgment in or otherwise
seek to terminate any pending or threatened action, claim, suit or proceeding in
respect to which indemnification or contribution may be sought hereunder
(whether or not any Indemnified Party is a party thereto) unless such
settlement, compromise, consent or termination includes an express unconditional
release of the Purchasers and the other Indemnified Parties, satisfactory in
form and substance to the Purchasers, from all liability arising out of such
action, claim, suit or proceeding.
If for any reason the foregoing indemnity is unavailable (otherwise than
pursuant to the express terms of such indemnity) to an Indemnified Party or
insufficient to hold an Indemnified Party harmless, then in lieu of indemnifying
such Indemnified Party, the Company shall contribute to the amount paid or
payable by such Indemnified Party as a result of such claims, liabilities,
losses, damages, or expenses (i) in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and by the
Purchasers on the other from the transactions contemplated by this Agreement or
(ii) if the allocation provided by clause (i) is not permitted under applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits received by the Company on the one hand and the Purchasers on the
other, but also the relative fault of the Company and the Purchasers as well as
any other relevant equitable considerations. Notwithstanding the provisions of
this Section 8.3, the aggregate contribution of all Indemnified Parties shall
not exceed the amount of interest and fees actually received by the Purchasers
pursuant to this Agreement. It is hereby further agreed that the relative
benefits to the Company on the one hand and the Purchasers on the other with
respect to the transactions contemplated hereby shall be determined by reference
to, among other things, whether any untrue or alleged untrue statement of
material fact or the omission or alleged omission to state a material fact
related to information supplied by the Company or by the Purchasers and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation.
The indemnification, contribution and expense reimbursement obligations
set forth in this Section 8.3 (a)(i) shall be in addition to any liability the
Company may have to any Indemnified Party at common law or otherwise and (ii)
shall survive the termination of this Agreement and the other Financing
Documents and the payment in full of the Notes.
(b) Whether or not the transactions contemplated by this Agreement and
the Financing Agreements shall be consummated, the Company hereby agrees to pay
on demand all reasonable out-of-pocket expenses incurred by the Purchaser. In
connection with the transactions contemplated by this Agreement and the
Financing Agreements and in connection with any
16
<PAGE>
<PAGE>
amendments or waivers (whether or not the same become effective) hereof or
thereof and all reasonable out-of-pocket expenses incurred by the Purchaser or
any of its affiliates in connection with the enforcement of any rights
hereunder, under any other Financing Agreement or with respect to any Security,
including without limitation (i) the cost and expenses of preparing and
duplicating this Agreement and the Securities; (ii) the cost of delivering to
the Purchaser's principal office, insured to the Purchaser's satisfaction, the
Securities sold to the Purchaser hereunder and any Securities delivered to the
Purchaser in exchange therefor or upon any exercise, conversion or substitution
thereof; (ii) the reasonable fees, expenses and disbursement of Riemer &
Braunstein, Purchaser's special counsel, in connection with the transactions
contemplated by this Agreement and the Financing Agreements and any amendments,
modifications, approvals, consents or waivers thereunder or thereunder; (iv) the
fees, expenses and disbursements of the Purchaser's accountants, in connection
with the Purchaser's due diligence investigation of the Company; (v) all taxes
(other than taxes determined with respect to income), including any recording
fees and filing fees and documentary stamps and similar taxes at any time
payable in respect of this Agreement, any Financing Agreement or the issuance of
any of the Securities; and (vi) all reasonable out-of-pocket expenses (including
without limitation reasonable attorneys' fees and costs, whether or not such
attorneys are the Purchaser's employees, all costs associated with any rights of
board attendance, observation or inspection and travel and lodging expenses
related thereto, and reasonable consulting, accounting, appraisal, investment
banking and similar professional fees and charges) incurred by the Purchaser in
connection with (A) the appropriate exercise, enforcement or preservation of
rights under this Agreement or any other Financing Agreement against the Company
after the occurrence of a Default or Event of Default (including engineering,
appraiser, environmental consulting and investment banking charges) and (B) any
appropriate litigation, proceeding or dispute whether arising hereunder or
otherwise, in any way related to the Purchaser's relationship with the Company.
The Company hereby further agrees to indemnify, exonerate and
hold free and harmless the Purchaser and the Purchaser's stockholders, officers,
directors, employees and agents from and against any and all actions, causes of
action, suites, losses, liabilities, damages and expenses (including, without
limitation, reasonable attorneys' fees and disbursements), incurred in any
capacity by any of the indemnitees as a result of or relating to (A) any
transaction financed or to be financed in whole or in part directly or
indirectly with proceeds from the sale of any of the Securities, or (B) the
execution, delivery, performance or enforcement of this agreement (including,
without limitation, any failure by the Company to comply with any of its
covenants hereunder), or any instrument contemplated hereby or thereby, except,
in each such case, for any such liabilities arising from any indemnitee's breach
of this Agreement, gross negligence or wilful misconduct.
The Company hereby indemnifies the Purchaser against and agrees
that it will hold the Purchaser harmless from any claim, demand or liability for
any broker's, finder's or placement fees or lender's incentive fees alleged to
have been incurred by it in connection with the transactions contemplated by
this Agreement.
The obligations of the Company to the Purchaser under this
Section 8.3(b) shall survive payment or transfer of the Securities and the
termination of this Agreement.
SECTION VIII.4. ADDITIONAL PAYMENTS UPON MERGER, ETC. If at any time
17
<PAGE>
<PAGE>
within twelve (12) months after any date of repurchase, redemption, exchange or
conversion of any Notes, Warrants and/or Common Stock, the Company or any if its
Subsidiaries shall become party to any Triggering Event (as defined in the
Indenture) or the Company or any of its Subsidiaries or their respective
stockholders enter into any agreement or letter of intent contemplating any
Triggering Event or at such later time as any payment is received by the Company
or any of its stockholders in respect of such Triggering Event, the Company
shall make an additional payment to the Purchaser in an amount per share of
Common Stock (or Common Stock issuable upon conversion of the Notes or exercise
of the Warrant) repurchased from the Purchaser equal to the excess, if any, of
the value per share of the cash, securities and other property that the
Purchaser would have received (or that the Company received in which the
Purchaser would have had a beneficial interest as a stockholder of the Company),
had the Purchaser's Securities not been previously repurchased, but had been
repurchased as a result of such Triggering Event, over the payment received by
the Purchaser with respect to each such prior repurchase. Each payment to the
Purchaser pursuant to this Section 8.4 shall be made either in cash or in the
form of consideration received by the holders of common equity of the Company
(or the Company).
SECTION VIII.5. DOCUMENTARY TAXES. The Company agrees to pay any and all
stamp, transfer and other similar taxes, assessments or charges payable in
connection with the execution and delivery of any Financing Document or the
issuance of the Securities to the Purchaser, excluding its assigns.
SECTION VIII.6. SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon the Company and upon the Purchaser and their respective successors and
assigns; provided that the Company shall not assign or otherwise transfer its
rights or obligations under this Agreement to any other Person without the prior
written consent of the Purchaser. All provisions hereunder purporting to give
rights to Purchaser and its affiliates or to holders of Securities are for the
express benefit of such Persons and their successors and assigns.
SECTION VIII.7. BROKERS. The Company represents and warrants that,
except for a commission of 5% payable by the Company to Dresdner Bank or its
Affiliate, it has not employed any broker, finder, financial advisor or
investment banker who would be entitled to any brokerage, finder's or other fee
or commission payable by the Company or the Purchasers in connection with the
sale of the Securities. The Purchaser hereby warrants that it has not employed
any broker, finder, financial advisor or investment banker who would be entitled
to any brokerage, finder's or other fee or commission payable by the Company in
connection with the sale of the Securities.
SECTION VIII.8. NEW YORK LAW; THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT
REFERENCE TO CHOICE OF LAW PROVISIONS.
SECTION VIII.9. SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated unless a failure
of consideration would result thereby.
18
<PAGE>
<PAGE>
SECTION VIII.10. COUNTERPARTS. This Agreement may be executed by telecopy
signature and in any number of counterparts each of which shall be an original
with the same effect as if the signatures there to and hereto were upon the same
instrument.
SECTION VIII.11. REGISTRATION RIGHTS. The Purchaser and its affiliates
shall be entitled to exercise registration rights with respect to the Common
Stock issuable upon conversion of the Convertible Notes to the same extent as
set forth in the Warrants (as if such shares constituted Warrant Shares).
SECTION VIII.12. PUBLICITY. The Company shall not issue a press release
or otherwise publicize the sale or issuance of the Securities hereunder without
the approval of the Agent, except as may be required by law.
[SIGNATURE PAGES FOLLOW]
19
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers, as of the date first
above written.
AUTOBOND ACCEPTANCE CORPORATION
_______________________________
By: _______________________________
Name: ________________________________
Title:
Address 301 Congress Avenue
Suite 900
Austin, Texas 78701
Fax: (512) 472-1548
Attn: Will Winsauer
BANCBOSTON INVESTMENTS, INC.
_______________________________
By: _______________________________
Name: _______________________________
Title:
Address:
Fax:
Attn:
20
<PAGE>
<PAGE>
EXHIBITS
Exhibit A - Form of Opinion
Exhibit B - Form of Officer's Certificate
<PAGE>
<PAGE>
Exhibit 21.2
Additional Subsidiaries of the Company
AutoBond Master Funding Corporation II (Nevada)
<PAGE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 2 to the registration
statement on Form S-1 (File No. 333-41257) of our report dated March 26, 1997,
on our audits of the consolidated financial statements and financial statement
schedule of AutoBond Acceptance Corporation and Subsidiaries. We also consent to
the references to our firm under the captions 'Experts' and 'Selected Financial
Data.'
COOPERS & LYBRAND L.L.P.
Austin, Texas
February 6, 1998
<PAGE>
