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FORM T-3
[As last amended in Release No. 39-170, May 7, 1962.]
FACING SHEET
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
AMENDMENT NO. 1
TO
FORM T-3
FOR APPLICATIONS FOR QUALIFICATION OF INDENTURES UNDER THE
TRUST INDENTURE ACT OF 1939
Altiva Financial Corporation
------------------------------------------------------
(Name of Applicant)
1000 Parkwood Circle, 6th Floor, Atlanta, GA 30339
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(Address of principal executive offices)
SECURITIES TO BE ISSUED UNDER THE INDENTURE TO BE QUALIFIED
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TITLE OF CLASS AMOUNT
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<S> <C>
$ 19,382,000
12% Secured Convertible Senior Notes
due 2006
</TABLE>
Approximate date of proposed public offering: NOT APPLICABLE.
Name and address of agent for service:
J. Richard Walker
Executive Vice President and
Chief Financial Officer
Altiva Financial Corporation
1000 Parkwood Circle
6th Floor
Atlanta, Georgia 30339
With a copy to:
John D. Capers, Jr.
King & Spalding
191 Peachtree Street
Atlanta, Georgia 30303
THE APPLICANT HEREBY AMENDS THIS APPLICATION FOR QUALIFICATION ON SUCH DATE AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVENESS UNTIL:(I) THE 20TH DAY AFTER THE
FILING OF A FURTHER AMENDMENT WHICH SPECIFICALLY STATES IT SHALL SUPERCEDE THIS
AMENDMENT, OR (II) SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION
307(A) OF THE ACT, MAY DETERMINE UPON WRITTEN REQUEST OF THE APPLICANT.
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GENERAL
1. General information. Furnish the following as to the applicant:
(a) Form of organization. - A corporation.
(b) State or other sovereign power under the laws of which organized.
- Delaware.
2. Securities Act exemption applicable. State briefly the facts relied
upon by the applicant as a basis for the claim that registration of the
indenture securities under the Securities Act of 1933 is not required.
The applicant relies upon the exemption from registration requirements of
the Securities Act of 1933 provided by section 3(a)(9) thereunder, in connection
with an exchange offer (the "Exchange") under which holders of the applicant's
outstanding 12 1/2% Subordinated Notes due 2001 (the "Subordinated Notes"), of
which $30.5 million of principal amount is currently outstanding, will be given
the opportunity to exchange such outstanding Subordinated Notes for new 12%
Secured Convertible Senior Notes due 2006 (the "Exchange Notes"). If all of the
outstanding Subordinated Notes participate in the Exchange, approximately $19.4
million principal amount of Exchange Notes and 6,428,000 shares of Common Stock
will be issued. No commission or similar variable type of remuneration has been
or will be paid or given directly or indirectly for soliciting such exchange.
The applicant expects that shortly before consummation of the Exchange, the
applicant will sell $14.0 million principal amount of 12% Secured Convertible
Senior Notes (the "Convertible Notes") to Value Partners, Ltd. The applicant has
engaged Carl Marks, an investment banking firm, to provide certain services in
connection with the Exchange. Carl Marks has performed the following services
for the applicant: (1) financial analyses; (2) assisted in the formulation of
restructuring alternatives, and (3) communicated the proposed terms of the
Exchange to one institutional holder of the Subordinated Notes. Carl Marks will
not issue a fairness opinion in connection with the Exchange and will not
solicit tenders of the Subordinated Notes. No cash payment will be made to or by
any holder of the Subordinated Notes in connection with such holder's
participation in the Exchange.
AFFILIATIONS
3. Affiliates. Furnish a list or diagram of all affiliates of the
applicant and indicate the respective percentages of voting securities or other
bases of control.
The following subsidiaries are wholly-owned by the applicant:
- The Money Centre, Inc., a North Carolina Corporation. The Money Centre,
Inc. has one wholly-owned subsidiary, Mortgage Securities, Inc., a
North Carolina Corporation; and
- Mego Mortgage Home Loan Acceptance Corp., a Delaware Corporation which
is inactive.
See Item 4 for "Directors and Executive Officers" of the Applicant, some
of whom may be deemed to be "affiliates" of the Applicant by virtue of their
positions.
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MANAGEMENT AND CONTROL
4. Directors and executive officers. List the names and complete
mailing addresses of all directors and executive officers of the applicant and
all persons chosen to become directors or executive officers. Indicate all
offices with the applicant held or to held by each person named.
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NAME ADDRESS OFFICE
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Edward B. "Champ" Meyercord 1000 Parkwood Circle, Chairman of the Board
6th Floor, Chief Executive Officer
Atlanta, GA 30339
Spencer I. Browne 1000 Parkwood Circle, Director
6th Floor,
Atlanta, GA 30339
Hubert M. Stiles 100 East Pratt Director
Street,
Baltimore, MD 21202
David J. Vida, Jr. 1000 Parkwood Circle, Director
6th Floor,
Atlanta, GA 30339
John D. Williamson 1000 Parkwood Circle, Director
6th Floor,
Atlanta, GA 30339
J. Richard Walker 1000 Parkwood Circle, Executive Vice President
6th Floor, Chief Financial Officer
Atlanta, GA 30339
</TABLE>
5. Principal owners of voting securities. Furnish the following
information as to each person owning 10 percent or more of the voting securities
of the applicant.
As of January 17, 2000
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NAME AND TITLE OF PERCENTAGE OF
COMPLETE CLASS AMOUNT VOTING SECURITIES
MAILING ADDRESS OWNED OWNED OWNED(1)
<S> <C> <C> <C>
VALUE PARTNERS, LTD. (2) 1,474,550 36.5
4514 COLE AVE.,
SUITE 808
DALLAS, TX 75205
CITY NATIONAL BANK (3) 1,333,336 25.0
25 GATEWATER RD.
CHARLESTON, W.VA.
25313
SOVEREIGN BANCORP (3) 1,333,336 25.0
1130 BERKSHIRE BLVD.
P.O. BOX 12646
READING, PA. 19612
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NAME AND TITLE OF PERCENTAGE OF
COMPLETE CLASS AMOUNT VOTING SECURITIES
MAILING ADDRESS OWNED OWNED OWNED(1)
<S> <C> <C> <C>
Friedman, Billings, (4) 974,245 21.6
Ramsey Group, Inc.
1001 19th St. North
Arlington, Va. 22209
Hubert M. Stiles/T.
Rowe Price Recovery (5) 675,569 16.6
Fund II, L.P.
100 East Pratt Street,
Baltimore, Md. 21202
Emanuel J. Friedman Common 666,666 16.4
1001 19th St. North Stock
Arlington, Va. 22209
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</TABLE>
(1) Based on 4,062,697 shares of Common Stock outstanding as of January 17,
2000. Beneficial ownership calculated pursuant to Rule 13d-3 under the Exchange
Act of 1934.
(2) Ownership includes shares of Common Stock issuable upon the conversion of
22,000 shares of Series A Preferred Stock ("Preferred Stock") of the applicant
and shares 11,027 shares of Common Stock issuable upon the conversion of
Convertible Notes.
(3) Ownership includes 666,670 shares of Common Stock issuable upon the
conversion of Preferred Stock and 666,666 shares of Common Stock issuable upon
the exercise of currently outstanding options.
(4) Ownership includes 535,910 shares of Common Stock and 438,335 shares of
Common Stock issuable upon the conversion of Preferred Stock.
(5) Ownership includes 672,418 shares of Common Stock and 3,151 shares of Common
Stock issuable upon the conversion of Convertible Notes.
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UNDERWRITERS
6. Underwriters. Give the name and complete mailing address of (a) each
person who, within three years prior to the date of filing the application,
acted as an underwriter of any securities of the obligor which were outstanding
on the date of filing the application, and (b) each proposed principal
underwriter of the securities proposed to be offered. As to each person
specified in (a), give the title of each class of securities underwritten.
[Item 6 as amended in Release No. 39-5, January 15, 1941.]
None.
CAPITAL SECURITIES
7. Capitalization. (a) Furnish the following information as to each
authorized class of securities of the applicant.
As of January 17, 2000 (Insert date within 31 days)
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AMOUNT AMOUNT
TITLE OF CLASS AUTHORIZED OUTSTANDING
-------------- ----------------- ------------------
<S> <C> <C>
Common Stock 400,000,000 4,062,697
Series A Preferred Stock 5,000,000 56,409
12% Subordinated Notes
due 2001 $ 41,495,000 $30,500,000
</TABLE>
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(b) Give a brief outline of the voting rights of each class of voting
securities referred to in paragraph (a) above.
The holders of the Common Stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Such stockholders do not have
cumulative voting rights in the election of directors. On any matter on which
the holders of the Preferred Stock may vote, each holder is entitled to one vote
for each share held. The holders of Preferred Stock may vote only as a separate
class, and their votes will not be counted together with the holders of the
Common Stock as a single class.
INDENTURE SECURITIES
8. Analysis of indenture provisions. Insert at this point the analysis
of indenture provisions required under section 305(a)(2) of the Act.
The "Indenture" refers to an Indenture between Altiva Financial
Corporation and United States Trust Company of New York, Trustee which governs
the Exchange Notes. Definitions of capitalized terms used herein but not defined
have the same meanings ascribed to them in the Indenture.
The following analysis of the indenture provisions is required under
Section 305(a)(2) of the Trust Indenture Act of 1939, as amended.
(i) Events of Default; Withholding of Notice
An Event of Default is defined in the Indenture as:
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- default in the payment of interest on the Exchange Notes when due,
continued for 30 days;
- default in the payment of principal of and premium, if any, on any
Exchange Note when due at its maturity date by acceleration or
otherwise;
- the failure by the Applicant to comply with any of its obligations in
the covenants and other agreements contained in the Indenture, for a
continued period of 60 days;
- failure of the Applicant or any Subsidiary of the Applicant to make any
payment, including any applicable grace period, in respect of principal
or interest on any Indebtedness which results in Indebtedness in an
amount in excess of $1,000,000;
- default by the Applicant or a Subsidiary of the Applicant with respect
to any Indebtedness of the Applicant or such Subsidiary, which results
in acceleration of any such Indebtedness in an amount in excess of
$1,000,000 without such Indebtedness having been discharged, or such
acceleration having been rescinded or annulled, within the applicable
grace period;
- certain events of bankruptcy, insolvency or reorganization of the
Applicant or a Subsidiary;
- any judgment or decree for the payment of money in excess of $1,000,000
is rendered against the Applicant or a Subsidiary and remains
outstanding for a period of 60 days following such judgment; or
- the Trustee or the Holders of 25% in principal amount of the
outstanding Exchange Notes notify the Applicant of its failure to
observe the Covenants contained in any of the Collateral Documents (as
defined in the Indenture) for a continued period of 30 days.
If an Event of Default occurs and is continuing, the holders of at least
25% in principal amount of the outstanding Exchange Notes and the Convertible
Notes, considered as a single class, by written notice to the Trustee, may
declare the principal of the Exchange Notes and all of the interest accrued
thereon to be due and payable immediately.
(ii) Authentication and Delivery
At any time and from time to time after the execution and delivery of
this Indenture, the Applicant may deliver executed Exchange Notes to the Trustee
for authentication, together with an order for the authentication and delivery
of such Exchange Notes, and the Trustee in accordance with such order shall
authenticate and deliver such Exchange Notes.
No Exchange Note shall be entitled to any benefit under the Indenture or
be valid or obligatory for any purpose unless there appears on such Exchange
Note a certificate of authentication substantially in the form provided for
herein executed by the Trustee by manual signature of a responsible officer of
the Applicant, and such certificate upon any Exchange Note shall be conclusive
evidence, and the only evidence, that such Exchange Note has been duly
authenticated and delivered.
(iii) Release or Release and Substitution of property subject to the lien
of the Indenture
The Applicant's obligations under the Indenture are secured pursuant to
Security Agreements (the "Security Agreements") to be entered into with the
holders of Exchange Notes who qualify as Qualified Institutional Buyers under
Rule 144A of the Securities Act (QIBs) and with the holders of the Exchange
Notes who are not QIBs. The Exchange Notes held by QIBs will be secured by a
pledge of certain of the Applicant's mortgage-related securities and by a pledge
of the capital stock of The Money Centre, Inc., the Applicant's
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wholly-owned subsidiary ("Money Centre"). The Exchange Notes held by Non-QIB's
will be secured only by a pledge of the capital stock of Money Centre.
The Security Agreements do not provide for the substitution of property
subject to the liens of the Indenture. In addition, the Security Agreements do
not provide for the release of collateral until the final payment in full of all
amounts payable under the Indenture with respect to the exchange Notes.
(iv) Satisfaction and Discharge of the Indenture
The Applicant may, at the option of its Board of Directors, be discharged
from its obligations with respect to all outstanding Notes and the Indenture
(i.e. legal defeasance), provided that the Applicant has complied with the
conditions below. The Applicant may also, at the option of its Board of
Directors, be released from its obligations under the covenants (i.e. covenant
defeasance) described under Article 9 of the Indenture.
The following shall be the conditions precedent to legal or covenant
defeasance:
- the Applicant must irrevocably deposit in trust (i.e. the defeasement
trust) with the Trustee unencumbered money or U.S. Government
Obligations for the payment of principal of, premium, if any, and
interest;
- the Applicant must deliver to the Trustee an opinion of counsel to the
effect that holders of the Exchange Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such
deposit and defeasance and will be subject to federal income tax on the
same amount and in the same manner and at the same time as would have
been the case if such deposit and defeasance had not occurred (and, in
the case of legal defeasance only, such opinion of counsel must be
based on a ruling of the Internal Revenue Service or other change in
applicable federal income tax law);
- no Default of Event of Default shall have occurred and be continuing on
the date of deposit or within 91 days thereafter;
- such legal or covenant defeasance shall not result in violation of, or
constitute a default under any material agreement, other than the
Indenture, to which the Applicant or any of its subsidiaries is bound;
and
- the Applicant will deliver to the Trustee (i) an opinion of counsel to
the effect that as of the 91st day after deposit, the defeasement trust
is not subject to any creditors' rights, (ii) an Officer's Certificate
stating that the deposit was not made by the Applicant in an effort to
evade the creditors' rights.
(v) Evidence of Compliance with Conditions and Covenants of the
Indenture.
The Applicant will deliver to each holder of the Exchange Notes, within
90 days after the end of each fiscal year of the Applicant, an officer's
certificate, signed by each of the Applicant's Chief Executive Officer and Chief
Financial Officer, to the effect that they are aware of no condition or event
which constitutes a Default or an Event of Default, or, if they are aware
thereof, the nature thereof and what action the Applicant is taking or proposes
to take with respect thereto.
Promptly upon acquiring knowledge of any Default or Event of Default, the
Applicant will promptly deliver to each holder of the Exchange Notes an
officer's certificate specifying such Default or Event of Default and what
action the Applicant is taking or proposes to take with respect thereto.
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Upon request, the Applicant will deliver to each Holder of at least $1.0
million aggregate principal amount of Exchange Notes, within 30 days after the
end of each fiscal quarter of the Applicant, an officers' certificate, signed by
the Applicant's Chief Executive Officer and Chief Financial Officer, which (i)
sets forth in reasonable detail the calculations which demonstrate the
Applicant's compliance with certain financial covenants set forth in the
Indenture and (ii) to the effect that each officer is not aware of the
occurrence or existence of any condition or event which constitute a Default or
an Event of Default with respect to covenants regarding the corporate existence
of the Applicant or the Money Centre, or, if they are aware thereof, the nature
thereof and what action the Applicant is taking or proposes to take with respect
thereto.
Upon request, the Applicant will deliver to each holder of at least $1.0
million aggregate principal amount of Exchange Notes, within 30 days after the
end of each calendar month, (i) an unaudited balance sheet and income statement
showing the results of the Applicant's operations for such month, certified by
an officers' certificate which is signed by the Applicant's Chief Financial
Officer or Chief Accounting Officer, and (ii) certain other types of operating
and financial information in respect of the period.
9. Other obligors. Give the name and complete mailing address of any
person, other than the applicant, who is an obligor upon the indenture
securities.
None.
Contents of application for qualification. This application for
qualification comprises --
(a) Pages numbered 1 to 8, consecutively.
(b) The statement of eligibility and qualification of each trustee under
the indenture to be qualified.
(c) The following exhibits in addition to those filed as a part of the
statement of eligibility and qualification of each trustee.
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SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
applicant, Altiva Financial Corporation, a corporation organized and existing
under the laws of Delaware, has duly caused this amendment to be signed on its
behalf by the undersigned, thereunto duly authorized, and its seal to be
hereunto affixed and attested, all in the city of Atlanta, and State of Georgia,
on the 24th day of February, 2000.
<TABLE>
<S> <C>
(SEAL) By /s/ J. RICHARD WALKER
-------------------------------------------------
J. Richard Walker
Executive Vice President and Chief Financial
Officer
Attest
By /s/ ROBERT H. CHASTAIN
-------------------------------------------------
Robert H. Chastain
Vice President, Corporate Counsel and Secretary
</TABLE>
INSTRUCTIONS AS TO EXHIBITS
Subject to rule T-7A-29, [17 CFR 260.7a-29] permitting incorporation of
exhibits by reference, the following exhibits shall be filed as a part of the
application for qualification:
Exhibit T3A. Amended and Restated Certificate of Incorporation of the
applicant (incorporated herein by reference to the (a) Registration Statement on
Form S-1 filed by the applicant, as amended (File No. 333-12443) and (b)
Registration Statement on Form S-1 filed by the Company, as amended (File No.
333-68995).
Exhibit T3B. Amended and Restated Bylaws of the applicant (incorporated
herein by reference to the Registration Statement on Form S-1 filed by the
applicant, as amended (File No. 333-12443).
Exhibit T3C. A copy of the indenture to be qualified, governing the
Exchange Notes.
Exhibit T3D. Not Applicable.
Exhibit T3E. Copies of the following written communications which are
to be sent or given to security holders in connection with the issuance or
distribution of the indenture securities are attached:
1) Private Placement Memorandum
2) Form of consent to amendment of indenture governing the Subordinated
Notes.
3) Form of Letter of Transmittal
4) Form of Book-Entry Instructions
5) Form of Notice of Guaranteed Delivery
Exhibit T3F. A cross reference sheet showing the location in the
indenture of the provisions inserted therein pursuant to Section 310 through
318(a), inclusive, of the Act [As added by Release No. 39-170, May 7, 1962].
Filed as part of the indenture attached hereto as Exhibit T3C.
Exhibit T3G. A copy of the statement of eligibility and qualification
of the trustee on Form T-1*.
* previously filed.
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EXHIBIT T3C
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ALTIVA FINANCIAL CORPORATION
TO
UNITED STATES TRUST COMPANY OF NEW YORK, TRUSTEE
--------------------------------------
12% SECURED CONVERTIBLE SENIOR NOTES
DUE 2006
---------------------------------------
INDENTURE
DATED AS OF FEBRUARY __, 2000
----------------------------------------
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TABLE OF CONTENTS
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PAGE
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ARTICLE One -Definitions and Other Provisions of General Application..............................................1
Section 1.1 Definitions.....................................................................................1
Section 1.2 Compliance Certificates and Opinions...........................................................18
Section 1.3 Form of Documents Delivered to Trustee.........................................................19
Section 1.4 Acts of Holders; Record Dates..................................................................19
Section 1.5 Notices, Etc., to Trustee and Company..........................................................21
Section 1.6 Notice to Holders; Waiver......................................................................22
Section 1.7 Conflict with Trust Indenture Act..............................................................22
Section 1.8 Effect of Headings and Table of Contents.......................................................22
Section 1.9 Successors and Assigns.........................................................................22
Section 1.10 Separability Clause............................................................................22
Section 1.11 Benefits of Indenture..........................................................................22
Section 1.12 Governing Law, Choice of Forum.................................................................23
Section 1.13 Legal Holidays.................................................................................24
ARTICLE Two -Note Forms..........................................................................................24
Section 2.1 Forms Generally................................................................................24
Section 2.2 Form of Face of Note...........................................................................24
Section 2.3 Form of Reverse of Note........................................................................26
Section 2.4 Form of Legends for Global Notes...............................................................28
Section 2.5 Form of Trustee's Certificate of Authentication................................................28
Section 2.6 Form of Assignment.............................................................................29
ARTICLE Three -The Notes.........................................................................................30
Section 3.1 Global Note; Depositary........................................................................30
Section 3.2 Amount.........................................................................................31
Section 3.3 Denominations..................................................................................31
Section 3.4 Execution, Authentication, Delivery and Dating.................................................31
Section 3.5 Temporary Notes................................................................................32
Section 3.6 Registration; Registration of Transfer and Exchange............................................32
Section 3.7 Mutilated, Destroyed, Lost and Stolen Notes....................................................33
Section 3.8 Payment of Interest and Principal; Additional Interest.........................................34
Section 3.9 Persons Deemed Owners..........................................................................36
Section 3.10 Cancellation...................................................................................36
Section 3.11 Computation of Interest........................................................................36
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ARTICLE Four -Book-Entry Provisions for Global Notes.............................................................37
Section 4.1 Applicability of Article.......................................................................37
Section 4.2 Book-Entry Provisions For Global Note..........................................................37
Section 4.3 Special Transfer Provisions....................................................................39
ARTICLE Five -Remedies of Holders on an Event of Default.........................................................40
Section 5.1 Events of Default..............................................................................40
Section 5.2 Payment of Notes on Default; Suit Therefor.....................................................42
Section 5.3 Application of Monies Collected................................................................44
Section 5.4 Remedies Cumulative and Continuing.............................................................45
Section 5.5 Waiver of Defaults by Holders..................................................................45
Section 5.6 Limitation on Suits............................................................................45
Section 5.7 Control by Holders.............................................................................46
ARTICLE Six -The Trustee.........................................................................................46
Section 6.1 Certain Duties and Responsibilities............................................................46
Section 6.2 Notice of Defaults.............................................................................47
Section 6.3 Certain Rights of Trustee......................................................................47
Section 6.4 Not Responsible for Recitals or Issuance of Notes..............................................48
Section 6.5 May Hold Notes.................................................................................48
Section 6.6 Money Held in Trust............................................................................48
Section 6.7 Compensation and Reimbursement.................................................................49
Section 6.8 Disqualification; Conflicting Interests........................................................49
Section 6.9 Corporate Trustee Required; Eligibility........................................................50
Section 6.10 Resignation and Removal; Appointment of Successor..............................................50
Section 6.11 Acceptance of Appointment by Successor.........................................................51
Section 6.12 Merger, Conversion, Consolidation or Succession to Business....................................52
Section 6.13 Preferential Collection of Claims Against Company..............................................52
Section 6.14 Appointment of Authenticating Agent............................................................52
ARTICLE Seven -Lists of Holders of Notes and Convertible Notes and Reports by Trustee and Company................54
Section 7.1 Company to Furnish Trustee Names and Addresses of Holders of Notes and Convertible Notes.......54
Section 7.2 Preservation of Information; Communications to Holders.........................................55
Section 7.3 Reports by Trustee.............................................................................56
Section 7.4 Reports by Company.............................................................................56
Section 7.5 Provision of Reports and Other Documents to Holders of Convertible Notes.......................56
ARTICLE Eight -Amendments, Supplements and Waivers...............................................................56
Section 8.1 Supplemental Indentures with Consent of Holders................................................56
Section 8.2 Execution of Supplemental Indentures...........................................................57
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Section 8.3 Effect of Supplemental Indentures..............................................................57
Section 8.4 Conformity with Trust Indenture Act............................................................57
Section 8.5 Reference in Notes to Supplemental Indentures..................................................57
Section 8.6 Notice of Supplemental Indenture...............................................................58
ARTICLE Nine -Covenants..........................................................................................58
Section 9.1 Payment of Notes...............................................................................58
Section 9.2 Stay, Extension and Usury Laws.................................................................58
Section 9.3 Reports and Certificates.......................................................................58
Section 9.4 Taxes and Other Charges........................................................................60
Section 9.5 Conduct of Business............................................................................60
Section 9.6 Corporate Existence............................................................................61
Section 9.7 Maintenance of Properties......................................................................62
Section 9.8 Insurance......................................................................................62
Section 9.9 Restricted Payments............................................................................63
Section 9.10 Restrictions on Issuance and Sale of Sale of Capital Stock of Subsidiaries.....................63
Section 9.11 Restrictions on Subsidiary Mergers and Sales of Assets.........................................63
Section 9.12 Financial Covenants............................................................................63
Section 9.13 Limitation on Incurrence of Indebtedness and Issuance of Disqualified Capital Stock...........64
Section 9.14 Liens..........................................................................................64
Section 9.15 Subsidiary Guarantees..........................................................................65
Section 9.16 Payment of Dividends from Subsidiaries.........................................................65
Section 9.17 Limitations on Dividends and Other Payment Restrictions Affecting Subsidiaries.................66
Section 9.18 Investments and Acquisitions...................................................................67
Section 9.19 Limitation on Investment Company Status........................................................67
Section 9.20 Payments on Notes; Repurchase of Notes.........................................................67
Section 9.21 Transactions with Affiliates...................................................................68
Section 9.22 Payments for Consent...........................................................................68
Section 9.23 Solvency Test..................................................................................68
Section 9.24 Waiver of Certain Covenants....................................................................68
ARTICLE Ten -Merger, Consolidation and Transfer of Assets........................................................69
Section 10.1 Company May Consolidate Etc. Only on Certain Terms.............................................69
Section 10.2 Successor Corporation to be Substituted........................................................70
ARTICLE Eleven -Security for Notes; Related Agreements...........................................................70
ARTICLE Twelve -Redemption and Repurchase of Notes...............................................................71
Section 12.1 Optional Rights to Redeem Notes................................................................71
Section 12.2 Notice of Optional Redemption..................................................................71
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Section 12.3 Effect of Notice of Optional Redemption........................................................72
Section 12.4 Right to Require Repurchase....................................................................72
Section 12.5 Notices; Method of Exercising Purchase Right, Etc..............................................73
Section 12.6 Repurchase Event...............................................................................74
Section 12.7 Certain Definitions............................................................................74
Section 12.8 Consolidation, Merger, Etc.....................................................................76
ARTICLE Thirteen -Defeasance and Covenant Defeasance.............................................................76
Section 13.1 Option to Effect Legal Defeasance or Covenant Defeasance.......................................76
Section 13.2 Legal Defeasance and Discharge.................................................................76
Section 13.3 Covenant Defeasance............................................................................77
Section 13.4 Conditions to Legal or Covenant Defeasance.....................................................77
Section 13.5 Deposited Money and U.S. Government Obligations to be Held in Trust; Other
Miscellaneous Provisions.......................................................................79
Section 13.6 Repayment to Company...........................................................................79
Section 13.7 Reinstatement..................................................................................79
Section 13.8 Defeasance of Convertible Notes................................................................80
ARTICLE Fourteen -Conversion.....................................................................................80
Section 14.1 Mandatory Conversion upon Stockholder Approval.................................................80
Section 14.2 Issuance of Common Stock on Conversion; No Adjustment for Interest or Dividends................80
Section 14.3 Disbursement of Shares.........................................................................81
Section 14.4 Taxes on Shares Issued.........................................................................81
Section 14.5 Reservation of Shares to Be Fully Paid; Compliance with Governmental Requirements;
Listing of Common Stock........................................................................82
ARTICLE Fifteen -Miscellaneous...................................................................................82
Section 15.1 No Recourse Against Others.....................................................................82
Section 15.2 Execution in Counterparts......................................................................82
Section 15.3 Waiver of Trial by Jury........................................................................82
</TABLE>
-iv-
<PAGE> 6
<TABLE>
<CAPTION>
TRUST INDENTURE
ACT SECTION INDENTURE SECTION
<S> <C> <C>
310 (a)(1)......................................................................... 6.9
(a)(2)......................................................................... 6.9
(a)(3)......................................................................... Not Applicable
(a)(4)......................................................................... Not Applicable
(a)(5)......................................................................... 6.9
(b)............................................................................ 1.5, 6.8, 6.9, 6.10,
6.11
(c)............................................................................ Not applicable
311 (a)............................................................................ 6.13
(b)............................................................................ 6.13
(c)............................................................................ Not Applicable
312 (a)............................................................................ 7.1, 7.2
(b)............................................................................ 7.2
(c)............................................................................ 7.2
313 (a)............................................................................ 7.3
(b)(1)......................................................................... 7.3
(b)(2)......................................................................... 7.3
(c)............................................................................ 1.6, 7.3
(d)............................................................................ 7.3
314 (a)............................................................................ 1.5, 1.6, 7.4
(b)............................................................................ Not applicable
(c)(1)......................................................................... 1.2
(c)(2)......................................................................... 1.2
(c)(3)......................................................................... 7.4
(d)............................................................................ 7.4
(e)............................................................................ 1.2
(f)............................................................................ Not Applicable
315 (a)............................................................................ 6.1
(b)............................................................................ 1.6, 6.2
(c)............................................................................ 6.1
(d)............................................................................ 6.1
(e)............................................................................ 5.14
316 (a) (last sentence)............................................................ 1.1 (definition of
"Outstanding")
(a)(1)(A)...................................................................... 5.7
(a)(1)(B)...................................................................... 5.13
(a)(2)......................................................................... Not Applicable
(b)............................................................................ 5.6, 8.1
(c)............................................................................ 1.4(c)
317 (a)(1)......................................................................... 5.3
(a)(2)......................................................................... 5.4
(b)............................................................................ 6.6
318 (a)............................................................................ 1.7
(c)............................................................................ 1.7
</TABLE>
<PAGE> 7
INDENTURE, dated as of February __, 2000, by and between
ALTIVA FINANCIAL CORPORATION, a corporation duly organized and existing under
the laws of the State of Delaware (herein called the "COMPANY"), having its
principal office at 1000 Parkwood Circle, Suite 600, Atlanta, Georgia 30339 and
UNITED STATES. TRUST COMPANY OF NEW YORK, a New York Banking corporation, as
Trustee (herein called the "TRUSTEE").
RECITALS OF THE COMPANY
A. The Company has duly authorized the execution and delivery,
of this Indenture to provide for the issuance of a series of its 12% Secured
Convertible Senior Notes due 2006 with an aggregate principal amount of $_______
(as amended, supplemented or otherwise modified from time to time, the "NOTES").
B. All things necessary to make this Indenture a valid
agreement of the Company, in accordance with its terms, have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of
the Notes by the Holders thereof, it is mutually agreed, for the equal and
proportionate benefit of all Holders of the Notes, as follows:
ARTICLE ONE -
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.1 Definitions.
For all purposes of this Indenture, except as otherwise
expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings
assigned to them in this Article and include the plural as well as the singular,
(b) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein;
(c) all accounting determinations hereunder shall be made, and
all accounting terms not otherwise defined herein have the meanings assigned to
them in accordance with GAAP;
(d) the words "HEREIN," "HEREOF" and "HEREUNDER" and other
words of similar import refer to this Indenture as a whole and not to any
particular Article, Section or other subdivision;
1
<PAGE> 8
(e) the word "INCLUDING" is not limiting;
(f) references in this Indenture to any agreement, other
document or law "AS AMENDED" or "AS AMENDED FROM TIME TO TIME," or to
"AMENDMENTS" of any document or law, shall include any amendments, supplements,
replacements, renewals or other modifications from time to time, provided in the
case of modifications to documents, such modifications are permissible under
this Indenture; and
"ACQUISITION" means any transaction, or any series of related
transactions, consummated on or after the Issue Date, by which the Company or
any of its Subsidiaries (i) acquires any going business or all or substantially
all of the assets of any firm, corporation or limited liability company, or
division thereof, whether through purchase of assets, merger or otherwise, or
(ii) directly or indirectly acquires (in one transaction or in a series of
transactions) at least a majority (in number of votes) of the securities of a
corporation which have ordinary voting power for the election of directors
(other than securities having such power only by reason of the happening of a
contingency) or a majority (by percentage or voting power) of the Outstanding
ownership interests of a partnership or a limited liability company.
"ACT" has the meaning set forth in Section 1.4 hereof.
"ADDED INTEREST" means any increases in the Interest Rate
pursuant to the second and third paragraphs of Section 3.8 hereunder.
"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 the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing, provided, however, that for purposes of this definition neither Value
Partners nor Lutheran Brotherhood High Yield Fund shall be deemed to be an
Affiliate of the Company.
"AGREEMENT" means the Exchange Agreement between the Company
and the holders of the Company's 12 1/2% Subordinated Notes due 2001 providing
for the Exchange, as amended, supplemented or otherwise modified from time to
time.
" BENEFICIAL OWNERS" means the beneficial owners of the Notes
identified in the registry of Beneficial Owners maintained by the Trustee
pursuant to Section 3.6 of this Indenture.
"BENEFICIAL OWNER REGISTRY" has the meaning set forth in
Section 3.6.
"BOARD OF DIRECTORS" means either the Board of Directors of
the Company or any committee of such Board duly authorized to act for it
hereunder.
2
<PAGE> 9
"BOARD RESOLUTION" means a copy of a resolution certified by
the Secretary or an Assistant Secretary of the Company to have been duly adopted
by the Board of Directors, and to be in full force and effect on the date of
such certification, and delivered to the Trustee.
"BUSINESS DAY" means any day other than (i) a Saturday or
Sunday or (ii) a day on which banking institutions in the City of Atlanta,
Georgia, or New York, New York are authorized or required by law or executive
order to remain closed.
"CAPITAL STOCK" in any Person means any and all shares,
interests, rights to purchase, warrants, options, participations or other
equivalents or interests in (however designated) capital stock in such Person,
including, with respect to a corporation or limited liability company, Preferred
Stock and other corporate stock and, with respect to a partnership, including
limited liability partnerships, partnership interests, whether general or
limited, and any rights (other than debt securities convertible into corporate
stock, partnership interests or other capital stock), warrants or options
exchangeable for or convertible into such corporate stock, partnership interests
or other capital stock.
"CAPITALIZED LEASE OBLIGATION" means indebtedness represented
by obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP; the amount of such indebtedness
shall be the capitalized amount of such obligations determined in accordance
with GAAP.
"COLLATERAL AGENT" means United States Trust Company of New
York and its successors and assigns.
"COLLATERAL DOCUMENTS" means any agreement entered into by the
Company, any Subsidiary of the Company or any other Person to provide collateral
or security for the repayment of the Notes or to Guarantee the Notes and the
Convertible Notes, including without limitation this Indenture, the Security
Agreements, the Value Partners Security Agreement and the Intercreditor
Agreement, in each case as defined herein or in the Agreement.
"COMMISSION" means the Securities and Exchange Commission, as
from time to time constituted.
"COMMON STOCK" means the common stock, par value $0.01 per
share, of the Company.
"COMPANY" has the meaning set forth in the first paragraph
hereof.
"CONSOLIDATED CASH FLOW" means, with respect to any Person for
any period, the Consolidated Net Income of such Person for such period plus (i)
provision for taxes based on income or profits of such Person and its
Subsidiaries for such period, to the extent that such provision for taxes was
included in computing such Consolidated Net Income, plus (ii) consolidated
interest expense of such Person and its Subsidiaries for such period, whether
paid or accrued and whether or not capitalized (including, without limitation,
amortization of debt
3
<PAGE> 10
issuance costs and original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, commissions,
discounts and other fees and charges incurred in respect of letters of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), to the extent that any such expense was deducted in computing such
Consolidated Net Income, plus (iii) depreciation and amortization (including
amortization of goodwill and other intangibles but excluding amortization of
prepaid cash expenses that were paid in a prior period) and other non-cash
expenses (excluding any such non-cash expenses to the extent that it represents
an accrual of or reserve for cash expenses in any future period or amortization
of a prepaid cash expense that was paid in a prior period) of such Person and
its Subsidiaries for such period to the extent that such depreciation,
amortization and other non-cash expenses were deducted in computing such
Consolidated Net Income, minus (v) non-cash revenues increasing such
Consolidated Net Income for such period, including without limitation non-cash
income recorded in connection with the ownership of mortgage related securities
(excluding any non-cash income to the extent it represents an accrual of cash
revenues in any future period), in each case, on a consolidated basis and
determined in accordance with GAAP. Notwithstanding the foregoing, the provision
for taxes based on the income or profits of, and the depreciation and
amortization and other non-cash charges of, a Subsidiary of a Person shall be
added to Consolidated Net Income to compute Consolidated Cash Flow only to the
extent (and in the same proportion) that the Net Income of such Subsidiary was
included in calculating the Consolidated Net Income of such Person and only if a
corresponding amount would be permitted at the date of termination to be
dividended to the Company by such Subsidiary without prior approval of any
Person (that has not been obtained), pursuant to the terms of its charter and
all agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Subsidiary or its stockholders;
provided that any contingent restriction contained in any thereof shall not be
deemed to prevent any such dividend until the applicable contingency shall have
occurred.
"CONSOLIDATED NET INCOME" means, with respect to any Person
for any period, the aggregate of the Net Income of such Person and its
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that (i) the Net Income of any Person that is not a
Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid in
cash (or to the extent converted into cash) to the referent Person or a
Wholly-Owned Subsidiary thereof, (ii) the Net Income of any Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Subsidiary of its Net Income is not at the date of
determination permitted without prior approval of any Person (that has not been
obtained) or, directly or indirectly, by operation of the terms of its charter
or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Subsidiary or its stockholders unless
waived; provided that any contingent restriction contained in any thereof shall
not be deemed to prevent any such dividend until the applicable contingency
shall have occurred, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded, (iv) the cumulative effect of a change in accounting principles
shall be excluded and (v) any net after-tax extraordinary gains or losses shall
be excluded.
4
<PAGE> 11
"CONSOLIDATED NET WORTH" of a Person means as of the date of
determination all amounts that would be included under stockholders' equity on a
consolidated balance sheet of the Person and its Subsidiaries determined in
accordance with GAAP.
"CONSOLIDATED TANGIBLE NET WORTH" of a Person means as of the
date of determination all amounts that would be included under stockholders'
equity on a consolidated balance sheet of the Person and its Subsidiaries
determined in accordance with GAAP less an amount equal to the consolidated
intangible assets of the Person and its Subsidiaries determined in accordance
with GAAP.
"CONVERTIBLE NOTE OBLIGATIONS" means all present and future
liabilities, obligations and indebtedness of the Company, any of its
Subsidiaries or any other obligor owing to any holder of Convertible Notes under
or in connection with the Value Partners Agreement, the Convertible Notes or the
Collateral Documents, including without limitation obligations in respect of (i)
principal, premium, if any, and interest on the Convertible Notes, (ii)
reimbursement of costs, fees, taxes or other items and (iii) indemnification and
related obligations.
"CONVERTIBLE NOTE REGISTRIES" has the meaning set forth in
Section 1.4(g).
"CONVERTIBLE NOTES" means the $14,000,000 principal amount of
12% Secured Convertible Senior Notes issued to Value Partners pursuant to the
Value Partners Agreement, as amended, supplemented or otherwise modified from
time to time.
"CORPORATE TRUST OFFICE" means with respect to the Trustee,
2001 Ross Avenue Suite 2700, Dallas, Texas, or such other office as the Trustee
or successor shall designate from time to time.
"DEFAULT" means any event which is, or after notice or passage
of time, or both, would be, an Event of Default.
"DEFAULTED INTEREST" has the meaning specified in Section 3.8.
"DEFINITIVE NOTE" is defined in Section 4.3(b).
"DEPOSITARY" has the meaning specified in Section 3.1.
"DISQUALIFIED CAPITAL STOCK" means any Capital Stock which, by
its terms (or by the terms of any security into which it is convertible or
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the holder thereof, in whole or in part on, or prior to, or is
exchangeable for debt securities of the Company or its Subsidiaries prior to,
the Stated Maturity of principal of the Notes, provided that only the amount of
such Capital Stock that matures or is redeemable prior to the Stated Maturity of
principal of the Notes shall be deemed to be Disqualified Capital Stock.
5
<PAGE> 12
"ELIGIBLE COLLATERAL" means any asset or property of the
Company other than the Note Security.
"EVENT OF DEFAULT" means any event specified in Section 5.1.
"EXCESS SPREAD" means (i) with respect to a "pool" of
Receivables that has been sold to a trust or other Person in a securitization,
the excess of (a) the weighted average coupon on each pool of Receivables sold
over (b) the sum of the pass-through interest rate plus a normal servicing fee,
a trustee fee, an insurance fee and an estimate of annual future credit losses
related to such assets, in each case calculated in accordance with any
applicable GAAP, and (ii) with respect to Receivables that have been sold to a
Person in a whole loan sale, the cash flow of the Company and its Subsidiaries
from such Receivables, net of, to the extent applicable, a normal servicing fee,
a trustee fee, an insurance fee and an estimate of annual future credit losses
related to such assets, in each case calculated in accordance with any
applicable GAAP.
"EXCESS SPREAD RECEIVABLES" of a Person means the contractual
or certified 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, net of any allowance for losses on
loans sold with recourse or other liability allocable thereto, to the extent not
otherwise reflected in such amount). Excess Spread Receivables (a) include
mortgage-related securities backed by Receivables sold by the Company or any
Subsidiary and (b) do not include any servicing rights.
"EXCHANGE" has the meaning set forth in the Agreement.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"FIXED CHARGES" means, with respect to the Company and its
Subsidiaries for any period, the sum, without duplication, of:
(i) the consolidated interest expense of the Company
and its Subsidiaries for such period, whether paid or accrued,
including, without limitation, amortization of debt issuance
costs and original issue discount, non-cash interest payments,
the interest component of any deferred payment obligations,
the interest component of all payments associated with
Capitalized Lease Obligations, commissions, discounts and
other fees and charges incurred in respect of letter of credit
or bankers' acceptance financings, and net of the effect of
all payments made or received pursuant to Hedging Obligations;
plus
(ii) the consolidated interest of the Company and its
Subsidiaries that was capitalized during such period; plus
(iii) any interest expense on Indebtedness of another
Person that is Guaranteed by the Company or one of its
Subsidiaries or secured by a Lien on
6
<PAGE> 13
assets of the Company or one of its Subsidiaries, whether or
not such Guarantee or Lien is called upon; plus
(iv) the product of (a) all dividends, whether paid
or accrued and whether or not in cash, on any series of
Preferred Stock of the Company or any of its Subsidiaries,
other than dividends on Capital Stock payable solely in
Capital Stock of the Company (other than Disqualified Capital
Stock) or to the Company or a Subsidiary of the Company, times
(b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined
federal, state and local statutory tax rate of the Company and
its Subsidiaries, expressed as a decimal, in each case, on a
consolidated basis and in accordance with GAAP.
"FIXED CHARGE COVERAGE RATIO" means with respect to the
Company and its Subsidiaries for any period, the ratio of the Consolidated Cash
Flow of the Company for such period to the Fixed Charges of the Company and its
Subsidiaries for such period. In the event that the Company or any of its
Subsidiaries Incurs, repays, repurchases or redeems any Indebtedness subsequent
to the commencement of the period for which the Fixed Charge Coverage Ratio is
being calculated and on or prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such Incurrence, repayment, repurchase or redemption of Indebtedness, and, if
applicable, the use of the proceeds therefrom to repay other Indebtedness as if
the same had occurred at the beginning of the applicable four-quarter reference
period.
"GAAP" means generally accepted accounting principles as in
effect from time to time, consistently applied.
"GLOBAL NOTE" means a Note bearing the legend prescribed in
Section 2.4 evidencing all or part of the Notes, authenticated and delivered to
the Depositary or its custodian, and registered in the name of such Depositary
or its nominee.
"GLOBAL NOTE HOLDER" has the meaning specified in Section 3.1.
"GUARANTEE" means any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Indebtedness or other
obligation of any other Person and any obligation, direct or indirect.
contingent or otherwise, of such Person (i) to purchase or pay (or advance or
supply funds for the purchase or payment of) such Indebtedness or other
obligation of such Person (whether arising by virtue of partnership
arrangements, or by agreements to keep-well, to purchase assets, goods,
securities or services, to take-or-pay or to maintain financial statement
conditions or otherwise) or (ii) entered into for the purpose of assuring in any
other manner the obligee of such Indebtedness or other obligation of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); provided, however, that the term "GUARANTEE" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "GUARANTEE" used as a verb has a corresponding meaning.
7
<PAGE> 14
"GUARANTOR" means any Person Guaranteeing any Indebtedness or
other obligation.
"HEDGING OBLIGATIONS" means with respect to any Person, the
obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements with respect to
Indebtedness that is permitted by the terms of the Notes and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates or the value of foreign currencies purchased or received by
such Person in the ordinary course of business.
"HOLDER" means a Person in whose name a Note is registered on
the Note Register.
"INCUR" means issue, assume, Guarantee, incur or otherwise
become liable for. The term "Incurrence" when used as a noun shall have a
corresponding meaning. The accretion of principal of a non-interest bearing or
other discount security shall be deemed the Incurrence of Indebtedness.
"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, (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 (including any such obligations under repurchase
agreements), 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; (v) the amount of all obligations of such Person
with respect to the redemption, repayment or other repurchase of any
Disqualified Stock or, in the case of a Subsidiary of such Person, any Preferred
Stock (vi) all obligations of the type referred to in clauses (i) through (v) of
other Persons and all dividends of other Persons 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; (vii) all
obligations of the type referred to in clauses (i) through (vi) of other Persons
secured by any Lien on any property or asset of such Person, and (viii) to the
extent not otherwise included in this definition, Hedging Obligations of such
Person. 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 amount of any Indebtedness under clause (vi) of this definition
for which such Person is responsible or liable, directly or indirectly,
including by way of any Guarantee. Notwithstanding the foregoing, any securities
issued in a securitization by a Securitization Subsidiary formed by or on behalf
of a Person and to which 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, regardless whether such
securities are treated as indebtedness for tax purposes, provided that (1)
neither the Company nor any of its Subsidiaries (other than the Securitization
Subsidiary) (a) provides credit support of any kind
8
<PAGE> 15
(including any undertaking, agreement or instrument that would constitute
Indebtedness), except for credit support in the form of "over-collateralization"
of the senior certificates issued in, or subordination of or recourse to all or
a portion of Excess Spread Receivables attributable to, such securitization, in
each case to the extent of the book value of such Excess Spread Receivables, or
(b) is directly or indirectly liable (as a guarantor or otherwise) for such
securities, and (2) no default with respect to such securities would permit
(upon notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its Stated Maturity.
"INDENTURE" shall mean this Indenture by and between the
Company and the Trustee.
"INTERCREDITOR AGREEMENT" has the meaning set forth in the
Agreement.
"INTEREST RATE" means 12% per annum, subject to increase as
specified in the second and third paragraphs of Section 3.8 hereof.
"INTEREST PAYMENT DATE" has the meaning set forth in Section
3.8 hereof.
"INVESTMENT" of a Person means any loan, advance (other than
commission, travel and similar advances to officers and employees made in the
ordinary course of business), extension of credit (other than accounts
receivable arising in the ordinary course of business on terms customary in the
trade) or contribution of capital by such Person; stocks, bonds, mutual funds,
partnership interests, notes, debentures or other securities owned by such
Person; and structured notes, derivative financial instruments and other similar
instruments or contracts owned by such Person.
"IO SECURITIES" means a security representing an undivided
interest in all or a portion of the interest payments due on a pool of
Receivables which back the mortgage-related security to which the IO Securities
relate.
"ISSUE DATE" means February __, 2000.
"JUNIOR INDEBTEDNESS" means any Indebtedness of the Company
subordinated in right of payment of either principal, premium (if any) or
interest thereon to the Notes.
"LEGAL DEFEASANCE" has the meaning specified in Section 13.2.
"LEGAL HOLIDAY" means any Saturday, Sunday or other day on
which banks in the States of New York, Texas or Georgia are authorized or
obligated by law to be closed for business.
"LIENS" means any mortgage, charge, pledge, lien (statutory or
otherwise), security interest, hypothecation, assignment for security, claim, or
preference or priority or other
9
<PAGE> 16
encumbrance (whether or not filed, recorded or otherwise perfected under
applicable law) upon or with respect to any asset or property owned by a Person.
"LIQUID ASSETS" means: (i) cash; (ii) any of the following
instruments that have a remaining term to maturity not in excess of 90 days from
the determination date: (a) repurchase agreements on obligations of, or are
guaranteed as to timely receipt of principal and interest by, the United States
or any agency or instrumentality thereof when such obligations are backed by the
full faith and credit of the United States, provided that the party agreeing to
repurchase such obligations is a primary dealer in U.S. Government securities,
(b) federal funds and deposit accounts, including but not limited to
certificates of deposit, time deposits and bankers' acceptances of any U.S.
depository institution or trust company incorporated under the laws of the
United States or any state thereof, provided that the debt of such depository
institution or trust company at the date of acquisition thereof has been rated
by Standard & Poor's Corporation in the highest short-term rating category or
has an equivalent rating from another nationally-recognized rating agency, or
(c) commercial paper of any corporation incorporated under the laws of the
United States or any state thereof that on the date of acquisition is rated
investment grade by Standard & Poor's Corporation or has an equivalent rating
from another nationally-recognized rating agency; (iii) any debt instrument
which is an obligation of, or is guaranteed as to the receipt of principal and
interest by, the United States, its agencies or any U.S. Government sponsored
enterprise and (iv) the amount of unused credit available to the Company in the
form of Permitted Warehouse Indebtedness under lines of such Indebtedness in
existence on the determination date which may be secured by existing net loans
or other Receivables held for sale by the Company on the determination date.
"LIQUIDATED DAMAGES" shall have the meaning set forth in the
Registration Rights Agreement.
"MARK-TO-MARKET ADJUSTMENTS" shall have the meaning set forth
in Section 9.12(a)(1).
"MATERIAL ADVERSE EFFECT" has the meaning set forth in the
Agreement
"MATURITY", when used with respect to any Note, means the date
on which the principal of such Note or an installment of principal becomes due
and payable as therein or herein provided, whether at the Stated Maturity or by
declaration of acceleration, call for redemption, upon repurchase or otherwise.
"MATURITY DATE" shall mean the date of Maturity specified in a
Note and such date will be the "STATED MATURITY" of the Note.
"MCI" means The Money Centre, Inc., a North Carolina
corporation.
"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.
10
<PAGE> 17
"NOTES" has the meaning set forth in the Recitals, provided
that upon consummation of the Exchange the Notes and the Convertible Notes shall
be considered as a single class of Pari Passu Indebtedness of the Company.
Notwithstanding any provision to the contrary continued in this Indenture,
references herein to actions by the Holders of the Notes shall in all cases
include the holders of the Convertible Notes, such holders acting together as
the holders of a single class of securities of the Company.
"NOTE OBLIGATIONS" means all present and future liabilities,
obligations and Indebtedness of the Company, any of its Subsidiaries or any
other obligor owing to any Holder under or in connection with the Agreement or
any Related Agreement, including without limitation obligations in respect of
(i) principal, premium, if any, and interest on the Notes, (ii) reimbursement of
costs, fees, taxes or other items and (iii) indemnification and related
obligations.
"NOTE REGISTER" has the meaning set forth in Section 3.6.
"NOTE REGISTRAR" has the meaning specified in Section 3.6.
"NOTE SECURITY" means all assets now or from time to time
after the Issue Date subjected to a security interest or other charge (or
intended to be so subjected pursuant to the Agreement or any Related Agreement)
to secure the payment or performance of any of the Note Obligations.
"OBLIGOR" means the Company or any Guarantor.
"OFFICER" means the Chairman of the Board, the President, the
Chief Financial Officer, the Controller, the Secretary, any Assistant Secretary
or any Vice President of the Company.
"OFFICERS' CERTIFICATE" means, unless otherwise specified
herein, a certificate signed by two Officers, one of whom must be the Chairman
of the Board, the President, the Chief Executive Officer or the Chief Financial
Officer of the Company.
"OPINION OF COUNSEL" means a written opinion of counsel, who
may be counsel for the Obligors and who shall be acceptable to the Trustee.
"OUTSTANDING" (i) when used as of any particular time with
reference to the Notes, means all of the Notes theretofore issued by the Company
and outstanding, which shall not include (x) the Notes theretofore canceled by
the Company or surrendered to the Trustee for cancellation, and (y) the Notes
for the transfer or exchange of or in lieu of or in substitution for which other
Notes shall have been delivered by the Trustee pursuant to this Indenture, and
(ii) when used as of any particular time with reference to the Convertible Notes
shall have the meaning set forth in the Convertible Notes. In determining
whether the registered holders of the requisite aggregate principal amount of
Notes and Convertible Notes have concurred in any
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demand, request, direction, consent, or waiver under the Notes, Notes which are
owned or held by or for the account of the Company, or by any other obligor on
the Notes, or by any Affiliate of the Company or any other obligor on the Notes,
shall be disregarded and deemed not to be Outstanding for the purpose of any
such determination. Notes so owned which have been pledged in good faith may be
regarded as Outstanding if the pledgee shall have the exclusive right to vote
such Notes and is not a Person which is an Affiliate of the Company or any other
obligor on the Notes.
"PARI PASSU INDEBTEDNESS" means any Indebtedness of the
Company that is pari passu in right of payment of principal, premium (if any)
and interest thereon to the Notes.
"PAYING AGENT" means any Person authorized by the Company to
pay the principal of or any premium or interest on any Notes on behalf of the
Company or, if the Company is acting as its own Paying Agent, the Company.
"PERMITTED INDEBTEDNESS" means:
(i) Permitted Warehouse Indebtedness of the Company
and its Subsidiaries, provided that to the extent any such
Indebtedness ceases to constitute Permitted Warehouse
Indebtedness of the Company or a Subsidiary, such event shall
be deemed to constitute the Incurrence of such Indebtedness
(and any related Guarantees, but without duplication) by the
Company or such Subsidiary, as the case may be;
(ii) the Note Obligations;
(iii) Indebtedness of the Company or a Subsidiary
outstanding on the Issue Date;
(iv) Hedging Obligations;
(v) Capital Lease Obligations, mortgage financings or
purchase money obligations, in each case incurred for the
purpose of financing all or any part of the purchase price,
lease or cost of construction or improvement of property,
plant or equipment used in the business of the Company or such
Subsidiary, in an aggregate principal amount not to exceed
$3.0 million at any time outstanding;
(vi) intercompany Indebtedness between or among the
Company and any Subsidiary, provided, however, that (i) if the
Company is the obligor on such Indebtedness, such Indebtedness
is expressly subordinated to the prior payment in full in cash
of all Note Obligations and Convertible Note Obligations and
(ii) (A) any subsequent issuance or transfer of Capital Stock
that results in any such Indebtedness being held by a Person
other than the Company or a Subsidiary and (B) any sale or
other transfer of any such Indebtedness to a Person that is
not either the Company or a
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Subsidiary shall be deemed, in each case, to constitute an
Incurrence of such Indebtedness by the Company or such
Subsidiary, as the case may be; and
(vii) Permitted Refinancing Indebtedness in exchange
for, or the net proceeds of which are used to refund,
refinance or replace Indebtedness Incurred pursuant to Section
9.13(a) or clause (iii) or (v) above.
"PERMITTED LIENS" means, with respect to the Company and any
Subsidiary:
(i) Liens for taxes, assessments or governmental
charges or levies on the assets or property of the Company or
any Subsidiary if the same shall not at the time be delinquent
or thereafter can be paid without penalty, or are being
contested in good faith and by appropriate proceedings and for
which adequate reserves in accordance with GAAP shall have
been set aside on its books;
(ii) Liens imposed by law, such as carriers',
warehousemen's and mechanics' liens and other similar liens
arising in the ordinary course of business which secure
payment of obligations not more than 60 days past due;
(iii) Liens arising out of pledges or deposits under
worker's compensation laws, unemployment insurance, old age
pensions or other social security or retirement benefits, or
similar legislation;
(iv) Utility easements, building restrictions and
such other encumbrances or charges against real property as
are of a nature generally existing with respect to properties
of a similar character and which do not in any material way
affect the marketability of the same or interfere with the use
thereof in the business of the Company or its Subsidiaries;
(v) Liens securing Permitted Indebtedness;
(vi) Liens with respect to IO Securities, Residual
Certificates or excess servicing rights arising from the
documents creating and governing such securities, certificates
and rights as a result of the subordinate nature of such
assets to other senior interests created and governed by such
documents; and
(vii) Liens on the Capital Stock of, or the assets or
property of, a Subsidiary acquired by the Company in existence
at the time of such acquisition provided that (a) such Liens
are not created, incurred or assumed in connection with, or in
contemplation of, such acquisition and (b) such Liens do not
extend to assets or property owned by the Company or any other
Subsidiary.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of
the Company or any of its Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund Indebtedness of the Company or any of its Subsidiaries, provided that (i)
the principal amount (or accreted value, if applicable) of such Permitted
Refinancing Indebtedness does not exceed the principal amount (or accreted
value, if
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applicable), plus accrued interest on, the Indebtedness so extended, refinanced,
renewed, replaced, defeased or refunded (plus the amount of reasonable expenses
incurred in connection therewith, including premiums paid, if any, to the
holders thereof); (ii) such Permitted Refinancing Indebtedness has a final
maturity date at or later than the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; (iii) if the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded is subordinated in right of payment to
the Notes, such Permitted Refinancing Indebtedness has a final maturity date
later than 91 days after the final maturity date of, and is subordinated in
right of payment to, the Notes on terms at least as favorable to the Holders as
those contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness
is incurred either by the Company or by the Subsidiary which is the obligor on
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"PERMITTED WAREHOUSE INDEBTEDNESS" means Indebtedness of any
Person under any warehouse line of credit, loan repurchase agreement or similar
facility or under any commercial paper program (a) that is incurred for the
purpose of funding the origination or purchase of Receivables that are intended
to be sold to investors and are eligible to be recorded as held for sale on the
consolidated balance sheet of such Person in accordance with GAAP and are so
recorded, (b) that in the case of any warehouse line of credit or similar
facility is, or, in the case of any commercial paper program, the letters of
credit or revolving credit facility providing credit enhancement or liquidity
backup for such commercial paper program are, secured by Receivables or
securities backed by such receivables or any combination thereof owned by such
Person, (c) the outstanding amount of which shall not exceed 100% of the
aggregate principal amount of the Receivables and/or securities backed by such
receivables securing such Indebtedness and (d) that has not been outstanding in
excess of 360 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.
"PLACE OF PAYMENT" means the place or places where the
principal of and any premium and interest on the Notes are payable.
"PREDECESSOR NOTE" of any particular Note means every previous
Note evidencing all or a portion of the same debt as that evidenced by such
particular Note; and, for the purposes of this definition, any Note
authenticated and delivered under Section 3.7 in exchange for or in lieu of a
mutilated, destroyed, lost or stolen Note shall be deemed to evidence the same
debt as the mutilated, destroyed, lost or stolen Note.
"PREFERRED STOCK" means with respect to any Person, any
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends or distributions, 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 in such Person.
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<PAGE> 21
"PRINCIPAL" of a Note means the principal of the Note payable
on the Note which is due or overdue or is to become due at the relevant time.
"QUALIFIED INSTITUTIONAL BUYER" or "QIB" has the meaning
specified in Rule 144A under the Securities Act.
"RECEIVABLES" means loans, leases and other credit receivables
commonly financed by companies in the mortgage lending or consumer finance
business in the United States which are purchased or originated by the Company
or any Subsidiary of the Company in the ordinary course of business.
"RECORD DATE" means, with respect to any Interest Payment
Date, the June 1 or December 1 preceding an Interest Payment Date of June 15 and
December 15, respectively.
"REDEMPTION DATE," when used with respect to any Note to be
redeemed, means the date fixed for such redemption by or pursuant to the
provisions of the Note.
"REDEMPTION PRICE," when used with respect to any Note to be
redeemed, means the price at which it is to be redeemed pursuant to the
provisions of the Note.
"REGISTRATION RIGHTS AGREEMENT" has the meaning set forth in
the Agreement.
"RELATED AGREEMENTS" means the Notes and the Collateral
Documents.
"REPURCHASE EVENT" has the meaning set forth in Section 12.6.
"REPURCHASE PRICE," when used with respect to any Note to be
repurchased, means the price at which it is to be repurchased pursuant to the
terms of the Notes.
"RESIDUAL CERTIFICATE" means a security (whether identified as
a certificate, instrument or interest) representing the residual interest in a
real estate mortgage investment conduit or other entity formed by the Company or
a Subsidiary and in which the Company or a Subsidiary has retained a residual
interest which is only payable on a fully subordinated basis after all regular
interests in and/or debt issued by such entity has been fully repaid.
"RESPONSIBLE OFFICER", when used with respect to the Trustee,
means the chairman or any vice-chairman of the board of directors, the chairman
or any vice-chairman of the executive committee of the board of directors, the
chairman of the trust committee, the president, any vice president, any
assistant vice president, the secretary, any assistant secretary, the treasurer,
any assistant treasurer, the cashier, any assistant cashier, any senior trust
officer, trust officer or assistant trust officer, the controller or any
assistant controller or any other officer of the Trustee customarily performing
functions similar to those performed by any of the above designated officers and
also means, with respect to a particular corporate trust matter, any other
officer to whom such matter is referred because of his knowledge of and
familiarity with the particular subject.
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"RESTRICTED PAYMENT" means
(i) the declaration, payment or setting apart of any
funds for the payment of any dividend on, or making of any
distribution to holders of, the Capital Stock of the Company
or any Subsidiary of the Company (including, without
limitation, any payment in connection with any merger or
consolidation involving the Company or any of its
Subsidiaries) or make any payment or distribution to or for
the benefit of the direct or indirect holders of the Capital
Stock of the Company or any Subsidiary of the Company (other
than (a) dividends or distributions payable in its Capital
Stock (other than Disqualified Capital Stock) and (b)
dividends or distributions payable to the Company or a
Subsidiary of the Company (and if such Subsidiary is not a
Wholly-Owned Subsidiary, to its other holders of Capital Stock
on a pro rata basis);
(ii) the purchase, redemption or other acquisition or
retirement for value, directly or indirectly, of any Capital
Stock of the Company or any Subsidiary of the Company (other
than any such Capital Stock owned by the Company or any of its
Subsidiaries and other than the acquisition of Capital Stock
in Subsidiaries solely in exchange for Capital Stock (other
than Disqualified Capital Stock ) of the Company); or
(iii) the making of any principal payments on, or
repurchase, redemption, defeasance, retirement or other
acquisition for value, directly or indirectly, of any Junior
Indebtedness or Pari Passu Indebtedness, prior to the Stated
Maturity of principal or scheduled redemption or defeasance
of, or any scheduled sinking fund payment on, such Junior
Indebtedness or Pari Passu Indebtedness.
Notwithstanding the above, a Restricted Payment shall not include: (A)
any future payments required to be made to the former shareholders of MCI
pursuant to the Stock Purchase Agreement, dated as of July 15, 1999, by and
among Rodney D. Atkinson, Charles R. Cunningham, Stuart A. Lewis, John Richard
Love, Stephen L. Walker, MCI and the Company; or (B) the repurchase, redemption,
defeasance, retirement or other acquisition for value directly or indirectly of
the Notes in accordance with the terms of the Indenture (including without
limitation Section 9.20 hereof).
"SECURITIES ACT" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"SECURITY AGREEMENTS" shall have the meaning specified in the
Agreement.
"SECURITIZATION SUBSIDIARY" means a Subsidiary of the Company
formed in connection with a securitization of Receivables (i) 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 Subsidiary) is owned by the Company or one or
more of its Subsidiaries, (ii) that has no assets other than Excess Spread
Receivables created in such securitization, (iii) that conducts no business
other
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than holding such Excess Spread Receivables, and (iv) that has no Indebtedness
(other than short-term Indebtedness to the Company or any Wholly-Owned
Subsidiary attributable to the purchase by such Subsidiary from the Company or
such Wholly-Owned Subsidiary of such Receivables, which Indebtedness is paid in
full upon closing of such securitization).
"SIGNIFICANT SUBSIDIARY" means, with respect to any Person,
any Subsidiary which is a "significant subsidiary" (as defined in Article 1,
Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act) of such
Person.
"SPECIAL RECORD DATE" for the payment of any Defaulted
Interest means a date fixed by the Company pursuant to Section 3.8.
"STATED MATURITY" shall have the meaning set forth in the
definition of "MATURITY DATE."
"STOCKHOLDER APPROVALS" means the approval of the stockholders
of the Company, pursuant to the Agreement, of (i) the issuance of Common Stock
upon mandatory conversion of the applicable portion of the Notes and (ii) the
issuance of Common Stock upon conversion of the Convertible Notes in accordance
with their terms.
"SUBSIDIARY" means, with respect to any Person, (i) any
corporation, association or other business entity of which more than 50% of the
total voting power of shares of Capital Stock 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
such Person or one or more Subsidiaries of such Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or one or more Subsidiaries
of such Person (or any combination thereof).
"SUBSTANTIAL PORTION" means, with respect to the assets of the
Company and its Subsidiaries, assets which (i) represent more than 10% of the
consolidated assets of the Company and its Subsidiaries as would be shown in the
consolidated financial statements of the Company and its Subsidiaries as at the
beginning of the twelve-month period ending with the month in which such
determination is made, or (ii) is responsible for more than 10% of the
Consolidated Net Income of the Company and its Subsidiaries as reflected in the
financial statements referred to in clause (i) above.
"SUCCESSOR COMPANY" has the meaning specified in Section 10.1.
"SUPERMAJORITY COVENANTS" has the meaning set forth in Section
9.24.
"TRADING DAY" shall mean (x) if the applicable security is
listed or admitted for trading on the New York Stock Exchange, the Nasdaq Stock
Market (National Market) or another national security exchange, a day on which
the New York Stock Exchange, the Nasdaq Stock Market (National Market) or
another national security exchange is open for business or (y) if the applicable
security is quoted on the Nasdaq National Market, a day on which trades may be
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<PAGE> 24
made thereon or (z) if the applicable security is not so listed, admitted for
trading or quoted, any day other than a Saturday or Sunday or a day on which
banking institutions in the State of Georgia are authorized or obligated by law
or executive order to close.
"TRUSTEE" means the Person named as the "TRUSTEE" in the first
paragraph of this instrument until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture and thereafter "TRUSTEE"
shall mean or include each Person who is then a Trustee hereunder, and if at any
time there is more than one such Person. "TRUSTEE" as used with respect to the
Notes shall mean the Trustee with respect to the Notes.
"TRUST INDENTURE ACT" means the Trust Indenture Act of 1939 as
in force at the date as of which this instrument was executed; provided,
however, that in the event the Trust Indenture Act of 1939 is amended after such
date, "TRUST INDENTURE ACT" means, to the extent required by any such amendment,
the Trust Indenture Act of 1939 as so amended.
"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.
"VALUE PARTNERS AGREEMENT" means the Amended and Restated
Secured Convertible Senior Note Purchase Agreement dated as of February ___,
2000 by and between the Company and Value Partners, Ltd., as amended,
supplemented or otherwise modified from time to time.
"VALUE PARTNERS SECURITY AGREEMENT" means the Amended and
Restated Pledge and Security Agreement, dated as f February __, 2000 for
reference purposes only, between the Company and Value Partners, Ltd., as
amended, supplemented or otherwise modified from time to time to time.
"VICE PRESIDENT", when used with respect to the Trustee, means
any vice president (but shall not include any assistant vice president), whether
or not designated by a number or a word or words added before or after the title
"vice president."
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the sum
of the products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at Stated Maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"WHOLLY-OWNED SUBSIDIARY" means a Subsidiary all of the
Capital Stock of which is owned by the Company or another Wholly-Owned
Subsidiary.
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Section 1.2 Compliance Certificates and Opinions.
Upon any application or request by any Obligor to the Trustee
to take any action under any provision of this Indenture, the Obligor shall
furnish to the Trustee such certificates and opinions as may be required under
the Trust Indenture Act. Each such certificate or opinion shall be given in the
form of an Officers' Certificate, if to be given by an officer of the Obligor,
or an Opinion of Counsel, if to be given by counsel, and shall comply with the
requirements of the Trust Indenture Act and any other requirements set forth in
this Indenture.
Every certificate or opinion (other than the Officers'
Certificate delivered under Section 10.4 hereof) with respect to compliance with
a condition or covenant provided for in this Indenture shall include:
(a) a statement that each individual signing such
certificate or opinion has read such covenant or condition and the definitions
herein relating thereto;
(b) 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;
(c) a statement that, in the opinion of each 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
(d) a statement as to whether, in the opinion of each
such individual, such condition or covenant has been complied with;
Section 1.3 Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified
by, or covered by an opinion of, any specified Person, it is not necessary that
all such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of any Obligor may be
based, insofar as it relates to legal matters, upon a certificate or opinion of,
or representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or opinion of counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Obligor stating that the
information with respect to such factual matters is in the possession of the
Obligor, unless such counsel knows, or in the exercise of reasonable care should
know, that the certificate or opinion or representations with respect to such
matters are erroneous.
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Where any Person is required to make, give or execute two or
more applications, requests, consents, certificates, statements, opinions or
other instruments under this Indenture, they may, but need not, be consolidated
and form one instrument.
Section 1.4 Acts of Holders; Record Dates.
(a) When herein it is provided that the registered
holders of a specified percentage in aggregate principal amount of the Notes and
the Convertible Notes may take any action (including the making of any demand or
request, the giving of any notice, consent or waiver or the taking of any other
action), the fact that at the time of taking any such action, the registered
holders of such specified percentage have joined therein may be evidenced (a) by
any instrument or any number of instruments of similar tenor executed by such
registered holders in person or by agent or proxy appointed in writing and
delivered to the Trustee, or (b) by the registered of such registered holders
voting in favor thereof at any meeting of registered holders duly called and
held in accordance with the provisions hereof and applicable law, a copy of
which shall be delivered to the Trustee, or (c) by a combination of such
instrument or instruments and any such record of such a meeting of such
registered holders. Such instrument or instruments or such record (and the
action embodied therein and evidenced thereby) are herein sometimes referred to
as the "Act" of the Holders. Such Acts shall become effective upon delivery of
such instrument or instruments or such record to the Trustee. Proof of execution
of any such instrument or authentication of such record shall be sufficient for
any purpose of this Indenture and (subject to Section 6.1) conclusive in favor
of the Trustee and the Company, if made in the manner provided in this Section.
Without limiting the generality of the foregoing, a Holder,
including a Depositary that is a Holder of a Global Note, may make, give or
take, by a proxy or proxies, duly appointed in writing, any request, demand,
authorization, direction, notice, consent, waiver or other action provided or
pertained in this Indenture to be made, given or taken by Holders, and a
Depositary that is a Holder of a Global Note may provide its proxy or proxies to
the beneficial owners of interest in any such Global Note.
(b) The fact and date of the execution by any Person of
any such instrument or writing or the authentication of any such record of a
meeting may be proved by the affidavit of a witness of such execution or by a
certificate of a notary public or other officer authorized by law to take
acknowledgments of deeds, certifying that the individual signing such instrument
or writing or record acknowledged to him the execution thereof. Where such
execution is by a signer acting in a capacity other than his individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of authority. The fact and date of the execution of such instrument or writing
or record, or the authority of the Person executing the same, may also be proved
in any other manner which the Trustee deems sufficient.
(c) The Company may, in the circumstances permitted by
the Trust Indenture Act, fix any day as the record date for the purpose of
determining the Holders of Notes entitled to give or take any request, demand,
authorization, direction, notice, consent, waiver or other action, or to vote on
any action, authorized or permitted to be given or taken by Holders of Notes. If
not set by the Company prior to the first solicitation of a Holder of Notes made
by any Person in
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<PAGE> 27
respect of any such action, or, in the case of any such vote, prior to such
vote, the record date for any such action or vote shall be the 30th day (or, if
later, the date of the most recent list of Holders required to be provided
pursuant to Section 7.1) prior to such first solicitation or vote, as the case
may be. With regard to any record date for action to be taken by the Holders
Notes, only the Holders of Notes on such date (or their duly designated proxies)
shall be entitled to give or take, or vote on, the relevant action.
(d) The ownership of Notes shall be proved by the Note
Register.
(e) Any request, demand, authorization, direction,
notice, consent, waver or other Act of the Holder of any Note shall bind every
future Holder of the same Note and the Holder of every Note issued upon the
registration of transfer thereof or in exchange therefor or in lieu thereof in
respect of anything done, omitted or suffered to be done by the Trustee or the
Company in reliance thereon, whether or not notation of such action is made upon
such Note.
(f) Without limiting the foregoing, a Holder entitled
hereunder to give or take any action hereunder with regard to any particular
Note may do so with regard to all or any part of the principal amount of such
Note or by one or more duly appointed agents each of which may do so pursuant to
such appointment with regard to all or any different part of such principal
amount.
(g) For purposes of actions required by this Indenture to
be taken by the record holders of the Notes and the Convertible Notes acting as
a single class or other actions required to be taken by the record holders of
the Convertible Notes hereunder (i) the Trustee shall be entitled to rely on the
registries of record and beneficial owners of the Convertible Notes maintained
by the Company pursuant to Section 2.3 of the Convertible Notes (the
"Convertible Note Registries"), copies of which shall be delivered by the
Company to the Trustee in accordance with Section 7.1(c) hereof, and shall treat
beneficial owners of Convertible Notes as record holders of Convertible Notes to
the extent provided in Section 2.3 of the Convertible Notes and (ii) the Trustee
shall be entitled to rely on the Beneficial Owner Registry, and shall treat
beneficial owners of Notes as registered holders of Notes to the extent provided
in this Section 1.4(g). A copy of any notice sent by the Company or the Trustee
hereunder to the Holders also shall be sent to each record and beneficial owner
of the Convertible Notes, as reflected in the Convertible Note Registries and to
each beneficial owner of the Notes shown on the Beneficial Owner Registry. With
respect to any consent, request, direction, approval, objection or other
instrument or action required or permitted by this Indenture to be executed or
taken by the Trustee, the Trustee shall be entitled to rely on the registries of
record and beneficial owners of the Convertible Notes and the Beneficial Owner
Registry and shall treat beneficial owners of Convertible Notes as record
holders of Convertible Notes to the extent provided in Section 2.3 of the
Convertible Notes and shall treat beneficial owners of the Notes as registered
owners of the Notes. Any action so taken shall be fully effective if executed or
taken by any such holders reflected in the Convertible Note Registries and the
Beneficial Note Registry, unless the Trustee receives written notification to
the contrary.
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Section 1.5 Notices, Etc., to Trustee and Company.
Except as otherwise expressly provided herein, any request,
demand, authorization, direction, notice, consent, waiver or Act of Holders or
other document provided or permitted by this Indenture to be made upon, given or
furnished to, or filed with,
(a) the Trustee by any Holder or by any Obligor shall be
sufficient for every purpose hereunder if made, given, furnished or filed in
writing to or with the Trustee at its Corporate Trust Office, or
(b) any Obligor by the Trustee or by any Holder shall be
sufficient for every purpose hereunder (unless otherwise herein expressly
provided) if in writing and mailed, first-class postage prepaid, to the Obligor
addressed to it at the address of the Company's principal office specified in
the first paragraph of this instrument or at any other address previously
furnished in writing to the Trustee by such Obligor, Attention: George
Karfunkel, Executive Vice President.
Section 1.6 Notice to Holders; Waiver.
Where this Indenture provides for notice to Holders of any
event, such notice shall be sufficiently given (unless otherwise herein
expressly provided) if in writing and mailed, first-class postage prepaid, to
each Holder affected by such event, at his address as it appears in the Note
Register, not later than the latest date (if any), and not earlier than the
earliest date (if any), prescribed for the giving of such notice. In any case
where notice to Holders is given by mail, neither the failure to mail such
notice, nor any defect in any notice so mailed, to any particular Holder shall
affect the sufficiency of such notice with respect to other Holders. Where this
Indenture provides for notice in any manner, such notice may be waived in
writing by the Person entitled to receive such notice, either before or after
the event, and such waiver shall be the equivalent of such notice. Waivers of
notice by Holders shall be filed with the Trustee, but such filing shall not be
a condition precedent to the validity of any action taken in reliance upon such
waiver.
In case by reason of the suspension of regular mail service or
by reason of any other cause it shall be impracticable to give such notice by
mail, then such notification as shall be made with the approval of the Trustee
shall constitute a sufficient notification for every purpose hereunder.
Section 1.7 Conflict with Trust Indenture Act.
If any provision hereof limits, qualifies or conflicts with a
provision of the Trust Indenture Act that is required under such Act to be a
part of and govern this Indenture, the latter provision shall control. If any
provision of this Indenture modifies or excludes any provision of the Trust
Indenture Act that may be so modified or excluded, the latter provision shall be
deemed to apply to this Indenture as so modified or to be excluded, as the case
may be.
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Section 1.8 Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of
Contents are for convenience only and shall not affect the construction hereof.
Section 1.9 Successors and Assigns.
All covenants and agreements in this Indenture by the Company
shall bind its successors and assigns, whether so expressed or not.
Section 1.10 Separability Clause.
In case any provision in this Indenture or in the Notes shall
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
Section 1.11 Benefits of Indenture.
Except to the extent provided in the definition of the term
"Notes" in Section 1.1 hereof, nothing in this Indenture or in the Notes,
express or implied, shall give any Person, other than (a) the parties hereto and
their successors hereunder and (b) the Holders, any benefit or any legal or
equitable right, remedy or claim under this Indenture.
Section 1.12 Governing Law, Choice of Forum.
(a) THIS INDENTURE AND THE NOTES WILL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING
EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE
APPLICATION OF THE LAW OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
(b) EACH OBLIGOR HEREBY IRREVOCABLY SUBMITS TO THE
JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN IN
THE CITY OF NEW YORK OR ANY FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN IN
THE CITY OF NEW YORK IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF
OR RELATING TO THIS INDENTURE AND THE NOTES, AND IRREVOCABLY ACCEPTS FOR ITSELF
AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, JURISDICTION OF
THE AFORESAID COURTS. EACH OBLIGOR IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT
MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, ANY OBJECTION WHICH IT MAY NOW OR
HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING
BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING
BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
(c) Each Obligor hereby irrevocably appoints CT
Corporation System (the "PROCESS AGENT," which has consented thereto) with
offices on the date hereof at
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_______________________________________, as Process Agent to receive for and on
behalf of such Obligor service of process in the Borough of Manhattan of
relating to this Indenture and the Notes. SERVICE OF PROCESS IN ANY SUIT, ACTION
OR PROCEEDING AGAINST ANY OBLIGOR MAY BE MADE ON THE PROCESS AGENT BY REGISTERED
OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, OR BY ANY OTHER METHOD OF SERVICE
PROVIDED FOR UNDER APPLICABLE LAWS IN EFFECT IN THE STATE OF NEW YORK, AND THE
PROCESS AGENT IS HEREBY AUTHORIZED AND DIRECTED TO ACCEPT SUCH SERVICE FOR AND
ON BEHALF OF SUCH OBLIGOR AND TO ADMIT SERVICE WITH RESPECT THERETO. SUCH
SERVICE UPON THE PROCESS AGENT SHALL BE DEEMED EFFECTIVE PERSONAL SERVICE ON
SUCH OBLIGOR, SUFFICIENT FOR PERSONAL JURISDICTION, 10 DAYS AFTER MAILING, AND
SHALL BE LEGAL AND BINDING UPON SUCH OBLIGOR FOR ALL PURPOSES, NOTWITHSTANDING
ANY FAILURE OF THE PROCESS AGENT TO MAIL COPIES OF SUCH LEGAL PROCESS TO SUCH
OBLIGOR OR ANY FAILURE ON THE PART OF SUCH OBLIGOR TO RECEIVE THE SAME. Each
Obligor confirms that it has instructed the Process Agent to mail to such
Obligor, upon service of process being made on the Process Agent pursuant to
this Section, a copy of the summons and complaint or other legal process served
upon it, by registered mail, return receipt requested, at such Obligor's address
set forth on the signature page hereto, or to such other address as such Obligor
may notify the Process Agent in writing. Each Obligor agrees that it will at all
times maintain a process agent to receive service of process in the Borough of
Manhattan on its behalf with respect to this Indenture and the Notes. If for any
reason the Process Agent or any successor thereto shall no longer serve as such
process agent or shall have changed its address without notification thereof to
the Trustee, such Obligor, immediately after gaining knowledge thereof,
irrevocably shall appoint a substitute process agent acceptable to the Trustee
in the Borough of Manhattan and advise the Trustee thereof.
(d) NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE TRUSTEE
OR ANY HOLDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO
COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST ANY OBLIGOR IN ANY OTHER
JURISDICTION.
Section 1.13 Legal Holidays.
In any case where any Interest Payment Date, Redemption Date
or Stated Maturity of any Note shall not be a Business Day at any Place of
Payment, then (notwithstanding any other provision of this Indenture or of the
Notes (other than a provision of the Notes which specifically states that such
provision shall apply in lieu of this Section)) payment of interest or principal
(and premium, if any) need not be made at such Place of Payment on such date,
but may be made on the next succeeding Business Day at such Place of Payment
with the same force and effect as if made on the Interest Payment Date or
Redemption Date, or at the Stated Maturity, provided that no interest shall
accrue with respect to such payment for the period from and after such Interest
Payment Date, Redemption Date or Stated Maturity, as the case may be.
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ARTICLE TWO -
NOTE FORMS
Section 2.1 Forms Generally.
The Notes shall be in substantially the form set forth in this
Article, with such appropriate insertions, omissions, substitutions and other
variations as are required or permitted by this Indenture, and may have such
letters, numbers or other marks of identification and such legends or
endorsements placed thereon as may be required to comply with the roles of any
securities exchange or as may, consistently herewith, be determined by the
officers executing such Notes, as evidenced by their execution of the Notes.
The Definitive Notes shall be printed, lithographed or
engraved on steel engraved borders or may be produced in any other manner, all
as determined by the officers of the Obligor executing such Notes, as evidenced
by their execution of such Notes.
Section 2.2 Form of Face of Note.
ALTIVA FINANCIAL CORPORATION
12% SECURED CONVERTIBLE SENIOR NOTES DUE 2006
NO. ____________ $__________
Altiva Financial Corporation, a corporation duly organized and
existing under the laws of Delaware (herein called the
"Company", which term includes any Successor Company under the
Indenture hereinafter referred to), for value received, hereby
promises to pay to ________________, or registered assigns,
the principal sum of _______________ Dollars on June 15, 2006,
and to pay interest thereon from [insert Series Issue Date of
the relevant series] or from the most recent Interest Payment
Date to which interest has been paid or duly provided for,
semi-annually on June 15 and December 15 in each year,
commencing [insert first Interest Payment Date after relevant
Series Issue Date], at the rate of 12% per annum, or such
other rate as prescribed by the Indenture, until the principal
hereof is paid or made available for payment. 'The interest so
payable, and punctually paid or duly. provided for, on any
Interest Payment Date will, as provided in such Indenture, be
paid to the Person in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on
the Record Date for such interest, which shall be the June 1
or December 1 (whether or not a Business Day), as the case may
be, next preceding such Interest Payment Date. Any such
interest not so punctually paid or duly provided for will
forthwith cease to be payable to the Holder on such Record
Date and may either be paid to the Person in whose name this
Note (or one or more Predecessor Notes) is registered at the
close of business on a Special Record Date for the payment of
such Defaulted Interest, notice whereof shall be given to
Holders of Notes not less than 10 days
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prior to such Special Record Date, or be paid at any time in
any other lawful manner not inconsistent with the requirements
of any securities exchange on which the Notes may be listed,
and upon such notice as may be required by such exchange, all
as more fully provided in said Indenture.
The principal amount or redemption price of this Note
shall be payable upon presentation and surrender of this Note,
at the office of United States Trust Company of New York in
New York, New York (such bank and any successor in such
capacity being referred to as the "Trustee") or at the office
of any other Paying Agent designated by the Company. Interest
shall be paid by check mailed to the address of such person on
the Note Register, provided that at the request of a Holder in
writing to the Company at least five days prior to the date
set for the payment of interest, interest on such Holder's
Notes shall be paid by wire transfer in immediately available
funds in accordance with the wire transfer instructions
supplied by such Holder to the Company. Payment of principal,
premium, if any and interest due on the Notes on the Maturity
Date similarly shall be paid by the Company by check or, at
the request of a Holder, wire transfer. Notwithstanding the
foregoing, for so long as the Depositary is the exclusive
registered owner of the Notes, or if the Notes are not in book
entry as provided in the Indenture described herein, the
principal amount and redemption price of the Notes and the
interest thereon shall be payable by wire transfer in
immediately available funds to the Depositary without
necessity of any immediate presentation and surrender of the
Notes pursuant to the letter of representations of the
Depositary or written instructions from the registered owner.
Reference is hereby made to the further provisions of
this Note set forth on the reverse hereof, which further
provisions shall for all purposes have the same effect as if
set forth at this place.
Unless the certificate of authentication hereon has
been executed by the Trustee referred to on the reverse hereof
by manual signature, this Note shall not be entitled to any
benefit under the Indenture or be valid or obligatory, for any
purpose.
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IN WITNESS WHEREOF, the Company has caused this
instrument to be duly executed under its corporate seal.
Dated:
ALTIVA FINANCIAL CORPORATION
By
----------------------------
Name:
Title:
Attest:
- -------------------------------
Name:
Title:
Section 2.3 Form of Reverse of Note.
This Note is one of a duly authorized issue of securities of
the Company (herein called the "NOTES"), issued under an Indenture, dated as of
February __, 2000 (herein called the "INDENTURE"), by and between the Company,
and United States Trust Company of New York, as Trustee (herein called the
"TRUSTEE", which term includes any successor three 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 Trustee and the Holders of the Notes
and of the terms upon which the Notes are, and are to be, authenticated and
delivered. This Note is one of the Notes designated on the face hereof, limited
in aggregate principal amount to $19,382,000 ($12,954,000 after giving effect to
the mandatory conversion pursuant to Article Fourteen of the Indenture)..
The Notes are redeemable, in whole but not in part, prior to
maturity at the option of the Company at any time and from time to time at a
redemption price (the "Redemption Price") (expressed as a percentage of
principal amount), on or after June 15, 2004 but prior to June 15, 2005, of 106%
and (ii) on or after June 15, 2005, of 100%, in either case plus accrued and
unpaid interest (including Added Interest, if any) to the redemption date
(subject to the right of Holders of record on the relevant record date to
receive interest (including Added Interest, if any) due on the relevant interest
payment date).
At issuance, the Notes that were issued to Qualified
Institutional Buyers, as such term is defined in the Securities Act of 1933 (a
"QIB"), were secured, in part, by a security interest in certain
mortgage-related securities and other assets of the Company. Notes that are
secured by such mortgage-related securities may not be transferred or pledged to
any person or entity that is not a QIB.
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The Indenture contains provisions for defeasance at any time
of (a) the entire indebtedness evidenced by this Note and (b) certain
restrictive covenants, in each case upon compliance by the Company with certain
conditions set forth therein, which provisions apply to this Note.
If an Event of Default with respect to Notes shall occur and
be continuing, the principal of the Notes 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 Notes to be
affected under the Indenture at any time by the Company and the Trustee with the
consent of the registered holders of a majority in aggregate principal amount of
the Notes and the Convertible Notes (as defined therein) at the time
Outstanding. The Indenture also contains provisions permitting the registered
holders of specified percentages in aggregate principal amount of the Notes and
the Convertible Notes, considered as a single class at the time Outstanding, on
behalf of the Holders of all Notes, to waive certain past defaults under the
Indenture and their consequences. Any such consent or waiver by the Holder of
this Note shall be conclusive and binding upon such Holder and upon all future
Holders of this Note and of any Note 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 Note.
No reference herein to the Indenture and no provision of this
Note or of the Indenture shall alter or impair the obligation of the Company,
which is absolute and unconditional, to pay the principal of and any premium and
interest on this Note at the times, place and rate, and in the coin or currency,
herein prescribed.
The Notes are issuable only in registered form without coupons
in denominations of $1,000 and any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein set forth, Notes are
exchangeable for a like aggregate principal amount of Notes of like tenor 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.
For notes issued to QIBs on the issue date and thereafter -
"This Note may not be transferred to any person or entity that is not a
Qualified Institutional Buyer as such term is defined in Rule 144A promulgated
under the Securities Act of 1933, as amended."
Prior to due presentment of this Note for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name this Note is registered as the owner hereof
for all purposes, whether or not this Note be overdue, and neither the Company,
the Trustee nor any such agent shall be affected by notice to the contrary.
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All terms used in this Note which are defined in the Indenture
shall have the meanings assigned to them in the Indenture.
Section 2.4 Form of Legends for Global Notes.
Any Global Note authenticated and delivered hereunder shall
bear a legend in substantially the following form:
"This Note is a Global Note within the meaning of the Indenture
hereinafter referred to and is registered in the name of a Depositary or a
nominee thereof. This Note may not be transferred to, or registered or exchanged
for Notes registered in the name of, any Person other than the Depositary or a
nominee thereof or a successor of such Depositary or a nominee of such successor
and no such transfer may be registered, except in the limited circumstances
described in the Indenture. Every Note authenticated and delivered upon
registration of transfer of, or in exchange for or in lieu of, this Note shall
be a Global Note subject to the foregoing, except in such limited
circumstances."
For notes issued to QIBs on the issue date and thereafter-
"This Note may not be transferred to any person or entity that is not a
Qualified Institutional Buyer as such term is defined in Rule 144A promulgated
under the Securities Act of 1933, as amended."
Section 2.5 Form of Trustee's Certificate of
Authentication.
The Trustee's certificate of authentication shall be in
substantially the, following form:
This is one of the Notes designated and referred to in the
within-mentioned Indenture.
-----------------------------------
as Trustee
By
---------------------------------
Authorized Officer
Section 2.6 Form of Assignment.
Each Note shall include the following form of Assignment:
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ASSIGNMENT
(TO BE EXECUTED BY THE REGISTERED HOLDER
IF SUCH HOLDER DESIRES TO TRANSFER THIS NOTE)
FOR VALUE RECEIVED _____________________ hereby sells, assigns
and transfers unto ________________________________
PLEASE INSERT SOCIAL SECURITY OR OTHER
TAX IDENTIFYING NUMBER OF TRANSFEREE
(PLEASE PRINT NAME AND ADDRESS OF TRANSFEREE)
this Note, together with all right, title and interest herein, and does hereby
irrevocably constitute and appoint Attorney to transfer this Note on the Note
Register, with full power of substitution.
Dated:
Signature of Holder Signature Guaranteed:
NOTICE: The signature to the foregoing Assignment must correspond to the Name as
written upon the face of this Note in every particular, without alteration or
any change whatsoever.
ARTICLE THREE -
THE NOTES
Section 3.1 Global Note; Depositary.
(a) The Notes initially will be issued in the form of one
or more Global Notes. Each Global Note will be deposited on the date of
consummation of the Exchange Offer with The Depository Trust Company or any
other depositary designated for the Notes evidenced thereby (the "DEPOSITARY"),
or the Trustee on its behalf, and registered in the name of Cede & Co. or any
other relevant Person, as nominee of the Depositary (such nominee being referred
to herein as the "GLOBAL NOTE HOLDER").
(b) Notes offered and sold to QIB's shall be issued
initially in the form of two Global Notes, one in the principal amount of
$____________ (the "QIB PERMANENT GLOBAL NOTE") and the second in the principal
amount of $__________ (the "QIB CONVERTIBLE GLOBAL NOTE," together with the QIB
Permanent Global Note, the "QIB NOTES"), and Notes offered and sold to persons
or entities that are note QIB's ("NON-QIBS") shall be issued initially in the
form of two Global Notes, one in the principal amount of $____________ (the
"NON-QIB PERMANENT GLOBAL NOTE") and the second in the principal amount of
$__________ (the "NON-QIB
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CONVERTIBLE GLOBAL NOTE," together with the Non-QIB Permanent Global Note, the
"NON-QIB NOTES," and each Global Note referred to in this sentence, a "GLOBAL
NOTE").
Section 3.2 Amount.
The aggregate principal amount of Notes which may be
authenticated and delivered under this Indenture is $____________
(__________________), except as for Notes authenticated and delivered pursuant
to Section 3.5, 3.6, 3.7 or 4.2.
The Notes constitute senior obligations of the Company and
shall not be subordinated in right or priority of payment to any existing or
future Indebtedness of the Company.
Section 3.3 Denominations.
The Notes shall be issuable in registered form without coupons
in denominations of $1,000 and any integral multiple thereof.
Section 3.4 Execution, Authentication, Delivery and
Dating.
The Notes shall be executed on behalf of each Obligor by its
Chairman of the Board, its Vice Chairman of the Board, its President or one of
its Vice Presidents, under its corporate seal reproduced thereon attested by its
Secretary or one of its Assistant Secretaries. The signature of any of these
officers on the Notes may be manual or facsimile.
Notes bearing the manual or facsimile signatures of
individuals who were at any time the proper officers of any Obligor shall bind
the Obligor, notwithstanding that such individuals or any of them have ceased to
hold such offices prior to the authentication and delivery of such Notes or did
not hold such offices at the date of such Notes.
At any time and from time to time after the execution and
delivery of this Indenture, the Company may deliver Notes executed by each
Obligor to the Trustee for authentication, together with a Company Order for the
authentication and delivery of such Notes, and the Trustee in accordance with
the Company Order shall authenticate and deliver such Notes.
Each Note shall be dated the date of its authentication.
No Note shall be entitled to any benefit under this Indenture
or be valid or obligatory for any purpose unless there appears on such Note a
certificate of authentication substantially in the form provided for herein
executed by the Trustee by manual signature of an Responsible Officer, and such
certificate upon any Note shall be conclusive evidence, and the only evidence,
that such Note has been duly authenticated and delivered hereunder.
Notwithstanding the foregoing, if any Note shall have been authenticated and
delivered hereunder but never issued and sold by the Company, and the Company
shall deliver such Note to the Trustee for cancellation as provided in Section
3.11, for all purposes of this Indenture such Note shall be deemed never to have
been authenticated and delivered hereunder and shall never be entitled to the
benefits of this Indenture.
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Section 3.5 Temporary Notes.
Pending the preparation of Definitive Notes, the Obligors may
execute, and upon Company Order the Trustee shall authenticate and deliver,
temporary Notes which are printed, lithographed, typewritten, mimeographed or
otherwise produced, in any authorized denomination, substantially of the tenor
of the Definitive Notes in lieu of which they are issued and with such
appropriate insertions, omissions, substitutions and other variations as the
officers executing such Notes may determine, as evidenced by their execution of
such Notes.
If temporary Notes are issued, the Company will cause
Definitive Notes to be prepared without unreasonable delay. After the
preparation of Definitive Notes, the temporary Notes shall be exchangeable for
Definitive Notes upon surrender of the temporary Notes at the office or agency
of the Company in a Place of Payment, without charge to the Holder. Upon
surrender for cancellation of any one or more temporary Notes the Obligors shall
execute and the Trustee shall authenticate and deliver in exchange therefor one
or more Definitive Notes of any authorized denominations and of a like aggregate
principal amount and tenor. Until so exchanged the temporary Notes shall in all
respects be entitled to the same benefits under this Indenture as Definitive
Notes of such tenor.
Section 3.6 Registration; Registration of Transfer and
Exchange.
The Company shall cause to be kept at the Corporate Trust
Office of the Trustee a register (the register maintained in such office being
herein sometimes collectively referred to as the "NOTE REGISTER") in which,
subject to such reasonable regulations as it may prescribe, the Company shall
provide for the registration of Notes and of transfers of Notes. The Trustee is
hereby appointed "Note Registrar" for the purpose of registering Notes and
transfers of Notes as herein provided.
The Trustee shall also maintain a register of Beneficial
Owners of the Notes (the "Beneficial Owner Registry"), which Beneficial Owners
shall be placed thereon upon receipt by the Trustee of written certification of
any such Beneficial Owner as to its beneficial ownership of a specified
principal amount of the Notes accompanied by evidence thereof reasonably
satisfactory to the Trustee and setting forth its address and other information
which will permit the Trustee to communicate with such Beneficial Owners as
required herein and deem such Beneficial Owners as registered holders for
purposes hereof. A copy of any notice sent hereunder to Holders shall also be
sent to the Beneficial Owners on the Beneficial Owner Registry and any consent,
request, direction, approval, objection, or other instrument or action required
or permitted by this Indenture to be executed or taken by any Holder (other than
a transfer or conversion of a Note) shall be fully effective or taken by the
Beneficial Owner thereof on the Beneficial Owner Registry, provided that, in the
event of conflicting instruments executed by the registered Holder and the
Beneficial Owner, the action by the registered Holder shall govern. The Trustee
may presume that the Persons that is enters on the Beneficial Owner Registry are
such Beneficial Owners unless the Trustee receives written notification to the
contrary.
Upon surrender for registration of transfer of any Note at the
office or agency, in a Place of Payment, the Company shall execute, and the
Trustee shall authenticate and deliver, in the name of the designated transferee
or transferees, one or more new Notes of any authorized denominations and of a
like aggregate principal amount and tenor.
At the option of the Holder, Notes may be exchanged for other
Notes of any authorized denominations and of a like aggregate principal amount
and tenor, upon surrender of the Notes to be exchanged at such office or agency.
Whenever any Notes are so surrendered for exchange, the Company shall execute,
and the Trustee shall authenticate and deliver, the Notes which the Holder
making the exchange is entitled to receive.
All Notes issued upon any registration of transfer or exchange
of Notes shall be the valid obligations of the Company, evidencing the same
debt, and entitled to the same benefits under this Indenture, as the Notes
surrendered upon such registration of transfer or exchange.
Every Note presented or surrendered for registration of
transfer or for exchange shall (if so required by the Company or the Trustee) be
duly endorsed, or be accompanied by a
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<PAGE> 39
written instrument of transfer in form satisfactory to the Company and the Note
Registrar duly executed, by the Holder thereof or his attorney duly authorized
in writing.
No service charge shall be made for any registration of
transfer or exchange of Notes, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer or exchange of Notes, other than
exchanges pursuant to Section 3.5, 3.6, 3.7 or 4.2 not involving any transfer.
The Company shall not be required (i) to issue, register the
transfer of or exchange Notes during a period beginning at the opening of
business 15 days before the day of the mailing of a notice of redemption of
Notes selected for redemption under Article Eight and ending at the close of
business on the day of such mailing or (ii) to register the transfer of or
exchange any Note so selected for redemption in whole or in part, except the
unredeemed portion of any Note being redeemed in part.
The Trustee shall also maintain a register of Beneficial
Owners of the Notes (the "Beneficial Owner Registry"), which Beneficial Owners
shall be placed thereon upon receipt by the Trustee of written certification of
any such Beneficial Owner as to its beneficial ownership of a specified
principal amount of the Notes accompanied by evidence thereof reasonably
satisfactory to the Trustee and setting forth its address and other information
which will permit the Trustee to communicate with such Beneficial Owners as
required herein and deem such Beneficial Owners as registered holders for
purposes hereof. A copy of any notice sent hereunder to Holders shall also be
sent to the Beneficial Owners on the Beneficial Owner Registry and any consent,
request, direction, approval, objection, or other instrument or action required
or permitted by this Indenture to be executed or taken by any Holder (other than
a transfer or conversion of a Note) shall be fully effective if executed or
taken by the Beneficial Owner thereof on the Beneficial Owner Registry, provided
that, in the event of conflicting instruments executed by the registered Holder
and the Beneficial Owner, the action by the registered Holder shall govern. The
Trustee may presume that the Persons that is enters on the Beneficial Owner
Registry are such Beneficial Owners unless the Trustee receives written
notification to the contrary.
Section 3.7 Mutilated, Destroyed, Lost and Stolen Notes.
If any mutilated Note is surrendered to the Trustee, the
Obligors shall execute and the Trustee shall authenticate and deliver in
exchange therefor a new Note of like tenor and principal amount and bearing a
number not contemporaneously Outstanding.
If there shall be delivered to the Company and the Trustee (i)
evidence to their satisfaction of the destruction, loss or theft of any Note and
(ii) such indemnity as may be required by them to save each of them and any
agent of either of them harmless, then, in the absence of notice to any Obligor
or the Trustee that such Note has been acquired by a bona fide purchaser, the
Obligors shall execute and the Trustee shall authenticate and deliver, in lieu
of any such destroyed, lost or stolen Note, a new Note of like tenor and
principal amount and bearing a number not contemporaneously Outstanding.
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In case any such mutilated, destroyed, lost or stolen Note has
become or is about to become due and payable, the Obligors in their discretion
may, instead of issuing a new Note, pay such Note.
Upon the issuance of any new Note under this Section, the
Company may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Note issued pursuant to this Section in lieu of any
destroyed, lost or stolen Note shall constitute an original additional
contractual obligation of the Obligors, whether or not the destroyed, lost or
stolen Note shall be at any time enforceable by anyone, and shall be entitled to
all the benefits of this Indenture equally and proportionately with any and all
other Notes duly issued hereunder.
The provisions of this Section are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with respect to
the replacement or payment of mutilated, destroyed, lost or stolen Notes.
Section 3.8 Payment of Interest and Principal;
Additional Interest.
Interest on the Notes shall be payable by the Company in cash
to Holders (i) from the most recent date to which interest has been paid or, if
no interest has been paid, from the Issue Date, on June 15 and December 15 of
each year (each an "Interest Payment Date"), commencing on June 15, 2001, and
(ii) on the Maturity Date (or earlier to the extent provided in Article V
hereof) to the extent accrued but theretofore unpaid. Interest on the Notes
shall be computed on the basis of a 360-day year comprised of twelve 30-day
months.
In the event that the Company is obligated to pay Liquidated
Damages to Holders, the Interest Rate shall be increased for the period during
which the Company is obligated to pay Liquidated Damages by the amount of such
Liquidated Damages and all references herein to interest shall include
Liquidated Damages, if any. The Company shall promptly notify each Holder at its
address as it appears on the Note Register in the event that the Company is
obligated to pay Liquidated Damages to Holders.
In the event that the Company does not obtain the Stockholder
Approvals on or before March 9, 2000 (or as extended), the Interest Rate shall
increase monthly, commencing on March 9, 2000 (or as may be extended pursuant to
Section 12.6 hereof), by 1% per annum, up to a maximum interest rate of 18%
(exclusive of Liquidated Damages, if any), provided that if the Company
subsequently obtains the Stockholders Approvals, the Interest Rate shall revert
as of the date of receipt of such approvals to the amount otherwise payable
hereunder and shall not thereafter reflect any increase in the Interest Rate as
a result of the requirements of this sentence. The Company shall promptly notify
each Holder at its address as it appears on the Note Register and the Trustee in
the event that the Company is obligated to increase the Interest Rate pursuant
to the requirements of this paragraph or in the event the interest rate shall
revert to the amount
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otherwise payable hereunder. The Trustee shall not be required to investigate
whether the Interest Rate is required to change pursuant to this paragraph.
The Person in whose name any Note is registered at the close
of business on any Record Date with respect to any Interest Payment Date
(including any Note that is converted after the Record Date and on or before the
Interest Payment Date) shall receive the interest payable on such Interest
Payment Date notwithstanding the cancellation of such Note upon any transfer,
exchange or conversion subsequent to the Record Date and on or prior to such
Interest Payment Date. Interest shall be paid by check mailed to the address of
such Person on the Note Register, provided that at the request of a Holder in
writing to the Company at least five days prior to the date set for payment of
interest, interest on such Holder's Notes shall be paid by wire transfer in
immediately available funds in accordance with the wire transfer instructions
supplied by such Holder to the Company. Payment of principal, premium, if any,
and interest due on the Notes on the Maturity Date similarly shall be paid by
the Company by check or, at the request of a Holder, wire transfer.
The principal amount or redemption price of this Note shall be
payable upon presentation and surrender of this Note, at the office of the
Trustee in New York, New York or at the office of any other Paying Agent
designated by the Company. The interest on the Notes shall be payable by check
mailed on the Interest Payment Date to the Person in whose name such Note is
registered as of the Regular Record Date, at the address of such Person as shown
on the Note Register maintained by the Trustee, as Note Registrar.
Notwithstanding the foregoing, for so long as the Depositary is the exclusive
registered owner of the Notes, or if the notes are not in book entry as provided
in this Indenture, the principal amount and redemption price of the Notes and
the interest thereon shall be payable by wire transfer in immediately available
funds to the Depositary or such owners (at their request to the Company and the
Trustee in writing at least five days prior to the date set for payment of
principal, redemption price, or interest), without necessity of any immediate
presentation and surrender of the Notes pursuant to the letter of
representations of the Depositary or written instructions from the registered
owner.
Any interest on any Note which is payable, but is not
punctually paid or duly provided for, on any Interest Payment Date (herein
called "Defaulted Interest") shall be paid by the Company, at its election in
each case, as provided in clause (1) or (2) below.
(1) The Company may elect to make payment of any
Defaulted Interest to the Persons in whose names Notes are registered
at the close of business on a special record date (the "SPECIAL RECORD
DATE") for the payment of such Defaulted Interest, which shall be not
more than 15 days and not less than 10 days prior to the date of the
proposed payment. The Company shall cause notice of the proposed
payment of such Defaulted Interest and the special record date therefor
to be mailed, first-class postage prepaid, to each Holder at his
address as it appears in the Note Register not less than 10 days prior
to such special record date. Notice of the proposed payment of such
Defaulted Interest and the special record date therefor having been so
mailed, such Defaulted Interest shall be paid to the Persons in whose
names the Notes were registered at the close of business on
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such special record date and shall no longer be payable pursuant to the
following clause (2).
(2) The Company may make payment of any Defaulted
Interest in any other lawful manner.
Section 3.9 Persons Deemed Owners.
Prior to due presentment of a Note for registration of
transfer, the Obligors, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name such Note is registered as the owner of such
Note for the purpose of receiving payment of principal of and any premium and
any interest on such Note and for all other purposes whatsoever, whether or not
such Note be overdue, and neither the Obligors, the Trustee nor any agent of the
Company or the Trustee shall be affected by notice to the contrary.
So long as the Global Note Holder is the registered owner of
any Notes, the Global Note Holder will be considered the sole Holder under this
Indenture of any Notes evidenced by the Global Note for the purposes of
receiving payment on the Notes, receiving notices, and for all other purposes
under this Indenture and the Notes. Beneficial owners of Notes evidenced by the
Global Note will not be considered the owners or Holders thereof under this
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Obligors nor the Trustee will have any responsibility or liability for any
aspect of the records of the Depositary or for maintaining, supervising or
reviewing any records of the Depositary relating to the Notes.
Section 3.10 Cancellation.
All Notes surrendered for payment, redemption, registration of
transfer or exchange or for credit against any sinking fund payment shall, if
surrendered to any Person other than the Trustee, be delivered to the Trustee
and shall be promptly canceled by it. The Company may at any time deliver to the
Trustee for cancellation any Notes previously authenticated and delivered
hereunder which the Company may have acquired in any manner whatsoever, and may
deliver to the Trustee (or to any other Person for delivery to the Trustee) for
cancellation any Notes previously authenticated hereunder which the Company has
not issued and sold, and all Notes so delivered shall be promptly canceled by
the Trustee. No Notes shall be authenticated in lieu of or in exchange for any
Notes canceled as provided in this Section, except as expressly permitted by
this Indenture. All canceled Notes held by the Trustee shall be disposed of in
accordance with the Trustee's regulations in accordance with the regulations
under the Exchange Act.
Section 3.11 Computation of Interest.
Interest on the Notes shall be computed on the basis of a
360-day year of twelve 30-day months.
Section 3.12 Restrictions on Transfer to Non-QIB's
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No Global or Definitive Note that is held by a QIB on the
issue date may be transferred to a Non-QIB and such notes will bear a legend to
such effect.
ARTICLE FOUR -
BOOK-ENTRY PROVISIONS FOR GLOBAL NOTES
Section 4.1 Applicability of Article.
Each Global Note shall be subject to this Article.
Section 4.2 Book-Entry Provisions For Global Note.
(a) Members of, or participants in, the Depositary
("AGENT MEMBERS") shall have no rights under this Indenture with respect to any
Global Note held on their behalf by the Depositary or under any Global Note, and
the Depositary may be treated by the Company, the Trustee and any agent of the
Company or the Trustee as the absolute owner of any Global Note for all purposes
whatsoever. Any Holder of any Global Note shall, by acceptance of such Global
Note, agree that the transfers of Interests in such Global Note may be effected
only through a book-entry system maintained by the Holder of such Global Note
(or its agent), and that ownership of an Interest in such Global Note shall be
required to be reflected in a book-entry system. Notwithstanding the foregoing,
nothing herein shall prevent the Company, the Trustee or an agent of the Company
or the Trustee from giving effect to any written certification, proxy or other
authorization furnished by the Depositary or impair, as between the Depositary
and its Agent Members, the operation of customary practices governing the
exercise of the rights of a Holder of any Note.
(b) The Depositary must, at the time of its designation
and at all times while it serves as Depositary, be a clearing agency registered
under the Exchange Act and any other applicable statute or regulation.
(c) Notwithstanding any other provision of this Section,
unless and until it is exchanged in whole or in part for individual Notes
represented thereby, a Global Note representing all or a portion of the Notes
may not be transferred except as a whole by the Depositary to a nominee of such
Depositary or by a nominee of such Depositary to such Depositary or another
nominee of such Depositary or by such Depositary or any such nominee to a
successor Depositary or a nominee of such successor Depositary. Interests of
beneficial owners in the Global Notes (each an "INTEREST") may be transferred to
Agent Members or other beneficial owners or exchanged for Definitive Notes in
accordance with the rules and procedures of the Depositary, the provisions of
this Indenture and applicable law.
(d) If specified by the Company pursuant to Section 3.4,
the Depositary may surrender a Global Note in exchange in whole or in part for
Definitive Notes of like tenor and terms on such terms as are acceptable to the
Company, the Trustee and the Depositary. In addition, Definitive Notes shall be
issued to all beneficial owners in exchange for their Interests in Global Notes
if (i) the Depositary for the Notes notifies the Company that the Depositary is
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unwilling or unable to continue as Depositary for the Global Notes or is no
longer eligible to serve as Depositary pursuant to the terms of this Indenture
and a successor Depositary is not appointed by the Company within 90 days after
delivery of such notice; (ii) the Company, at its sole discretion, notifies the
Trustee in writing that it elects to cause the issuance of Definitive Notes
under this Indenture; or (iii) there shall have occurred and be continuing a
Default with respect to any Notes represented by the Global Notes.
(e) In connection with the transfer of any Interest from
one Agent Member to another Agent Member not taking a Definitive Note, but an
Interest, the Depositary shall reflect on its books and records the date. the
name of the transferor and transferee, and the amount of the Interest
transferred.
(f) In connection with the issuance to beneficial owners
of Definitive Notes in exchange for any Global Note pursuant to paragraph (c) or
(h) of this Section, such Global Note shall be deemed to be surrendered to the
Trustee for cancellation, and the Company shall execute and the Trustee upon
receipt of a Company Order for the authentication and delivery of Definitive
Notes shall authenticate and deliver, without service charge:
(i) to the Depositary or to each Person
specified by such Depositary a new Definitive Note or
Definitive Notes of like tenor and terms and of any authorized
denomination as requested by such Person in aggregate
principal amount equal to and in exchange for such Person's
Interest in the Global Note; and
(ii) to such Depositary a new Global Note of like
tenor and terms and in an authorized denomination equal to the
difference, if any, between the principal mount of the
surrendered Global Note and the aggregate principal amount of
Definitive Notes delivered to Holders thereof.
Except as otherwise provided in this Indenture, any
Note authenticated and delivered upon registration of transfer
of, or in exchange for, or in lieu of, any Global Note shall
also be a Global Note and shall bear the legend specified in
Section 2.4 except for any Note authenticated and delivered in
exchange for, or upon registration of transfer of, a Global
Note pursuant to the preceding sentence.
(g) The Holder of any Global Note may grant proxies and
otherwise authorize any person, including Agent Members and persons that may
hold Interests through Agent Members, to take any action which a Holder is
entitled to take under this Indenture or the Notes.
(h) Upon the exchange of any Global Note in its entirety
for Definitive Notes or another Global Note, such Global Note shall be canceled
by the Trustee.
(i) Notwithstanding anything herein to the contrary, if
at any time the Depositary for the Notes notifies the Company that it is
unwilling or unable to continue as a Depositary for the Notes or if at any time
the Depositary for the Notes shall no longer be registered or in good standing
under the Exchange Act, or other. applicable statute or regulation,
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the Company shall appoint a successor Depositary with respect to the Notes. If a
successor Depositary for the Notes is not appointed by the Company within 90
days after the Company receives such notice or becomes aware of such condition,
the Company will execute, and the Trustee, upon Company Request, will
authenticate and deliver Definitive Notes in an aggregate principal amount equal
to the principal amount of the Global Note or Global Notes representing Notes in
exchange for such Global Note or Global Notes.
(j) With respect to Notes registered in the Note Register
in the name of the Depositary or its nominee, the Company and the Trustee shall
have no responsibility or obligation to any Agent Member. Without limiting the
immediately preceding sentence, the Company and the Trustee shall have no
responsibility or obligation with respect to (a) the accuracy of the records of
the Depositary or any Agent Member with respect to any ownership interest in the
Notes, (b) the delivery to any Agent Member or any other Person, other than a
Holder, as shown in the Note Register or a Beneficial Owner, of any notice with
respect to the Notes, including any notice of redemption, (c) the payment to any
Agent Member or any other Person, other than a Holder as shown in the Note
Register or a Beneficial Owner, of any amount with respect to principal of,
premium, if any, or interest or Additional Interest on, the Notes or (d) any
consent given by the Depositary as registered owner. So long as certificates for
the Notes are registered in book entry in the name of the Depositary, the
Company and the Trustee shall treat the Depositary or any successor securities
depository as, and deem the Depositary or any successor securities depository to
be, the absolute owner of the Notes, for all purposes whatsoever, including
without limitation (i) the payment of principal and interest or Liquidated
Damages on such Notes (ii) giving notice of redemption and other matters with
respect to the Notes, (iii) registering transfers with respect to the Notes and
(iv) the selection of Notes for redemption. While the Notes are in the book
entry as provided in this Section, no Person other than the Depositary or its
nominee, or any successor thereto, as nominee for the Depositary shall receive a
Note certificate with respect to any Note. Notwithstanding any other provision
of this Indenture to the contrary, so long as any of the Notes are registered in
the name of the Depositary or its nominee, all payments with respect to
principal of, premium, if any, and interest and Additional Interest on such
Notes and all notices with respect to such Notes shall be made and given,
respectively, in the manner provided in the representation letter or other
agreement with the Depositary in regard to the Notes.
Section 4.3 Special Transfer Provisions.
(a) Transfers to QIBs. With respect to any proposed
transfer to a QIB of any Definitive Note:
(i) in the case of the transfer of any
Definitive Note, the Note Registrar shall register the
transfer only upon receipt of instructions in accordance with
the Depositary's and the Note Registrar's procedures and only
if (y) the transferor has delivered to the Note Registrar a
certificate substantially in the form of Annex A hereto; and
(ii) With respect to all such transfers, (A) the
Note Registrar shall reflect on its books and records the date
of such transfer, (B) if the transfer affects
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a Global Note, the Company shall execute, and the Trustee
shall authenticate and deliver to the Depositary, a new Global
Note or Global Notes in a principal amount as appropriate to
reflect such transfer, and (C) if the transfer is of a
Definitive Note, the transferred Definitive Note shall be
cancelled and, if the entire amount of such Definitive Note
was not transferred, a new Definitive Note, in the amount of
the untransferred portion of the original Definitive Note,
shall be executed by the Company, authenticated by the
Trustee, and delivered to such transferor.
(b) The Note Registrar shall retain copies of all
letters, notices and other written communications received pursuant to Section
4.2 or this Section 4.3 in accordance with its usual procedures. The Company
shall have the right to inspect and make copies of all such letters, notices or
other written communications at any reasonable time upon the giving of
reasonable written notice to the Note Registrar.
Interests in a Global Note may be exchanged for a certificated
note or notes (a "DEFINITIVE NOTE"); however, no Global Note may be exchanged
for a Definitive Note prior to day next following the day on which the meeting
of stockholders at which Stockholder Approval is sought, including any
adjournments thereof.
ARTICLE FIVE -
REMEDIES OF HOLDERS ON AN EVENT OF DEFAULT
Section 5.1 Events of Default.
In case one or more of the following Events of Default (whatever the
reason for such Event of Default and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body) shall have occurred and be continuing:
(a) default in the payment of any installment of interest
upon any of the Notes as and when the same shall become due and payable, and
continuance of such default for a period of 30 days; or
(b) default in the payment of the principal of or
premium, if any, on any of the Notes as and when the same shall become due and
payable at maturity of the Notes, by acceleration or otherwise, or in connection
with any redemption pursuant to Article Twelve; or
(c) failure on the part of the Company duly to observe or
perform any other of the covenants or agreements on the part of the Company in
the Agreement or in any of the Related Agreements or the Value Partners
Agreement (other than a covenant or agreement a default in whose performance or
whose breach is elsewhere in this Section 5.1 specifically dealt with) continued
for a period of 60 days after the date on which written notice of such failure,
requiring the Company to remedy the same, shall have been given to the Company
by the Trustee
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or by the registered holders of at least 25% in aggregate principal amount of
the Notes and the Convertible Notes, considered as a single class, at the time
Outstanding; or
(d) failure of the Company or any Subsidiary of the
Company to make any payment, including any applicable grace period, in respect
of principal or interest on any Indebtedness which default shall have resulted
in Indebtedness in an amount in excess of $1,000,000; or
(e) default by the Company or a Subsidiary of the Company
with respect to any Indebtedness of the Company or such Subsidiary, which
default results in acceleration of any such Indebtedness which is in an amount
in excess of $1,000,000 without such Indebtedness having been discharged, or
such acceleration having been rescinded or annulled, within the applicable grace
period; or
(f) the entry by a court having jurisdiction in the
premises of a final judgment, decree or order against the Company or any
Subsidiary of the Company which shall require the payment by the Company or any
Subsidiary of the Company of an amount (to the extent not covered by insurance)
in excess of $1,000,000 and the continuance of any such judgment, decree or
order unstayed or unsatisfied and in effect for a period of 60 consecutive days
which is not being contested in good faith by appropriate judicial proceedings;
or
(g) the Company or any Subsidiary that is a Significant
Subsidiary of the Company shall commence a voluntary case or other proceeding
seeking liquidation, reorganization or other relief with respect to itself or
its debts under any bankruptcy, insolvency or other similar law now or hereafter
in effect or seeking the appointment of a trustee, receiver, liquidator,
custodian or other similar official of it or any substantial part of its
property, or shall consent to any such relief or to the appointment of or taking
possession by any such official in an involuntary case or other proceeding
commenced against it, or shall make a general assignment for the benefit of
creditors, or shall fail generally to pay its debts as they become due; or
(h) an involuntary case or other proceeding shall be
commenced against the Company or any Subsidiary that is a Significant Subsidiary
of the Company seeking liquidation, reorganization or other relief with respect
to it or its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial part of
its property, and such involuntary case or other proceeding shall remain
undismissed and unstayed for a period of 60 consecutive days; or
(i) failure on the part of the Company duly to observe or
perform any of the covenants or agreements of the Company in any of the
Collateral Documents continued for a period of 10 days after the date on which
written notice of such failure, requiring the Company to remedy the same, shall
have been given to the Company by the Trustee or by the registered holders of at
least 25% in aggregate principal amount of the Notes and the Convertible Notes,
considered as a single class, at the time Outstanding; or
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(j) any of the Collateral Documents after delivery
thereof shall for any reason, except to the extent permitted by the terms
thereof, cease to be in full force and effect and valid, binding and enforceable
against the Company in all material respects in accordance with their terms, or
cease in any material respect to create a valid and perfected Lien of the
priority required thereby on any of the collateral purported to be covered
thereby, or the Company shall so state in writing, and such default shall
continue unremedied for a period of 10 days; or
(k) default by the Company with respect to any of its
obligations contained in Sections 12.4 through 12.8 hereof; or
(l) default by the Company with respect to any of its
obligations contained in Section 9.23 hereof, unless waived pursuant to Section
5.5 hereof within 10 calendar days thereafter;
(m) any annual audited financial statement of the Company
is qualified as to going concern or similar qualifications;
then, and in each and every such case (other than an Event of Default specified
in Section 5.1(g) or (h)), unless the principal of all of the Notes shall have
already become due and payable, the registered holders of not less than 25% in
aggregate principal amount of the Notes and the Convertible Notes, considered as
a single class, then Outstanding, by notice in writing to the Trustee, may
declare the principal of all the Notes and the interest accrued thereon to be
due and payable immediately, without presentment, demand, protest, notice of
protest or dishonor, notice of intent to accelerate or other notice of default
of any kind, all of which are expressly waived by the Company, and upon any such
declaration the same shall become and shall be immediately due and payable,
anything herein contained to the contrary notwithstanding.
If an Event of Default specified in Section 5.1(g) or (h) occurs, the
principal of all the Notes and the interest accrued thereon shall be immediately
and automatically due and payable without presentment, demand, protest, notice
of protest or dishonor, notice of intent to accelerate or other notice of
default of any kind, all of which are expressly waived by the Company.
Section 5.2 Payment of Notes on Default; Suit Therefor.
(a) The Company covenants that (1) in case default shall
be made in the payment of any installment of interest upon any of the Notes as
and when the same shall become due and payable, and such default shall have
continued for a period of 30 days, or (2) in case default shall be made in the
payment of the principal of or premium, if any, on any of the Notes as and when
the same shall have become due and payable, whether at maturity of the Notes or
in connection with any redemption or repurchase hereunder, by declaration or
otherwise, then the Company will pay to the Holders the whole amount that then
shall have become due and payable on the Notes for principal and premium, if
any, or interest, or both, as the case may be, with interest upon the overdue
principal and premium, if any, and (to the extent that payment of such interest
is enforceable under applicable law) upon the overdue installments of interest
at the rate then borne by the Notes and, in addition thereto, such further
amount as shall be sufficient to cover the costs and expenses of collection.
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(b) If the Company fails to pay such amounts forthwith
upon such demand, the Trustee, in its own name and as trustee of an express
trust, may (or, at the direction of registered holders of not less than 25% of
the aggregate principal amount of the Notes and the Convertible Notes,
considered as a single class, then Outstanding, shall), in addition to any other
remedies available to it, institute a judicial proceeding for the collection of
the sums so due and unpaid and may prosecute such proceeding to judgment or
final decree, and may enforce the same against the Company or any other obligor
upon the Notes and collect the moneys adjudged or decreed to be payable in the
manner provided by law out of the property of the Company or any other obligor
upon the Notes, wherever situated. If an Event of Default with respect to Notes
occurs and is continuing, the Trustee may in its discretion proceed to protect
and enforce its rights and the rights of the Holders of Notes by such
appropriate judicial proceedings as the Trustee shall deem most effectual to
protect and enforce any such rights, whether for the specific enforcement of any
covenant or agreement in this Indenture or in aid of the exercise of any power
granted herein, or to enforce any other proper remedy.
(c) In case of any judicial proceeding relative to the
Company (or any other Obligor upon the Notes), its property or its creditors,
the Trustee shall be entitled and empowered, by intervention in such proceeding
or otherwise, to take any and all actions authorized under the Trust Indenture
Act in order to have claims of the Holders and the Trustee allowed in any such
proceeding. In particular, the Trustee shall be authorized to collect and
receive any moneys or other property payable or deliverable on any such claims
and to distribute the same; and any custodian, receiver, assignee, trustee,
liquidator, sequestrator or other similar official in any such judicial
proceeding is hereby authorized by each Holder to make such payments to the
Trustee and, in the event that the Trustee shall consent to the making of such
payments directly to the Holders, to pay to the Trustee any amount due it for
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 6.7.
(d) No provision of this Indenture shall be deemed to
authorize the Trustee to authorize or consent to or accept or adopt on behalf of
any Holder any plan of reorganization, arrangement, adjustment or composition
affecting the Notes or the rights of any Holder thereof or to authorize the
Trustee to vote in respect of the claim of any Holder in any such proceeding;
provided, however, the Trustee may vote on behalf of the Holders for the
election of a trustee in bankruptcy or similar official and may be a member of a
creditors' or other similar committee.
(e) All rights of action and claims under this
Indenture or the Notes may be prosecuted and enforced by the Trustee without the
possession of any of the Notes or the production thereof in any proceeding
relating thereto, and any such proceeding instituted by the Trustee shall be
brought in its own name as trustee of an express trust, and any recovery of
judgment shall, after provision for the payment of the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel, be
for the ratable benefit of the Holders of the Notes in respect of which such
judgment has been recovered.
(f) In the case there shall be pending proceedings for
the bankruptcy or for the reorganization of the Company under Title 11 of the
United States Code, or any other applicable law, or in case a receiver, assignee
or trustee in bankruptcy or reorganization, liquidator,
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sequestrator or similar official shall have been appointed for or taken
possession of the Company, the property of the Company, or in the case of any
other judicial proceedings relative to the Company or to the creditors or
property of the Company, the Trustee shall be entitled to and shall,
irrespective of whether the principal of the Notes shall then be due and payable
as herein expressed or by declaration or otherwise, shall be entitled and
empowered, by intervention in such proceedings or otherwise, file and prove a
claim or claims for the whole amount of principal, premium, if any, and interest
owing and unpaid in respect of the Notes, and, in case of any judicial
proceedings, to file such proofs of claim and other papers or documents as may
be necessary or advisable in order to have the claims of the Holders allowed in
such judicial proceedings relative to the Company or its creditors or its
property, and shall be entitled to collect and receive any monies or other
property payable or deliverable on any such claims.
Section 5.3 Application of Monies Collected.
Subject to the terms of the Intercreditor Agreement, and Section 9.20
hereof, any monies collected by or on behalf of a Holder pursuant to this
Article V shall be applied in the following order:
First, to reimbursement of expenses and indemnities provided in Section
6.7 of this Indenture, the Agreement, the Value Partners Agreement, the Notes,
the Convertible Notes and the Collateral Documents;
Second, in case the principal of the Notes then Outstanding shall not
have become due and be unpaid, to the payment of interest on the Notes in
default in the order of the maturity of the installments of such interest, with
interest upon the overdue installments of interest at the rate then borne by the
Notes, such payments to be made ratably to the Holders entitled thereto;
Third, in case the principal of the Notes then Outstanding shall have
become due, by declaration or otherwise, and be unpaid, to the payment of the
whole amount then owing and unpaid upon the Notes for principal and premium, if
any, and interest, with interest on the overdue principal and premium, if any,
and upon overdue payments of interest at the rate then borne by the Notes, and
in case such monies shall be insufficient to pay in full the whole amounts so
due and unpaid upon the Notes, then to the payment of such principal and
premium, if any, and interest without preference or priority of principal and
premium, if any, over interest, or of interest over principal and premium, if
any, or of any installment of interest over any other installment of interest,
or of any Note over any other Note, ratably to the aggregate of such principal
and premium, if any, and accrued and unpaid interest; and
Fourth, to the payment of the remainder, if any, to the Company or any
other Person lawfully entitled thereto.
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Section 5.4 Remedies Cumulative and Continuing.
Except as provided in the last paragraph of Section 3.7, all powers and
remedies given by this Article V to a Holder shall, to the extent permitted by
law, be deemed cumulative and not exclusive of any thereof or of any other
powers and remedies available to a Holder by judicial proceedings or otherwise,
to enforce the performance or observance of the covenants and agreements
contained herein, and no delay or omission of any Holder of any of the Notes to
exercise any right or power accruing upon an Event of Default shall impair any
such right or power, or shall be construed to be a waiver of any such default or
any acquiescence therein and every power and remedy given herein, by the
Collateral Documents or by law to the Holders may be exercised from time to
time, and as often as shall be deemed expedient, by the Holders.
Section 5.5 Waiver of Defaults by Holders.
Except as provided in the next sentence, the registered holders of a
majority in aggregate principal amount of the Notes and the Convertible Notes,
considered as a single class, at the time Outstanding may on behalf of the
Holders of all of the Notes waive any past Default or Event of Default hereunder
and its consequences, except (i) a default in the payment of interest or
premium, if any, on, or the principal of, the Notes, (ii) a failure by the
Company to convert any Notes into Common Stock in accordance with the provisions
hereof, (iii) a default in the payment of the Redemption Price or the Repurchase
Price pursuant to Article Twelve or (iv) a default in respect of a covenant or
provision hereof which under Article Eight cannot be modified or amended without
the consent of the Holder of each Note affected thereby. Notwithstanding the
foregoing, the registered holders of at least 70% in aggregate principal amount
of the Notes and the Convertible Notes, considered as a single class, at the
time Outstanding shall be required on behalf of the Holders of all the Notes to
waive any past Default or Event of Default under any of the Supermajority
Covenants. Upon any waiver pursuant to this Section 5.5, the Company and the
Holders shall be restored to their former positions and rights hereunder, but no
such waiver shall extend to any subsequent or other Default or Event of Default
or impair any right consequent thereon. Whenever any Default or Event of Default
hereunder shall have been waived as permitted by this Section 5.5, said Default
or Event of Default shall for all purposes of the Notes be deemed to have been
cured and to be not continuing, but no such waiver shall extend to any
subsequent or other Default or Event of Default or impair any right consequent
thereon.
Section 5.6 Limitation on Suits
No Holder of any Note shall have any right to institute any
proceeding, judicial or otherwise, with respect to this Indenture, or for the
appointment of a receiver or trustee, or for any other remedy hereunder, unless
(a) such Holder has previously given written notice to
the Trustee of a continuing Event of Default with respect to the Notes;
(b) the registered holders of not less than 25% in
aggregate principal amount of the Notes and the Convertible Notes, considered as
a single class, then Outstanding shall have
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made written request to the Trustee to institute proceedings in respect of such
Event of Default in its own name as Trustee hereunder,
(c) such Holder or Holders have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities to
be incurred in compliance with such request;
(d) the Trustee for 60 days after its receipt of such
notice, request and offer of indemnity has failed to institute any such
proceeding; and
(e) no direction inconsistent with such written
request has been given to the Trustee during such 60-day period by the
registered holders of a majority in aggregate principal amount of the Notes and
the Convertible Notes, considered as a single class, then Outstanding;
it being understood and intended that no one or more of such Holders shall have
any right in any manner whatever by virtue of, or by availing of, any provision
of this Indenture to affect, disturb or prejudice the rights of any other of
such Holders, or to obtain or to seek to obtain priority or preference over any
other of such Holders or to enforce any right under this Indenture, except in
the manner herein provided and for the equal and ratable benefit of all of such
Holders.
Section 5.7 Control by Holders
The registered holders of a majority of the aggregate
principal amount of the Notes and the Convertible Notes, considered as a single
class, then Outstanding shall have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred on the Trustee, with respect to the
Notes, provided that
(a) such direction shall not be in conflict with any
rule of law or with this Indenture,
(b) the Trustee may take any other action deemed
proper by the Trustee which is not inconsistent with such direction, and
(c) subject to the provisions of Section 6.1, the
Trustee shall have the right to decline to follow any such direction if the
Trustee in good faith shall, by a Responsible Officer or Officers of the
Trustee, determine that the proceeding so directed would be unduly prejudicial
to the rights of any other Holder or would involve the Trustee in personal
liability.
ARTICLE SIX -
THE TRUSTEE
Section 6.1 Certain Duties and Responsibilities.
The duties and responsibilities of the Trustee shall be as
provided by the Trust Indenture Act. Whether or not therein expressly so
provided, every provision of this Indenture
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relating to the conduct or affecting the liability of or affording protection to
the Trustee shall be subject to the provisions of this Section. If an Event of
Default occurs (and is not cured), the Trustee, in the exercise of its power,
must use the degree of care of a prudent man in the conduct of his own affairs.
Subject to the requirement in the foregoing sentence, the Trustee is under no
obligation to exercise any of its rights or powers under this Indenture at the
request of any Holder, unless such Holder shall have offered to the Trustee
security and indemnity satisfactory to it against any loss, liability or expense
and then only to the extent required by the terms of this Indenture.
Section 6.2 Notice of Defaults.
If a Default occurs and is continuing and is known to the Trustee, the
Trustee shall mail to each Holder notice of the Default within 60 days after it
occurs. Except in the case of a Default in the payment of principal of, premium,
if any, or interest on any Note, the Trustee may withhold notice if and so long
as a committee of its trust officers determines that withholding notice is not
opposed to the interest of the Holders. The Trustee shall not be deemed to have,
or be required to take, notice of Default or Event of Default under this
Indenture except any default under Section 5.1(a) or (b) hereof or in the event
of written notification of such Default or Event of Default by the owners of any
of the Notes, and in the absence of such notice the Trustee may conclusively
presume there is no default except as aforesaid. The Trustee may nevertheless
require the Company to furnish information regarding performance of its
obligations under this Indenture, but is not obligated or does not have a duty
to the Holders to do so.
Section 6.3 Certain Rights of Trustee.
Subject to the provisions of Section 6.1:
(a) the Trustee may rely and shall be protected in
acting or refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond,
debenture, note, other evidence of indebtedness or other paper or document
believed by it to be genuine and to have been signed or presented by the proper
party or parties;
(b) any request or direction of any Obligor mentioned
herein shall be sufficiently evidenced by a Company Request or Company Order and
any resolution of the Board of Directors of any Obligor may be sufficiently
evidenced by a Board Resolution;
(c) whenever in the administration of this Indenture
the Trustee shall deem it desirable that a matter be proved or established prior
to taking, suffering or omitting any action hereunder, the Trustee (unless other
evidence be herein specifically prescribed) may, in the absence of bad faith on
its part, rely upon an Officers' Certificate;
(d) the Trustee may consult with counsel and the
advice of such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or omitted
by it hereunder in good faith and in reliance thereon;
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(e) the Trustee shall be under no obligation to
exercise any of the rights or powers vested in it by this Indenture at the
request or direction of any of the Holders pursuant to this Indenture, unless
such Holders shall have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which might be incurred by it in
compliance with such request or direction;
(f) the Trustee shall not be bound to make any
investigation into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction, consent,
order, bond, debenture, note, other evidence of indebtedness or other paper or
document, but the Trustee, in its discretion, may make such further inquiry or
investigation into such facts or matters as it may see fit, and, if the Trustee
shall determine to make such further inquiry or investigation, it shall be
entitled to examine the books, records and premises of the Company, personally
or by agent or attorney, and
(g) the Trustee may execute any of the trusts or
powers hereunder or perform any duties hereunder either directly or by or
through agents or attorneys and the Trustee shall not be responsible for any
misconduct or negligence on the part of any agent or attorney appointed with due
care by it hereunder.
Section 6.4 Not Responsible for Recitals or Issuance of
Notes.
The recitals contained herein and in the Notes, except the
Trustee's certificate of authentication, shall be taken as the statements of the
Company, and the Trustee or any Authenticating Agent assumes no responsibility
for their correctness. The Trustee makes no representations as to the validity
or sufficiency of this Indenture or of the Notes. The Trustee or any
Authenticating Agent shall not be accountable for the use or application by the
Company of Notes or the proceeds thereof.
Section 6.5 May Hold Notes.
The Trustee, any Authenticating Agent, any Paying Agent, any
Note Registrar or any other agent of the Company, in its individual or any other
capacity, may become the owner or pledgee of Notes and, subject to Sections 6.8
and 6.13, may otherwise deal with the Company with the same rights it would have
if it were not Trustee, Authenticating Agent, Paying Agent, Note Registrar or
such other agent.
Section 6.6 Money Held in Trust.
Money held by the Trustee in trust hereunder need not be
segregated from other funds except to the extent required by law. The Trustee
shall be under no liability for interest on any money received by it hereunder
except as otherwise agreed with the Company.
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Section 6.7 Compensation and Reimbursement.
The Company agrees:
(a) to pay to the Trustee from time to time reasonable
compensation for all services rendered by it hereunder (which compensation shall
not be limited by any provision of law in regard to the compensation of a
trustee of an express trust);
(b) except as otherwise expressly provided herein, to
reimburse the Trustee upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Trustee in accordance with
any provision of this Indenture (including the reasonable compensation and the
expenses and disbursements of its agents and counsel), except any such expense,
disbursement or advance as may be attributable to its negligence or bad faith;
(c) to indemnify the Trustee for, and to hold it
harmless against, any loss, liability, or expense incurred without negligence or
bad faith on its part, arising out of or in connection with the acceptance or
administration of the trust or trusts hereunder, including the reasonable costs
and expenses of defending itself against any claim or liability in connection
with the exercise or performance of any of its powers or duties hereunder, and
(d) when the Trustee incurs any expenses or renders
any services after the occurrence of an Event of Default specified in Section
5.1(g) such expenses and the compensation for such services are intended to
constitute expenses of administration under the Bankruptcy Code or any similar
federal or state law for the relief of debtors.
As security for the performance of the obligations of the
Company under this Section, the Trustee shall have a lien prior to the Notes
upon all property and funds held or collected by the Trustee as such, except
funds (i) held in trust for the payment of principal of and interest on Notes or
(ii) held in the Trustee's capacity as Paying Agent.
The obligations of the Company under this Section to
compensate and indemnify the Trustee and each predecessor Trustee and to pay or
reimburse the Trustee and each predecessor Trustee for expenses, disbursements
and advances shall constitute an additional obligation hereunder and shall
survive the satisfaction and discharge of this Indenture and the resignation or
removal of the Trustee and each predecessor Trustee.
Section 6.8 Disqualification; Conflicting Interests.
If the Trustee has or shall acquire a conflicting interest
within the meaning of the Trust Indenture Act, the Trustee shall either
eliminate such interest or resign, to the extent and in the manner provided by,
and subject to the provisions of, the Trust Indenture Act and this Indenture.
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Section 6.9 Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder which shall be
a Person that is eligible pursuant to the Trust Indenture Act to act as such and
has a combined capital and surplus of at least $100,000,000. If such Person
publishes reports of condition at least annually, pursuant to law or to the
requirements of said supervising or examining authority, then for the purposes
of this Section, the combined capital and surplus of such Person shall be deemed
to be its combined capital and surplus as set forth in its most recent report of
condition so published. If at any time the Trustee shall cease to be eligible in
accordance with the provisions of this Section, it shall resign immediately in
the manner and with the effect hereinafter specified in this Article.
Section 6.10 Resignation and Removal; Appointment of
Successor.
(a) No resignation or removal of the Trustee and no
appointment of a successor Trustee pursuant to this Article shall become
effective until the acceptance of appointment by the successor Trustee in
accordance with the applicable requirements of Section 6.11.
(b) The Trustee may resign at any time with respect to
the Notes by giving written notice thereof to the Company. If the instrument of
acceptance by a successor Trustee required by Section 6.11 shall not have been
delivered to the Trustee within 30 days after the giving of such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor Trustee with respect to the
Notes.
(c) The Trustee may be removed at any time with
respect to the Notes by Act of the Holders of a majority in principal amount of
the Notes then Outstanding, delivered to the Trustee and to the Company.
(d) If at any time:
(i) the Trustee shall fail to comply
with Section 6.8 after written request therefor by the Company or
by any Holder who has been a bona fide Holder of a Note for at
least six months, or
(ii) the Trustee shall cease to be
eligible under Section 6.9 and shall fail to resign after written
request therefor by the Company or by any such Holder, or
(iii) the Trustee shall become incapable
of acting or shall be adjudged a bankrupt or insolvent or a
receiver of the Trustee or of its property shall be appointed or
any public officer shall take charge or control of the Trustee or
of its property or affairs for the purpose of rehabilitation,
conservation or liquidation,
then, in any such case, (i) the Company by a Board Resolution may
remove the Trustee with respect to all securities, or (ii) subject to Section
5.14, any Holder who has been a bona fide Holder of a Note for at least six
months may, on behalf of himself and all others
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similarly situated, petition any court of competent jurisdiction for the removal
of the Trustee with respect to all Notes and the appointment of a successor
Trustee or Trustees.
(e) If the Trustee shall resign, be removed or become
incapable of acting, or if a vacancy shall occur in the office of Trustee for
any cause, with respect to the Notes, the Company, by a Board Resolution, shall
promptly appoint a successor Trustee or Trustees with respect to the Notes and
shall comply with the applicable requirements of Section 6.11. If, within one
year after such resignation, removal or incapability, or the occurrence of such
vacancy, a successor Trustee with respect to the Notes shall be appointed by Act
of the Holders of a majority in principal amount of the Notes then Outstanding
delivered to the Company and the retiring Trustee, the successor Trustee so
appointed shall, forthwith upon its acceptance of such appointment in accordance
with the applicable requirements of Section 6.11, become the successor Trustee
with respect to the Notes and to that extent supersede the successor Trustee
appointed by the Company. If no successor Trustee with respect to the Notes
shall have been so appointed by the Company or the Holders and accepted
appointment in the manner required by Section 6.1l, any Holder who has been a
bona fide Holder of a Note for at least six months may, on behalf of himself and
all others similarly situated, petition any court of competent jurisdiction for
the appointment of a successor Trustee with respect to the Notes.
(f) The Company shall give notice of each resignation
and each removal of the Trustee with respect to the Notes and each appointment
of a successor Trustee with respect to the Notes to all Holders of Notes in the
manner provided in Section 1.6. Each notice shall include the name of the
successor Trustee with respect to the Notes and the address of its Corporate
Trust Office.
Section 6.11 Acceptance of Appointment by Successor.
(a) In case of the appointment hereunder of a
successor Trustee with respect to the Notes, every such successor Trustee so
appointed shall execute, acknowledge and deliver to the Company and to the
retiring Trustee an instrument accepting such appointment, and thereupon the
resignation or removal of the retiring Trustee shall become effective and such
successor Trustee, without any further act, deed or conveyance, shall become
vested with all the rights, powers, trusts and duties of the retiring Trustee;
but, on the request of the Company or the successor Trustee, such retiring
Trustee shall, upon payment of its charges, execute and deliver an instrument
transferring to such successor Trustee all the rights, powers and trusts of the
retiring Trustee and shall duly assign, transfer and deliver to such successor
Trustee all property and money held by such retiring Trustee hereunder.
(b) Upon request of any such successor Trustee, the
Company shall execute any and all instruments for more fully and certainly
vesting in and confirming to such successor Trustee all such rights, powers and
trusts referred to in paragraph (a) of this Section.
(c) No successor Trustee shall accept its appointment
unless at the time of such acceptance such successor Trustee shall be qualified
and eligible under this Article.
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Section 6.12 Merger, Conversion, Consolidation or
Succession to Business.
Any corporation into which the Trustee may be merged or
convened or with which it may be consolidated, or any corporation resulting from
any merger, conversion or consolidation to which the Trustee shall be a party,
or any corporation succeeding to all or substantially all the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided such corporation shall be otherwise qualified and eligible under this
Article, without the execution or filing of any paper or any further act on the
part of any of the parties hereto. In case any Notes shall have been
authenticated, but not delivered, by the Trustee then in office, any successor
by merger, conversion or consolidation to such authenticating Trustee may adopt
such authentication and deliver the Notes so authenticated with the same effect
as if such successor Trustee had itself authenticated such Notes.
Section 6.13 Preferential Collection of Claims Against
Company.
If and when the Trustee shall be or become a creditor of the
Company (or any other obligor upon the Notes), the Trustee shall be subject to
the provisions of the Trust Indenture Act regarding the collection of claims
against the Company (or any such other obligor).
Section 6.14 Appointment of Authenticating Agent.
The Trustee may appoint an Authenticating Agent or Agents
(which may be an affiliate of the Company) with respect to the Notes which shall
be authorized to act on behalf of the Trustee to authenticate Notes issued upon
original issue and upon exchange, registration of transfer or partial redemption
thereof or pursuant to Section 3.7, and Notes so authenticated shall be entitled
to the benefits of this Indenture and shall be valid and obligatory for all
purposes as if authenticated by the Trustee hereunder. Wherever reference is
made in this Indenture to the authentication and delivery of Notes by the
Trustee or the Trustee's certificate of authentication, such reference shall be
deemed to include authentication and delivery on behalf of the Trustee by an
Authenticating Agent and a certificate of authentication executed on behalf of
the Trustee by an Authenticating Agent. Each Authenticating Agent shall be
acceptable to the Company and shall at all times be a corporation organized and
doing business under the laws of the United States of America, any state thereof
or the District of Columbia, authorized under such laws to act as Authenticating
Agent, having a combined capital and surplus of not less than $100,000,000 and
subject to supervision or examination by federal or state authority. If such
Authenticating Agent publishes reports of condition at least annually, pursuant
to law or to the requirements of said supervising or examining authority, then
for the purposes of this Section, the combined capital and surplus of such
Authenticating Agent shall be deemed to be its combined capital and surplus as
set forth in its most recent report of condition so published. If at any time an
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, such Authenticating Agent shall resign immediately
in the manner and with the effect specified in this Section.
Any corporation into which an Authenticating Agent may be
merged or converted or with which it may be consolidated, or any corporation
resulting from any merger, conversion or consolidation to which such
Authenticating Agent shall be a party, or any corporation
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succeeding to the corporate agency or corporate trust business of an
Authenticating Agent, shall continue to be an Authenticating Agent, provided
such corporation shall be otherwise eligible under this Section, without the
execution or filing of any paper or any further act on the part of the Trustee
or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving
written notice thereof to the Trustee and to the Company. The Trustee may at any
time terminate the agency of an Authenticating Agent by giving written notice
thereof to such Authenticating Agent and to the Company. Upon receiving such a
notice of resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, the Trustee may appoint a successor Authenticating
Agent which shall be acceptable to the Company and shall mail written notice of
such appointment by first-class mail, postage prepaid, to all Holders of Notes
with respect to which such Authenticating Agent will serve, as their names and
addresses appear in the Note Register. Any successor Authenticating Agent upon
acceptance of its appointment hereunder shall become vested with all the rights,
powers and duties of its predecessor hereunder, with like effect as if
originally named as an Authenticating Agent. No successor Authenticating Agent
shall be appointed unless eligible under the provisions of this Section.
Unless the Authenticating Agent has been appointed by the
Trustee at the request of the Company, the Trustee agrees to pay to each
Authenticating Agent from time to time reasonable compensation for its services
under this Section, and the Trustee shall be entitled to be reimbursed for such
payments, subject to the provisions of Section 6.7.
If an appointment is made pursuant to this Section, the Notes
may have endorsed thereon, in addition to the Trustee's certificate of
authentication, an alternative certificate of authentication in the following
form:
This is one of the Notes designated and referred to in the
within-mentioned Indenture.
________________________________, as Trustee
By:_____________________________
As Authenticating Agent
By:_____________________________
Authorized Officer
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ARTICLE SEVEN -
LISTS OF HOLDERS OF NOTES AND CONVERTIBLE NOTES AND REPORTS BY TRUSTEE AND
COMPANY
Section 7.1 Company to Furnish Trustee Names and
Addresses of Holders of Notes and Convertible Notes.
(a) The Company will furnish or cause to be furnished
to the Trustee:
(i) semi-annually, not later than five
Business Days after each Record Date, a list, in such form as the
Trustee may reasonably require, of the names and addresses of
each of (x) the Holders of Notes and (y) the Beneficial Owners as
of such Record Date, and
(ii) at such other times as the Trustee
may request in writing, within 30 days after the receipt by the
Company of any such request, lists of similar form and content as
of a date not more than 15 days prior to the time such list is
furnished;
excluding from any such list names and addresses received by
the Trustee in its capacity as Note Registrar.
(b) If and whenever the Company or any Affiliate of
the Company acquires any Notes, the Company shall within 10 Business Days after
such acquisition by the Company and within 10 Business Days after the date on
which it obtains knowledge of any such acquisition by an Affiliate of the
Company, provide the Trustee with written notice of such acquisition, the
aggregate principal amount acquired (to the extent known by the Company), the
Holder from whom such Notes were acquired and the date of such acquisition.
(c) The Company will furnish or cause to be furnished
to the Trustee:
(i) semi-annually, not later than five
Business Days after each Record Date, list, in such form as the
trustee may reasonably require, of the names and addresses of
each of the record and the beneficial owners of the Convertible
Notes, as reflected in the Convertible Note Registries, as of
such Record Date; and
(ii) at such other times as the Trustee
may request in writing, within 30 days after the receipt by the
Company of any such request, lists of similar form and content as
of a date not more than 15 days prior to the time such list is
furnished.
(d) If and whenever the Company or any Affiliate of
the Company acquires any Convertible Notes, the Company shall within 10 Business
Days after such acquisition by the Company and within 10 Business Days after the
date on which it obtains knowledge of any such acquisition by an Affiliate of
the Company, provide the Trustee with written notice of such acquisition, the
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aggregate principal amount acquired (to the extent known by the Company), the
holder from whom such Convertible Notes were acquired and the date of such
acquisition.
Section 7.2 Preservation of Information; Communications
to Holders.
(a) The Trustee shall preserve, in as current a form
as is reasonably practicable, the names and addresses of Holders contained in
the most recent list furnished to the Trustee as provided in Section 7.1 and the
names and addresses of Holders received by the Trustee in its capacity as Note
Registrar. The Trustee may destroy any list furnished to it as provided in
Section 7.1 upon receipt of a new list so furnished.
(b) The rights of the Holders to communicate with
other Holders with respect to their rights under this Indenture or under the
Notes, and the corresponding rights and privileges of the Trustee, shall be as
provided by the Trust Indenture Act.
(c) Every Holder of Notes, by receiving and holding
the same, agrees with the Company and the Trustee that neither the Company nor
the Trustee nor any agent of either of them shall be held accountable by reason
of any disclosure of information as to names and addresses of Holders made
pursuant to the Trust Indenture Act.
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Section 7.3 Reports by Trustee.
(a) The Trustee shall transmit to Holders such reports
concerning the Trustee and its actions under this Indenture as may be required
pursuant to the Trust Indenture Act at the times and in the manner provided
pursuant thereto. To the extent that any such report is required by the Trust
Indenture Act with respect to any 12-month period, such report shall cover the
12-month period ending December 31 and shall be transmitted by the next
succeeding March 1.
(b) A copy of each such report shall, at the time of
such transmission to Holders, be filed by the Trustee with each stock exchange
upon which any Notes are listed, with the Commission and with the Company. The
Company will notify the Trustee when any Notes are listed on any stock exchange.
Section 7.4 Reports by Company.
The Company shall file with the Commission and shall furnish to
the Trustee and the Holders, within 5 days after it files them with the
Commission, copies of its annual report and the information, documents and other
reports which the Company is required to file with the Commission pursuant to
Section 13 or 15(d) of the Exchange Act. Notwithstanding that the Company may
not be required to remain subject to the reporting requirements of Section 13 or
15(d) of the Exchange Act, the Company shall continue to file with the
Commission and to provide to the Trustee and the Holders the annual reports and
the information, documents and other reports which are specified in Section 13
or 15(d) of the Exchange Act and applicable to a US corporation subject to such
sections, such information, documents and other reports to be filed and provided
at the times specified for the filing of such information, documents and reports
under such section. The Company also shall comply with the other provisions of
ss. 314(a) of the Trust Indenture Act.
Section 7.5 Provision of Reports and Other Documents to
Holders of Convertible Notes.
Notwithstanding any other provision of this Indenture to the contrary,
the Company and the Trustee shall provide to each record and beneficial owner of
a Convertible Note, as reflected in the Convertible Note Registries, at the same
time and in the same manner as is provided to Holders, copies of any notice,
report or other document provided to the Holders hereunder.
ARTICLE EIGHT -
AMENDMENTS, SUPPLEMENTS AND WAIVERS
Section 8.1 Supplemental Indentures with Consent of
Holders.
(a) With the written consent of the registered holders
of a majority in aggregate principal amount of the Notes and the Convertible
Notes, considered as a single class, at the time Outstanding, by Act of such
registered holders delivered to the Company and the Trustee, the Company, when
authorized by a Board Resolution, and the Trustee may enter into an
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indenture or indentures supplemental hereto for the purpose of adding any
provisions to or changing in any manner or eliminating or waiving any of the
provisions of this Indenture or of modifying in any manner the rights of the
Holders under this Indenture; provided, however, that no such supplemental
indenture shall, without the consent of the Holder of each Note affected thereby
(i) extend the fixed maturity of such Note, or reduce the rate or extend the
time of payment of interest thereon, or reduce the principal amount thereof or
premium, if any, thereon, or reduce any amount payable on redemption thereof, or
impair the right of any such Holder to institute suit for the payment thereof,
or make the principal thereof or interest or premium, if any, thereon payable in
any coin or currency other than that provided herein, or change the obligation
of the Company to repurchase any Note upon the occurrence of a Repurchase Event
in a manner adverse to such Holder, or impair the right to convert the Notes
into Common Stock in any material respect, or (ii) reduce the aforesaid
percentage of Notes and the Convertible Notes, considered as a single class, the
registered holders of which are required to consent to any such amendment,
modification, supplement or waiver; and further provided that no such
supplemental indenture shall amend, modify, supplement or waive the
Supermajority Covenants, the second sentence of Section 9.24, the date March 31,
2000 in the proviso clause to Section 12.6 and this proviso clause without the
written consent of the registered holders of not less than 70% in aggregate
principal amount of the Notes and the Convertible Notes, considered as a single
class, at the time Outstanding.
(b) It shall not be necessary for any Act of the
registered holders of the Notes and Convertible Notes under this Section to
approve the particular form of any proposed supplemental indenture, but it shall
be sufficient if such Act and such notice shall approve the substance thereof.
Section 8.2 Execution of Supplemental Indentures.
In executing, or accepting the additional trusts created by,
any supplemental indenture permitted by this Article or the modifications
thereby of the trusts created by this Indenture, the Trustee shall receive, and
(subject to Section 6.1) shall be fully protected in relying upon, an Opinion of
Counsel stating that this Indenture, as amended by such supplemental indenture,
constitutes the legal, valid and binding obligation of all Obligors, enforceable
against each of them in accordance with its terms.
Section 8.3 Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this
Article, this Indenture shall be modified in accordance therewith, and such
supplemental indenture shall form a part of this Indenture for all purposes; and
every Holder of Notes theretofore or thereafter authenticated and delivered
hereunder shall be bound thereby and entitled to the benefits thereof.
Section 8.4 Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article
shall conform to the requirements of the Trust Indenture Act as then in effect.
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Section 8.5 Reference in Notes to Supplemental
Indentures.
Notes authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall if required by
the Trustee, bear a notation in form acceptable to the Trustee as to any matter
provided for in such supplemental indenture. If the Company shall so determine,
new Notes so modified as to conform, in the opinion of the Trustee and the Board
of Directors, to any such supplemental indenture may be prepared and executed by
the Obligors and authenticated and delivered by the Trustee in exchange for
Notes then Outstanding.
Section 8.6 Notice of Supplemental Indenture.
After an supplemental indenture hereunder becomes effective,
the Company shall mail to Holders a notice briefly describing such supplemental
indenture; provided, that the failure to give such notice to all Holders, or any
defect therein, will not impair or affect the validity of the supplemental
indenture.
ARTICLE NINE -
COVENANTS
Section 9.1 Payment of Notes.
The Company shall pay the principal of, premium, if any, and
interest on the Notes on the dates and in the manner provided herein. To the
extent lawful, the Company shall pay interest (including post-petition interest
in any proceeding under any bankruptcy law) on (i) overdue principal, at the
rate borne by the Notes at the time, and (ii) overdue installments of interest
(without regard to any applicable grace period) at the same rate, compounded
semi-annually.
Section 9.2 Stay, Extension and Usury Laws.
The Company covenants (to the extent that it may lawfully do
so) that it shall not at any time insist upon, plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay, extension or
usury law or other law which would prohibit or forgive the Company from paying
all or any portion of the principal of, premium, if any, or interest on the
Notes as contemplated herein, wherever enacted, now or at any time hereafter in
force, or which may affect the covenants or the performance of its obligations
herein, and the Company (to the extent it may lawfully do so) hereby expressly
waives all benefits or advantages of any such law.
Section 9.3 Reports and Certificates.
(a) Whether or not required by the rules and
regulations of the Commission, so long as any Notes are Outstanding, the Company
will furnish to the Trustee and the Holders, within five days after the time
periods specified in the Commission's rules and regulations (including any
extensions expressly permitted by such rules and regulations):
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(1) all quarterly and annual information,
financial and other, that would be required to be contained in a
filing with the Commission on Forms 10-Q and 10-K (or any
successor forms) if the Company were required to file such forms,
including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and an annual report on the
Company's consolidated financial statements by the Company's
independent certified public accountants; and
(2) all current reports that would be required to
be filed with the Commission on Form 8-K (or any successor form)
if the Company were required to file such reports.
(b) For so long as any Notes are Outstanding, the
Company will furnish to the Holders and to securities analysts and prospective
investors, upon their request, the information required to be delivered pursuant
to Rule 144A(d)(4) under the Securities Act.
(c) Concurrently with the delivery of the annual
report described in Section 9.3(a)(1), the Company will deliver to each Holder
at such Holder's address as it appears on the Note Register a statement of the
Company's independent certified public accountants to the effect that they have
reviewed the Agreement and the Related Agreements and that based on their
examination of the affairs of the Company and its Subsidiaries, performed in
connection with their audit of the Company's annual financial statements, they
are not aware of the occurrence or existence of any condition or event which
constitutes a Default or an Event of Default, or, if they are aware thereof, the
nature thereof.
(d) Concurrently with the delivery of the annual
report described in Section 9.3(a)(1), the Company will deliver to each Holder
at such Holder's address as it appears in the Note Register, within 90 days
after the end of each fiscal year of the Company, an Officer's Certificate,
signed by each of the Company's Chief Executive Officer and Chief Financial
Officer, to the effect that each such officer has reviewed the Agreement and the
Related Agreements and is not aware of the occurrence or existence of any
condition or event which constitutes a Default or an Event of Default, or, if
they are aware thereof, the nature thereof and what action the Company is taking
or proposes to take with respect thereto.
(e) Notwithstanding any other provision hereof to the
contrary, promptly upon acquiring knowledge of any Default or Event of Default,
the Company will promptly deliver to each Holder at such Holder's address as it
appears in the Note Register an Officer's Certificate specifying such Default or
Event of Default and what action the Company is taking or proposes to take with
respect thereto.
(f) The Company will deliver to each Holder of at
least $1.0 million aggregate principal amount of Notes who so requests at such
Holder's address as it appears in the Note Register, within 30 days after the
end of each fiscal quarter of the Company, an Officers' Certificate, signed by
the Company's Chief Executive Officer and Chief Financial Officer, which (i)
sets forth in reasonable detail the calculations which demonstrate the Company's
compliance with the financial covenants set forth in Section 9.12 (regardless
whether such covenants are in effect) and Section 9.13 (regardless whether the
Company is seeking to incur additional Indebtedness) and (ii) to the effect that
each such officer is not aware of the occurrence or
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existence of any condition or event which constitute a Default or an Event of
Default with respect to Section 9.6 or, if they are aware thereof, the nature
thereof and what action the Company is taking or proposes to take with respect
thereto.
(g) The Company will deliver to each Holder of at
least $1.0 million aggregate principal amount of Notes who so requests at such
Holder's address as it appears in the Note Register, within 30 days after the
end of each calendar month, (i) an unaudited balance sheet and income statement
showing the results of the Company's operations for such month, certified by an
Officers' Certificate which is signed by the Company's Chief Financial Officer
or Chief Accounting Officer, (ii) the amount of originations, purchases and
sales of each type of Receivable by the Company and each Subsidiary of the
Company during such month and fiscal year to date and (iii) the amount of (x)
delinquent loans or other Receivables and (y) real estate owned of the Company
and each Subsidiary of the Company at the end of such month.
Section 9.4 Taxes and Other Charges.
(a) Each of the Company and its Subsidiaries will duly
pay and discharge, or cause to be paid and discharged, before the same becomes
in arrears, all taxes, assessments and other governmental charges imposed upon
such Person and its properties, sales or activities, or upon the income or
profits therefrom, as well as all claims for labor, materials, supplies or
services which if unpaid might by law become a Lien upon any of its assets;
provided, however, that any such tax, assessment, charge or claim need not be
paid if the validity or amount thereof shall at the time be contested in good
faith by appropriate proceedings and if such Person shall, in accordance with
GAAP, have set aside on its books adequate reserves with respect thereto; and
provided, further, that each of the Company and its Subsidiaries shall pay or
bond, or cause to be paid or bonded, all such taxes, assessments, charges or
other governmental claims immediately upon the commencement of proceedings to
foreclose any Lien which may have attached as security therefor (except to the
extent such proceedings have been dismissed or stayed).
(b) Each of the Company and its Subsidiaries will
promptly pay when due, or in conformity with ordinary business practices, all
accounts payable incident to the operations of such Person not referred to in
paragraph (a) of this Section 9.4; provided, however, that any such Indebtedness
need not be paid if the validity or amount thereof shall at the time be
contested in good faith and if such Person shall, in accordance with GAAP, have
set aside on its books adequate reserves with respect thereto.
Section 9.5 Conduct of Business.
(a) Each of the Company and its Subsidiaries (i) will
carry on and conduct its business in substantially the same manner and in
substantially the same fields of enterprise as is conducted generally from time
to time by companies in the mortgage lending business or the consumer finance
business in the United States and will not engage in any other business
activities and (ii) do all things necessary to remain duly incorporated, validly
existing and in good standing as a domestic corporation in its jurisdiction of
incorporation and maintain all requisite authority to conduct its business in
each jurisdiction in which its business is conducted
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to the extent failure to do so would have, or could reasonably be expected to
have, a Material Adverse Effect.
(b) Each of the Company and its Subsidiaries will
comply in all material respects with all valid and applicable statutes, laws,
ordinances, zoning and building codes and other rules and regulations of the
United States of America, of the states and territories thereof and their
counties, municipalities and other subdivisions and of any foreign country or
other jurisdictions applicable to such Person, except where failure so to comply
would not, individually or in the aggregate, result in any Material Adverse
Effect.
Section 9.6 Corporate Existence.
(a) Subject to Article Ten, the Company will do or
cause to be done all things necessary to preserve and keep in full force and
effect its corporate existence, rights (charter and statutory) and franchises
and those of any Subsidiary of the Company, provided, however, that the Company
and any Subsidiary of the Company shall not be required to preserve any such
right or franchise if the Board of Directors of the Company shall determine in
good faith that the preservation is no longer desirable in the conduct of the
Company's business and that the loss thereof is not, and will not be, reasonably
likely to result in any Material Adverse Effect.
(b) Notwithstanding anything in paragraph (a) to the
contrary, the Company will exercise its reasonable best efforts to operate MCI
in a manner that will maintain the corporate existence and enterprise value of
MCI, including but not limited to maintenance of its production, administration
and secondary marketing functions in a fashion that would make its business a
commercially marketable asset, which shall include:
(i) the maintenance of separate books,
records and accounts, including detailed intercompany payables
and receivables accounts;
(ii) separate revenue generation
(including loan origination and loan sales), collection, and
credit functions;
(iii) separate expense allocation;
(iv) separate employment of employees,
consultants and agents;
(v) separate compensation of employees,
consultants and agents;
(vi) maintenance of separate licenses;
(vii) maintenance of separate borrowing
facilities, whether in MCI's own name, or as a named borrower
under the Company facilities, including warehouse facilities;
(viii) separation of all material
operational functions, including telephone systems, computer
systems, etc.
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(ix) separate corporate existence; and
(x) separate business leases and
contracts, including as to office space, phone systems, copy
systems, leased furniture and equipment.
(c) The Company will take reasonable steps to ensure
that all data and information reasonably necessary for the operation of MCI as
an independent corporation, including accounting, loan production and loan sales
information, shall be transferable to MCI promptly and without material expense
upon reasonable request by MCI. MCI shall maintain, at MCI, computer systems
capable of maintaining and processing the above and such data shall be forwarded
to such system periodically.
(d) The Company will ensure that all business
relations with MCI, including any services provided to MCI by the Company, are
properly documented. All contracts between MCI and the Company shall include a
provision permitting MCI to terminate such contracts without penalty, at its
discretion. The Company will take no action which it reasonably believes will
result in a material reduction in the enterprise value or marketability of MCI,
provided that this restriction shall not prohibit the Company from transferring
money from MCI to the Company in such manner as the Company determines is
necessary, in its discretion.
(e) The covenants in paragraphs (b) and (c) above
shall cease to be effective at such time on or after August 31, 2001 as the
Company shall have established compliance with all of the financial tests
specified in Section 9.12 (a), (b) and (c).
Section 9.7 Maintenance of Properties.
The Company and its Subsidiaries will cause all material
properties (real and personal) owned, leased or licensed in the conduct of their
business to be maintained and kept in good condition, repair and working order
and supplied with all necessary equipment and will cause to be made all
necessary repairs, renewals, replacements, betterments and improvements thereof
and thereto, all as in the reasonable judgment of the Board of Directors may be
necessary so that the business carried on in connection therewith may be
properly and advantageously conducted at all times while any Notes are
Outstanding, provided, however, that nothing in this Section 9.7 shall prevent
the Company and its Subsidiaries from discontinuing the maintenance of any such
properties if, in the reasonable judgment of the Board of Directors, such
discontinuance is desirable in the conduct of the Company's business and is not,
and will not be, reasonably likely to result in any Material Adverse Effect.
Section 9.8 Insurance.
Each of the Company and its Subsidiaries will maintain with
financially sound and reputable insurers insurance against liability for
hazards, risks and liability to persons and property, to the extent, in amounts
and with deductibles at least as favorable as those generally maintained by
businesses of similar size engaged in similar activities.
Section 9.9 Restricted Payments.
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The Company will not, and will not permit any Subsidiary to,
directly or indirectly, make any Restricted Payment.
Section 9.10 Restrictions on Issuance and Sale of
Sale of Capital Stock of Subsidiaries.
The Company will not sell, transfer or otherwise dispose of
shares of Capital Stock of any Subsidiary of the Company or permit any
Subsidiary of the Company to issue, sell or otherwise dispose of shares of its
Capital Stock unless in either case such Subsidiary remains a Wholly-Owned
Subsidiary of the Company.
Section 9.11 Restrictions on Subsidiary Mergers and
Sales of Assets.
(a) The Company will not permit any Subsidiary to merge or
consolidate with any Person, except that a Subsidiary, other than MCI, may merge
into the Company or another Wholly-Owned Subsidiary of the Company.
(b) The Company will not permit any Subsidiary to sell, lease
or otherwise dispose of its assets to any other Person, except (i) sales of
Receivables in the ordinary course of business, (ii) sales of mortgage-related
securities which are issued or sponsored by the Subsidiary or an Affiliate of
the Subsidiary in the ordinary course of business or (iii) sales, leases or
other dispositions of its assets that, together with all other assets of the
Subsidiary previously sold, leased or disposed of (other than Receivables and
securities referred to in clauses (i) and (ii) of this sentence) in accordance
with this Section 9.11(b) during the 12-month period ending with the month in
which any such sale, lease or other disposition occurs, do not constitute a
Substantial Portion of the consolidated assets of the Company under GAAP.
Section 9.12 Financial Covenants.
(a) The Company will not at any time permit its Consolidated
Net Worth to be less than the sum of (1) $30.0 million plus (2) 60% of the sum
of the Company's positive Consolidated Net Income (determined in accordance with
GAAP) for each fiscal semi-annual period ending after the Issue Date, commencing
with the semi-annual period ending August 31, 2000, plus (3) 100% of the net
proceeds obtained by the Company through the issuance or sale of Capital Stock
(after the deduction of all costs of such issuance). For purposes of this
Section 9.12(a), Consolidated Net Worth shall not include (i) up to an aggregate
of $5.0 million of increases in the carrying value of the mortgage-related
securities owned by the Company as of the Issue Date (the "Issue Date
Securities") recorded by the Company under GAAP and (ii) up to an aggregate of
$5.0 million of decreases in the carrying value of the Issue Date Securities
recorded by the Company under GAAP, in each case measured from the carrying
value of the Issue Date Securities as of the month-end preceding the Closing
Date, as set forth on an Officers' Certificate delivered to Value Partners and
the Collateral Agent, and as subsequently reflected on any statement of
financial condition of the Company included in a report filed by the Company
pursuant to Section 9.3(a)(1) (the "Mark-to-Market Adjustments"). To illustrate,
if the Company decreased the carrying value of the Issue Date Securities under
GAAP as of the month-end preceding the Issue Date by $4.0 million and $3.0
million at August 31, 2000 and November 30,
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2000, respectively, the Consolidated Net Worth of the Company at November 30,
2000 for purposes of Section 9.12(a)(1) shall be increased by $5.0 million.
Similarly, if the Company increased the carrying value of the Issue Date
Securities by such respective amounts at such respective dates, the Consolidated
Net Worth of the Company at November 30, 2000 for purposes of Section 9.12(a)(1)
shall be decreased by $5.0 million.
(b) Commencing on August 31, 2001 and thereafter, the Company
will not at any time permit the ratio of (i) the aggregate amount of
consolidated liabilities of the Company and its Subsidiaries (determined in
accordance with GAAP) to (ii) the Consolidated Net Worth of the Company and its
Subsidiaries to exceed 7.0 to 1.0.
(c) Commencing with the fiscal quarter ending August 31, 2001
and as of the end of each fiscal quarter of the Company thereafter, the Company
will not permit the Fixed Charge Coverage Ratio of the Company to be less than
1.5 to 1.0 on a trailing four-quarter basis.
Section 9.13 Limitation on Incurrence of Indebtedness and
Issuance of Disqualified Capital Stock.
(a) The Company will not, and shall not permit any of its
Subsidiaries to, directly or indirectly, Incur any Indebtedness or issue any
Disqualified Capital Stock, provided, that the Company and any Subsidiary may
Incur Indebtedness, other than in the case of the Company Indebtedness as a
result of its Guarantee of the Indebtedness of any Person, including without
limitation any Subsidiary of the Company, if at the time of Incurrence a Default
or Event of Default shall have occurred and be continuing or would occur as a
consequence thereof and each of the following requirements is satisfied:
(i) The Fixed Charge Coverage Ratio for the
Company's most recently ended four fiscal quarters for which
internal financial statements are available immediately
preceding the date on which such additional Indebtedness is
Incurred would have been at least 1.6 to 1.0, determined on a
pro forma basis (including, if applicable, a pro forma
application of the net proceeds therefrom to repay other
Indebtedness), as if the additional Indebtedness had been
Incurred at the beginning of such four-quarter period; and
(ii) the ratio of (i) the aggregate amount
of consolidated liabilities of the Company and its
Subsidiaries to (ii) the Consolidated Net Worth of the Company
does not exceed 6.0 to 1.0, determined on a pro forma basis
(including a pro forma application of the net proceeds
therefrom).
(b) Notwithstanding paragraph (a) of this Section 9.13, the
Company and its Subsidiaries may incur Permitted Indebtedness while no Default
or Event of Default exists.
Section 9.14 Liens.
(a) The Company will not, and will not permit any Subsidiary
to, create, assume or otherwise cause or suffer to exist or to become effective
any Lien upon any Note Security (or become contractually committed to do so),
except the following:
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(i) liens created under the agreements
governing the securitization of the Receivables underlying the
mortgage-related securities included in the Note Security;
(ii) liens to secure taxes, assessments and
other governmental charges, to the extent that payment thereof
shall not at the time be required by Section 9.4;
(iii) restrictions under federal and state
securities laws on the transfer of securities; and
(iv) liens which solely secure the Note
Obligations.
(b) The Company will not, and will not permit any Subsidiary
to, create, assume or otherwise cause or suffer to exist or become effective any
Lien upon any Eligible Collateral, other than Permitted Liens, to secure any
Indebtedness of the Company (other than the Note Obligations and Convertible
Note Obligations), any Subsidiary of the Company or any other Person, without in
each case making effective provision whereby all Notes and Convertible Notes
shall be directly secured equally and ratably with (or prior to in the case of
Liens with respect to Junior Indebtedness) such Indebtedness.
Section 9.15 Subsidiary Guarantees.
The Company will not permit any Subsidiary of the Company,
directly or indirectly, to Guarantee or assume, or subject any of its assets to
a Lien to secure, any Pari Passu Indebtedness or Junior Indebtedness unless (i)
such Subsidiary simultaneously provides for a Guarantee of, or pledge of assets
to secure, the Note Obligations and the Convertible Note Obligations by such
Subsidiary on terms at least as favorable to the Holders as such Guarantee or
security interest in such assets is to the holders of such Pari Passu
Indebtedness or Junior Indebtedness, except that in the event of a Guarantee or
security interest in such assets with respect to (x) Pari Passu Indebtedness,
the Guarantee or security interest in such assets shall be made pari passu to
the Guarantee or security interest in such assets with respect to such Pari
Passu Indebtedness or (y) Junior Indebtedness, any such Guarantee or security
interest in such assets with respect to such Junior Indebtedness shall be
subordinated to such Subsidiary's guarantee or security interest in such assets
with respect to the Note Obligations and the Convertible Note Obligations to the
same extent as such Junior Indebtedness is subordinated to the Note Obligations
and the Convertible Note Obligations and (ii) such Subsidiary waives and agrees
in writing that it will not in any manner whatsoever claim, or take the benefit
or advantage of, any rights of reimbursement, indemnity or subrogation or any
other rights against the Company or any other Subsidiary of the Company as a
result of any payment by such Subsidiary under its guarantees.
Section 9.16 Payment of Dividends from Subsidiaries.
To the extent necessary to enable it to make payments on the
Notes in accordance with their terms, the Company shall cause dividends to be
paid to it by its Subsidiaries (whether in existence as of the date of issuance
of the Notes or thereafter formed or acquired) in amounts
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which are sufficient to enable the Company to satisfy its payment obligations
under the Notes (and which shall be so used by the Company), provided that the
Company shall not be required to take any action which would result in a
Subsidiary paying dividends to the extent not permitted by applicable law and
regulation and/or restrictions existing under agreements in effect on the Issue
Date if the Company receives an opinion of counsel (in form and substance
satisfactory to the registered holders of a majority in aggregate principal
amount of the Notes and the Convertible Notes, considered as a single class, at
the time Outstanding) as to the existence of the relevant restriction no later
than the applicable Interest Payment Date or the Stated Maturity of the Notes,
whether by acceleration or otherwise.
Section 9.17 Limitations on Dividends and Other Payment
Restrictions Affecting Subsidiaries.
The Company will not, and will not permit any of its
Subsidiaries (whether in existence as of the date of issuance of the Notes or
thereafter formed or acquired) to, create, assume or otherwise cause or suffer
to exist or to become effective any consensual encumbrance or consensual
restriction on the ability of any such Subsidiary to:
(a) pay any dividends or make any other distribution to the
Company or any other Subsidiary on its Capital Stock or with respect to any
other interest or participation in, or measured by, its profits;
(b) make payments in respect to any Indebtedness owed to the
Company or any other Subsidiary; or
(c) make loans or advances to the Company or any other
Subsidiary or to guarantee Indebtedness of the Company or any other Subsidiary;
other than, in the case of (a), (b) and (c),
(1) restrictions existing under agreements in effect on the
Issue Date;
(2) consensual encumbrances or consensual restrictions binding
upon any Person at the time such Person becomes a Subsidiary of the
Company so long as such encumbrances or restrictions (i) are not
created, incurred or assumed in contemplation of such Person becoming a
Subsidiary and (ii) do not encumber or restrict the Company or any
other Subsidiary of the Company as set forth in (a), (b) or (c) above.
(3) restrictions on the transfer of assets which are subject
to Liens; and
(4) restrictions existing under any agreement which refinances
or replaces any of the agreements containing the restrictions in
clauses (1) and (2), provided that the terms and conditions of any such
restrictions are not materially less favorable to the Holders than
those under the agreement evidencing or relating to the Indebtedness
refinanced.
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Section 9.18 Investments and Acquisitions.
The Company will not, nor will it permit any Subsidiary to,
make or suffer to exist any Investments (including, without limitation, loans
and advances to, and other Investments in, Subsidiaries), or commitments
therefor, or create any Subsidiary or become a partner in any partnership or
joint venture, or make any Acquisition of any Person, in each case whether
directly or indirectly through a transaction which may otherwise be permissible
pursuant to Section 10.1 hereof or otherwise, except:
(i) Short-term obligations of, or fully
guaranteed by, the United States of America;
(ii) Commercial paper rated A-1 or better by
Standard and Poor's Ratings Group or P-1 or better by Moody's
Investors Service, Inc.;
(iii) Demand deposit accounts maintained in
the ordinary course of business;
(iv) Certificates of deposit issued by and
time deposits with federally-insured financial institutions
having capital and surplus in excess of $100,000,000;
(v) Investments in existence on the Issue
Date;
(vi) Investments in the ordinary course of
the Company's business to originate or purchase (a)
Receivables (and in connection with commitments to purchase
the same) and (b) real estate acquired by foreclosure or by
deed-in-lieu thereof, whether directly or indirectly through a
Subsidiary formed for the sole purpose of holding the same;
(vii) Hedging Obligations; and
(viii) Investments in Securitization
Subsidiaries.
Section 9.19 Limitation on Investment Company Status.
The Company will not take, and will not permit any Subsidiary
to take, any action, or otherwise permit to exist any circumstance, that would
require the Company or such Subsidiary to register as an "investment company"
under the Investment Company Act of 1940, as amended.
Section 9.20 Payments on Notes; Repurchase of Notes.
(a) Except as expressly provided in the Intercreditor
Agreement, the Company will not make any payment of interest, premium, if any,
or principal on the Notes or the Convertible Notes without making a pro rata
payment to all holders of the Notes and Convertible Notes.
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(b) The Company will not, and will not permit any Subsidiary
or other Affiliate of the Company to, redeem or purchase (whether in public or
private transactions) any Notes or Convertible Notes other than pursuant to a
redemption or repurchase offer made to each holder of a Note or Convertible Note
pro rata in accordance with the aggregate principal amount of Notes and
Convertible Notes held by such holders.
Section 9.21 Transactions with Affiliates.
Neither the Company nor any Subsidiary will enter into any
transaction, including, without limitation, any purchase, sale, lease or
exchange of any asset or the rendering of any service, with any Affiliate (other
than the Company or a Subsidiary of the Company) unless such transaction (a) is
otherwise not in violation of the Agreement and the Related Agreements
(including without limitation the Notes), and (b) is approved by a majority of
the disinterested members of the Board of Directors, is in the ordinary course
of its business and is upon fair and reasonable terms no less favorable to it
than it would obtain in a comparable arm's-length transaction with a Person not
an Affiliate, provided that the requirements of this clause (b) shall not apply
to (i) any transaction pursuant to agreements in effect on the Issue Date and
(ii) any transaction or series of related transactions in which the amount
involved does not exceed $250,000.
Section 9.22 Payments for Consent.
The Company will not, and will not permit any of its
Subsidiaries to, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any holder of
Note or an Exchange Note as an inducement to any consent, waiver or amendment of
any of the terms or provisions of the Notes or the Convertible Notes (other than
Article Seven thereof) unless such consideration is paid to all holders of Notes
and Convertible Notes that provide such consent or so waive or agree to amend.
Section 9.23 Solvency Test.
Commencing on May 31, 2000, the Company will not permit the
sum of the amount of (i) the Liquid Assets owned by the Company, as of the end
of each fiscal month of the Company, which are not subject to any Lien and (ii)
the Consolidated Cash Flow of the Company during the preceding three fiscal
months to amount to zero or less.
Section 9.24 Waiver of Certain Covenants.
Except as provided in the next sentence, the Company may omit
in any particular instance to comply with any covenant or condition set forth in
Sections 9.3 to 9.23, inclusive, if before the time for such compliance the
registered holders of at least a majority in principal amount of the Notes and
the Convertible Notes, considered as a single class, at the time Outstanding,
shall either waive such compliance in such instance or generally waive
compliance with such covenant or condition. Notwithstanding the foregoing, the
Company may omit in any particular instance to comply with the covenants or
conditions set forth in any of the following sections if before the time for
such compliance the registered holders of at least 70% in aggregate
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principal amount of the Notes and the Convertible Notes, considered as a single
class, at the time Outstanding, shall either waive such compliance in such
instance or generally waive compliance with such covenant or condition: Section
9.5(a); Section 9.9; Section 9.11; Section 9.12(a), but only to the extent that
the waiver relates to a Consolidated Net Worth of less than $25.0 million ($20.0
million exclusive of Mark-to-Market Adjustments, if any); Section 9.12(b), but
only to the extent that the waiver relates to an increase in the ratio set forth
therein above 8.0 to 1.0; Section 9.12(c), but only to the extent that the
waiver relates to a decrease in the ratio set forth therein below 1.2 to 1.0;
Section 9.13(a), but only to the extent that the waiver relates to a decrease in
the ratio set forth in Section 9.13(a)(i) below 1.3 to 1.0 and/or an increase in
the ratio set forth in Section 9.13(a)(ii) above 7.0 to 1.0; Section 9.14;
Section 9.15; Section 9.18, but only to the extent that the waiver relates to an
acquisition of the capital stock or assets of a corporation, firm or other
entity which would constitute a Significant Subsidiary of the Company; Section
9.20; and Section 9.22 (collectively, the "Supermajority Covenants"). No waiver
of a covenant pursuant to this Section 9.25 shall extend to or affect such
covenant or condition except to the extent so expressly waived, and, until such
waiver shall become effective, the obligations of the Company in respect of any
such covenant or condition shall remain in full force and effect.
ARTICLE TEN -
MERGER, CONSOLIDATION AND TRANSFER OF ASSETS
Section 10.1 Company May Consolidate Etc. Only on Certain
Terms.
Subject to the provisions of Sections 12.1 through 12.8,
nothing contained herein shall prevent any consolidation or merger of the
Company with or into any other Person (whether or not affiliated with the
Company), or successive consolidations or mergers in which the Company or its
successor or successors shall be a party or parties, or shall prevent any sale,
conveyance or lease (or successive sales, conveyances or leases) of the property
of the Company, substantially as an entirety, to any other Person (whether or
not affiliated with the Company), authorized to acquire and operate the same and
which, in each case, shall be organized under the laws of the United States of
America, any state thereof or the District of Columbia, provided, that (i) upon
any such consolidation, merger, sale, conveyance or lease, if the Company is not
the surviving entity, the due and punctual payment of the Notes Obligations,
including without limitation the principal of and premium, if any, and interest
on all of the Notes, according to their tenor, and the due and punctual
performance and observance of all of the covenants and conditions to be
performed by the Company under the Agreement, the Notes, the Convertible Notes,
the Collateral Documents and the Value Partners Agreement shall be expressly and
unconditionally assumed, by agreement in form and substance reasonably
satisfactory to the registered holders of not less than a majority in aggregate
principal amount of the Notes and the Convertible Notes, considered as a single
class, at the time Outstanding, executed and delivered to such holders by the
Person (if other than the Company) formed by such consolidation, or into which
the Company shall have been merged, or by the Person which shall have acquired
or leased such property, (ii) the agreement referred to in clause (i) shall
provide for the applicable conversion rights set forth in Section 7.6 of the
Convertible Notes and the applicable repurchase rights set forth in Section 12.8
hereof, (iii) immediately after giving effect to such transaction, no
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Default or Event of Default shall have occurred and be continuing (iv)
immediately after giving effect to such transaction, the Company (or the
surviving entity if the Company is not continuing) would be able to incur an
additional $1.00 of Indebtedness pursuant to Section 9.13, (v) immediately after
giving effect to such transaction, the Company (or the surviving entity if the
Company is not continuing) shall have a Consolidated Tangible Net Worth equal to
or greater than the Consolidated Tangible Net Worth of the Company immediately
prior to such transaction and (vi) the Company or the Person formed by such
consolidation, or into which the Company shall have been merged, or which shall
have acquired or leased such property, as applicable, shall have delivered an
Officer's Certificate to the Trustee to the effect that such consolidation,
merger, sale, conveyance or lease complies with the terms hereof and that all
conditions precedent provided for herein relating to such transaction have been
complied with.
Section 10.2 Successor Corporation to be Substituted.
In case of any such consolidation, merger, sale, conveyance or
lease referenced in Section 10.1, and upon the assumption by any Person of the
due and punctual payment of the principal of and premium, if any, and interest
on all of the Notes and the due and punctual performance of all of the covenants
and conditions to be performed by the Company under the Agreement and the
Related Agreements, in accordance with Section 10.1 such Person shall succeed to
and be substituted for the Company, with the same effect as if it had been named
herein as such. In the event of any such consolidation, merger, sale or
conveyance (but not in the event of any such lease), the Person named as the
"Company" in the first paragraph hereof or any successor which shall thereafter
have become such in the manner prescribed in this Article Ten shall be released
from its liabilities as obligor and maker of the Notes and from its obligations
hereunder.
ARTICLE ELEVEN -
SECURITY FOR NOTES; RELATED AGREEMENTS
The Notes shall be secured by the Collateral Documents, duly
executed by the Company and the other parties thereto for the ratable benefit of
the holders of the Notes and the Convertible Notes granting a security interest
in the collateral covered thereby, which security interest shall not be
subordinate in priority to any other Liens except those expressly set forth in
the Collateral Documents. The Notes are entitled to the benefits of and subject
to the limitations contained in the Agreement and the Related Agreements, and
the Holder of any Note may enforce such rights in accordance with the terms
hereof and thereof, as applicable.
ARTICLE TWELVE -
REDEMPTION AND REPURCHASE OF NOTES
Section 12.1 Optional Rights to Redeem Notes.
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(a) Except as provided in paragraph (b) below, the Notes are
not redeemable at the Company's option prior to June 15, 2004. Thereafter, the
Notes may be redeemed, in whole but not in part, at the option of the Company at
the Redemption Prices specified below (expressed as percentages of the principal
amount thereof), in each case, together with accrued and unpaid interest, if
any, thereon to the Redemption Date, if redeemed during the 12-month period
beginning on June 15 of the years indicated below:
<TABLE>
<CAPTION>
Year Redemption Rate
---- ---------------
<S> <C>
2004 106%
2005 100%
</TABLE>
Notwithstanding the foregoing, the Notes may be redeemed at
the Company's option prior to June 15, 2004, in whole but not in part, at a
Redemption Price equal to 100% of the principal amount thereof, together with
accrued and unpaid interest, if any, thereon to the Redemption Date, if the
Closing Price of the Common Stock equals or exceeds $5.00 per share (subject to
adjustment as provided herein, the "Redemption Trading Price") for thirty five
(35) consecutive Trading Days after the Issue Date and prior to June 15, 2004
provided that no Notes may be redeemed prior to the mandatory conversion of the
Notes provided for in Article Fourteen.
In case outstanding shares of Common Stock shall be subdivided
into a greater number of shares of Common Stock, the Redemption Trading Price in
effect at the opening of business on the day following the day upon which such
subdivision becomes effective shall be proportionately reduced, and conversely,
in case outstanding shares of Common Stock shall be combined into a smaller
number of shares of Common Stock, the Redemption Trading 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.
(b) Notwithstanding any provision hereof to the contrary, if
it any time the total outstanding principal amount of the Notes shall be less
than 10% of the aggregate principal amount Outstanding on the Issue Date, the
Company may, at its option, redeem all or any part of the Notes then Outstanding
at a Redemption Price equal to the applicable amount set forth in Section
12.1(a) hereof of the principal amount of the Notes then Outstanding, together
with accrued and unpaid interest, if any, thereon to the Redemption Date.
Section 12.2 Notice of Optional Redemption.
At least 30 days but not more than 90 days before a Redemption
Date, the Company shall mail or cause to be mailed a notice of optional
redemption by first-class mail to each Holder of Notes to be redeemed at such
Holder's address as it appears on the Note Register.
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The notice shall identify the Notes to be redeemed and shall
state:
(a) the Redemption Date;
(b) the Redemption Price;
(c) that Notes called for redemption must be presented and
surrendered to the Company to collect the Redemption Price;
(d) that the Notes called for redemption may be converted at
any time before the close of business on the fifth Business Day immediately
preceding the Redemption Date;
(e) that, unless the Company defaults in making the redemption
payment, the only remaining right of the Holder shall be to receive payment of
the Redemption Price upon presentation and surrender to the Company of the
Notes; and
(f) that interest on Notes called for redemption ceases to
accrue on and after the Redemption Date.
Section 12.3 Effect of Notice of Optional Redemption.
Once notice of optional redemption is mailed, Notes called for
redemption become due and payable on the Redemption Date and at the Redemption
Price. Upon presentation and surrender to the Company, Notes called for
redemption shall be paid at the Redemption Price, plus accrued interest up to
but not including the Redemption Date.
Section 12.4 Right to Require Repurchase.
In the event that a Repurchase Event (as hereinafter defined)
shall occur, then each Holder shall have the right, at the Holder's option, to
require the Company to repurchase, and upon the exercise of such right the
Company shall repurchase, all of such Holder's Notes, or any portion of the
principal amount thereof that is an integral multiple of $1,000 (provided that
no single Note may be repurchased in part unless the portion of the principal
amount of such Note to be Outstanding after such repurchase is equal to $1,000
or an integral multiple of $1,000), on the date (the "Repurchase Date") that is
60 days after the date of the Company Notice (as defined in Section 12.5) for
cash at a purchase price equal to 101% of the aggregate principal amount of such
Notes in the event that the Repurchase Event is the event specified in clause
(i) of the definition such term and 112% of the aggregate principal amount of
such Notes in the event that the Repurchase Event is an event specified in
clause (ii) or clause (iii) of the definition of such term (the "Repurchase
Price"), plus interest accrued and unpaid to, but excluding, the Repurchase
Date.
Whenever in this Note there is a reference, in any context, to
the principal of any Note as of any time, such reference shall be deemed to
include reference to the Repurchase Price payable in respect of such Note to the
extent that such Repurchase Price is, was or would be so payable at such time,
and express mention of the Repurchase Price in any provision of this Note
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shall not be construed as excluding the Repurchase Price in those provisions of
this Note when such express mention is not made.
Section 12.5 Notices; Method of Exercising Purchase Right,
Etc.
(a) Unless the Company shall have theretofore called for
redemption all of the Notes then Outstanding pursuant to Article Twelve, on or
before the fifth day after the occurrence of a Repurchase Event, the Company
shall give to all Holders of Notes notice (the "Company Notice") of the
occurrence of the Repurchase Event and of the repurchase right set forth herein
arising as a result thereof.
Each notice of a repurchase right shall state:
(i) the Repurchase Event and the Repurchase
Date,
(ii) the date by which the repurchase right
must be exercised,
(iii) the Repurchase Price,
(iv) a description of the procedure which a
Holder must follow to exercise a repurchase right,
(v) that on the Repurchase Date the
Repurchase Price will become due and payable upon each such
Note designated by the Holder to be repurchased, and that
interest thereon shall cease to accrue on and after said date,
and
(vi) the place where such Notes are to be
surrendered for payment of the Repurchase Price and accrued
interest, if any.
No failure of the Company to give the foregoing notices or
defect therein shall limit any Holder's right to exercise a repurchase right or
affect the validity of the proceedings for the repurchase of Notes.
If any of the foregoing provisions or other provisions of this
Article are inconsistent with applicable law, such law shall govern.
(b) To exercise a repurchase right, a Holder shall deliver to
the Company on or before the 30th day after the date of the Company Notice (i)
written notice of the Holder's exercise of such right, which notice shall set
forth the name of the Holder, the principal amount of the Notes to be
repurchased (and, if any Note is to be repurchased in part, the portion of the
principal amount thereof to be repurchased and the name of the Person in which
the portion thereof to remain Outstanding after such repurchase is to be
registered) and a statement that an election to exercise the repurchase right is
being made thereby, and (ii) the Notes with respect to which the repurchase
right is being exercised.
(c) In the event a repurchase right shall be exercised in
accordance with the terms hereof, the Company shall pay or cause to be paid the
Repurchase Price in cash to the
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Holder on the Repurchase Date, together with accrued and unpaid interest to, but
excluding, the Repurchase Date payable with respect to the Notes as to which the
repurchase right has been exercised.
(d) If any Note (or portion thereof) surrendered for
repurchase shall not be so paid on the Repurchase Date, the principal amount of
such Note (or portion thereof, as the case may be) shall, until paid, bear
interest from the Repurchase Date at the rate per annum then currently in
effect, and each Note shall remain convertible into Common Stock until the
principal of such Note (or portion thereof, as the case may be) shall have been
paid or duly provided for.
(e) Any Note which is to be repurchased only in part shall be
surrendered to the Company (with, if the Company so requires, due endorsement
by, or a written instrument of transfer in form satisfactory to the Company 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 Note without service
charge, a new Note or Notes, containing identical terms and conditions, each in
an authorized denomination in aggregate principal amount equal to and in
exchange for the portion of the principal of the Note so surrendered that was
not repurchased.
(f) Any Holder that has delivered to the Company its written
notice exercising its right to require the Company to repurchase its Notes upon
a Repurchase Event shall have the right to withdraw such notice at any time
prior to the close of business on the Repurchase Date by delivery of a written
notice of withdrawal to the Company prior to the close of business on such date.
Section 12.6 Repurchase Event.
A "Repurchase Event" shall be deemed to occur (i) upon the
occurrence of a Change in Control, (ii) in the event that the Company fails to
obtain either of the Stockholder Approvals on or before March 9, 2000 or (iii)
in the event that the Notes are not mandatorily converted into shares of Common
Stock in accordance with Article Fourteen on or before March 9, 2000, provided
that the date set forth in clauses (ii) and (iii) may be extended to March 31,
2000 with the consent of the registered holders of a majority of the aggregate
principal amount of the Notes and the Convertible Notes, considered as a single
class, at the time Outstanding.
Section 12.7 Certain Definitions.
For purposes of this Article Twelve,
(a) the term "beneficial owner" shall be determined in
accordance with Rule 13d-3 promulgated by the Commission pursuant to the
Exchange Act;
(b) the term "Person" shall include any syndicate or group
which would be deemed to be a "Person" under Section 13(d)(3) of the Exchange
Act;
(c) the term "controlled" shall mean ownership or control of
more than 50% of the voting power of an entity; and
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(d) the term "Change in Control" shall mean the occurrence of
any of the following events after the Issue Date:
(i) any Person, other than the Company, any
Subsidiary of the Company or any entity controlled by the
foregoing, or any employee benefit plan of the Company or any
such Subsidiary, becomes the beneficial owner, directly or
indirectly, through a purchase or other acquisition
transaction or series of transactions (other than a merger or
consolidation involving the Company), of shares of capital
stock of the Company entitling such Person to exercise in
excess of 50% of the total voting power of all shares of
Capital Stock of the Company entitled to vote generally in the
election of directors, provided that a Change in Control shall
not be deemed to have occurred pursuant to this paragraph (a)
as a result of issuances of capital stock by the Company upon
the exercise of rights or warrants, or upon conversion of
convertible securities, which are issued and outstanding on
the Issue Date to the holders of such rights, warrants or
convertible securities on the date of issuance of the Notes;
(ii) there occurs any consolidation of the
Company with, or merger of the Company into, any other Person,
any merger of another Person into the Company, or any sale or
transfer of the assets of the Company as, or substantially as,
an entirety to another Person (other than (i) any such
transaction pursuant to which the holders of the Common Stock
immediately prior to such transaction have, directly or
indirectly, shares of capital stock of the continuing or
surviving corporation immediately after such transaction which
entitle such holders to exercise in excess of 50% of the total
voting power of all shares of capital stock of the continuing
or surviving corporation entitled to vote generally in the
election of directors and (ii) any merger (1) which does not
result in any reclassification, conversion, exchange or
cancellation of outstanding shares of Common Stock or (2)
which is effected solely to change the jurisdiction of
incorporation of the Company and results in a
reclassification, conversion or exchange of outstanding shares
of Common Stock solely into shares of Common Stock and
separate series of Common Stock carrying substantially the
same relative rights as the Common Stock); or
(iii) individuals who constituted the Board
of Directors of the Company at the beginning of any one-year
period (together with any other director whose election by the
Board of Directors of the Company or whose nomination for
election by the stockholders of the Company was approved by a
vote of at least a majority of the directors then in office
either who were directors at the beginning of such period or
whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the
directors then in office.
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Section 12.8 Consolidation, Merger, Etc.
In the case of any reclassification, change, consolidation,
merger, combination, sale or conveyance, in which the Common Stock is changed or
exchanged as a result into the right to receive shares of stock and other
securities or property or assets (including cash) which includes shares of
Common Stock or common stock of another Person that are, or upon issuance will
be, traded on a United States national securities exchange or approved for
trading on an established automated over-the-counter trading market in the
United States and such shares constitute at the time such change or exchange
becomes effective in excess of 50% of the aggregate fair market value of such
shares of stock and other securities, property and assets (including cash) (as
determined in good faith by the Board of Directors of the Company, which
determination shall be conclusive and binding), then the Person formed by such
consolidation or resulting from such merger or combination or which acquires the
properties or assets (including cash) of the Company, as the case may be, shall
execute and deliver to the Holders, at their last address reflected in the Note
Register, an amendment to the Notes, in form and substance satisfactory to the
registered holders of not less than a majority in aggregate principal amount of
the Notes and the Convertible Notes, considered as a single class, at the time
Outstanding, and to the Trustee, modifying the provisions of the Notes relating
to the right of Holders to cause the Company to repurchase the Notes following a
Repurchase Event, including without limitation the applicable provisions of this
Article Twelve and the definitions of Common Stock and Change in Control, as
appropriate, and such other related definitions set forth herein as determined
in good faith by the Board of Directors of the Company (which determination
shall be conclusive and binding), to make such provisions apply to the common
stock and the issuer thereof if different from the Company and the Common Stock
(in lieu of the Company and the Common Stock).
ARTICLE THIRTEEN -
DEFEASANCE AND COVENANT DEFEASANCE
Section 13.1 Option to Effect Legal Defeasance or Covenant
Defeasance.
The Company may, at the option of its Board of Directors
evidenced by a Board Resolution, at any time, elect to have either Section 13.2
or 13.3 be applied to all Notes then Outstanding upon compliance with the
conditions set forth below in this Article.
Section 13.2 Legal Defeasance and Discharge.
Upon the Company's exercise under Section 13.1 of the option
applicable to this Section, the Company shall, subject to the satisfaction of
the conditions set forth in Section 13.4, be deemed to have been discharged from
its obligations with respect to all Notes then Outstanding on the date the
conditions set forth below are satisfied (hereinafter, "LEGAL DEFEASANCE"). For
this purpose, Legal Defeasance means that the Company shall be deemed to have
paid and discharged the entire Indebtedness represented by the Notes then
Outstanding, which shall thereafter be deemed to be Outstanding only for the
purposes of Section 13.5 and the other Sections of this Indenture referred to in
(a) and (b) below, and the Company shall be deemed to have satisfied all its
other obligations under the Notes and this Indenture (and the
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Trustee, on demand of and at the expense of the Company, shall execute proper
instruments acknowledging the same), except for the following provisions which
shall survive until otherwise terminated or discharged hereunder: (a) the rights
of Holders of Notes then Outstanding to receive solely from the trust fund
described in Section 13.4, and as more fully set forth in such Section, payments
in respect of the principal of, premium, if any, and interest on such Notes as
and when such payments are due, (b) the Company's obligations with respect to
such Notes under Articles One, Two, Three and Four and Section 9.3, (c) the
rights, powers, trusts, duties and immunities of the Trustee hereunder and the
Company's obligations in connection therewith and (d) this Article. Subject to
compliance with this Article, the Company may exercise its option under this
Section notwithstanding the prior exercise of its option under Section 13.3.
Section 13.3 Covenant Defeasance.
Upon the Company's exercise under Section 13.1 of the option
applicable to this Section, the Company shall, subject to the satisfaction of
the conditions set forth in Section 13.4, be released from its obligations under
the covenants contained in Article Nine with respect to the Notes on and after
the date the conditions set forth below are satisfied (hereinafter, "COVENANT
DEFEASANCE"), and the Notes shall thereafter be deemed not Outstanding for the
purposes of any direction, waiver, consent or declaration or act of Holders (and
the consequences of any thereof) in connection with such covenants, but shall
continue to be deemed Outstanding for all other purposes hereunder (it being
understood that such Notes shall not be deemed Outstanding for accounting
purposes). For this purpose, Covenant Defeasance means that. with respect to the
Notes then Outstanding and the Subsidiary Guarantees, the Company may omit to
comply with and shall have no liability, in respect of any term, condition or
limitation set forth in any such covenant, whether directly or indirectly, by
reason of any reference elsewhere herein to any such covenant or by reason of
any reference in any such covenant to any other provision herein or in any other
document and such omission to comply shall not constitute a Default or an Event
of Default under Section 5.1, but, except as specified above, the remainder of
this Indenture and such Notes shall be unaffected thereby. In addition, upon any
such Covenant Defeasance, the events specified in paragraphs (f), (g) (with
respect to Subsidiaries only) and (h) shall not constitute Defaults.
Section 13.4 Conditions to Legal or Covenant Defeasance.
The following shall be the conditions precedent to the
effectiveness of any Legal Defeasance or Covenant Defeasance:
(a) the Company shall (i) irrevocably deposit with the
Trustee, in trust, for the benefit of the Holders, unencumbered cash in United
States dollars, unencumbered U.S. Government Obligations, or a combination
thereof, in such amounts as will be sufficient, in a written opinion of a
nationally recognized firm of independent public accountants delivered to the
Trustee, to pay the principal of, premium, if any, and interest on the Notes
then Outstanding on the stated date for payment thereof or on the applicable
Redemption Date, as the case may be, and the Company must specify whether the
Notes are being defeased to maturity or to a particular Redemption Date, and
(ii) irrevocably instruct the Trustee to apply such cash and U.S. Government
Obligations to such payments with respect to the Notes;
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(b) in the case of an election under Section 13.2, the Company
shall have delivered to the Trustee an Opinion of Counsel in the United States
reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of this Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such Opinion of Counsel shall confirm that, the Holders of the Notes
then Outstanding will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred;
(c) in the case of an election under Section 13.3 hereof, the
Company shall have delivered to the Trustee an Opinion of Counsel in the United
States reasonably acceptable to the Trustee confirming that the Holders of the
Notes then Outstanding will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance has not occurred;
(d) no Default or Event of Default shall have occurred and be
continuing on (i) the date of such deposit (other than a Default or Event of
Default resulting from the Incurrence of Indebtedness all or a portion of the
proceeds of which will be used to defease the Notes pursuant to this Article
concurrently with such Incurrence) and (ii) insofar as Section 5.1(g) hereof is
concerned, at any time during the period ending on the 91st day after the date
of deposit (such condition not being satisfied until such 91st day);
(e) such Legal Defeasance or Covenant Defeasance shall not
result in a breach or violation of, or constitute a default under, any material
agreement or instrument (other than this Indenture) to which the Company or any
of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound;
(f) the Obligors shall have delivered to the Trustee an
Opinion of Counsel to the effect that on the 91st day following the deposit, the
trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally;
(g) the Obligors shall have delivered to the Trustee an
Officers' Certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders over any other creditors of the Obligors or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Obligors; and
(h) the Obligors shall have delivered to the Trustee Officers'
Certificates and an Opinion of Counsel, each stating that all conditions
precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
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Section 13.5 Deposited Money and U.S. Government Obligations
to be Held in Trust; Other Miscellaneous
Provisions.
Subject to Section 13.6, all money and U.S. Government
Obligations (including the proceeds thereof) deposited with the Trustee (or
other qualifying trustee, collectively for purposes of this Section, the
"TRUSTEE") pursuant to Section 13.4 in respect of the Notes then Outstanding
shall be held in trust and applied by the Trustee, in accordance with the
provisions of the Notes and this Indenture, to the payment, either directly or
through any Paying Agent (excluding any Obligor acting as Paying Agent) as the
Trustee may determine, to the Holders of such Notes of all sums due and to
become due thereon in respect of principal, premium, if any, and interest, but
such money need not be segregated from other funds except to the extent required
by law.
The Company shall pay and indemnify the Trustee against any
tax, fee or other charge imposed on or assessed against the cash or U.S.
Government Obligations deposited pursuant to Section 13.4 or the principal and
interest received in respect thereof.
Anything in this Article to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon the request
of the Company any money or U.S. Government Obligations held by it as provided
in Section 13.4 which, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee (which may be the opinion delivered under Section
13.4), are in excess of the amount thereof that would then be required to be
deposited to effect an equivalent Legal Defeasance or Covenant Defeasance.
Section 13.6 Repayment to Company.
Any money deposited with the Trustee or any Paying Agent, or
then held by the Company, in trust for the payment of the principal of, premium,
if any, or interest on any Note and remaining unclaimed for two years after such
principal, and premium, if any, or interest has become due and payable shall be
paid to the Company on its request or (if then held by the Company) shall be
discharged from such trust; and the Holder of such Note shall thereafter, as a
creditor, look only to the Company for payment thereof, and all liability of the
Trustee or such Paying Agent with respect to such trust money, and all liability
of the Company as trustee thereof, shall thereupon cease; provided, however,
that the Trustee or such Paying Agent, before being required to make any such
repayment, may at the expense of the Company cause to be published once, in The
New York Times and The Wall Street Journal (national edition), notice that such
money remains unclaimed and that, after a date specified therein, which shall
not be less than 30 days from the date of such notification or publication, any
unclaimed balance of such money then remaining will be repaid to the Company.
Section 13.7 Reinstatement.
If the Trustee or Paying Agent is unable to apply any United
States Dollars or U.S. Government Obligations in accordance with Section 13.2 or
13.3, as the case may be, by reason of any order or judgment of any court or
governmental authority enjoining, restraining or
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otherwise prohibiting such application, then the Obligors' obligations under
this Indenture and the Notes shall be revived and reinstated as though no
deposit had occurred pursuant to Section 13.2 or 13.3 until such time as the
Trustee or Paying Agent is permitted to apply all such money, in accordance with
Section 13.2 or 13.3, as the case may be: provided, however, that, if the
Company makes any payment of principal of, premium, if any, or interest on any
Note following the reinstatement of its obligations, the Company shall be
subrogated to the rights of the Holders of such Notes to receive such payment
from the money held by the Trustee or Paying Agent.
Section 13.8 Defeasance of Convertible Notes
Notwithstanding any provision of this Indenture to the
contrary, the Company may not effect legal defeasance or covenant defeasance of
the Notes unless it adequately provides for the same for all Outstanding
Convertible Notes by means which are satisfactory to the holders of a majority
of the aggregate principal amount of the Outstanding Convertible Notes.
ARTICLE FOURTEEN -
CONVERSION
Section 14.1 Mandatory Conversion upon Stockholder Approval
Immediately upon approval by the stockholders of the Company
on or prior to March 9, 2000 (or before such other time as may be consented to
pursuant to the provisions herein) of the conversion of $6,428,000 of the
aggregate principal amount of the Notes issued pursuant to the Agreement into a
maximum of 6,428,000 shares of Common Stock, the QIB Convertible Global Note
will automatically convert into the right to receive ________ shares of Common
Stock (the "QIB SHARES") and the Non-QIB Global Note will automatically convert
into the right to receive ____________ shares of Common Stock (the "NON-QIB
SHARES"). A Holder is not entitled to any rights of a holder of Common Stock
until such Holder's Notes have converted to Common Stock, and only to the extent
such Notes are deemed to have been converted to Common Stock under this Article
Fourteen.
Section 14.2 Issuance of Common Stock on Conversion; No
Adjustment for Interest or Dividends
Promptly following the automatic conversion of the aforesaid
amount of the Notes issued pursuant to this Indenture, the Company shall issue
and shall deliver to the Trustee certificates for the number of full shares of
Common Stock issuable to the Holders upon the conversion of each Holder's Note
in accordance with the provisions of this Article Fourteen and a check or cash
in respect of any fractional interest in respect of a share of Common Stock
arising upon such conversion, as provided in Section 14.3.
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Each conversion shall be deemed to have been effected as to
any such Note on the date on which the requirement set forth in Section 14.1
shall have been satisfied, and the Person in whose name any certificate or
certificates for shares of Common Stock shall be issuable upon such conversion
shall be deemed to have become on said date the Holder of record of the shares
represented thereby and the Holder of a principal amount of Notes which has been
proportionately reduced to reflect such conversion..
Section 14.3 Disbursement of Shares.
(a) Upon conversion of the QIB Convertible Global Note and the
Non-QIB Convertible Global Note in accordance with Section 14.1, each Holder
shall be entitled to receive such Holder's pro-rata portion of the QIB Shares or
the Non-QIB Shares (the "PRO-RATA PORTION"), as the case may be, with any
fractional share rounded down to the nearest whole share. A Holder's Pro-Rata
Portion shall be calculated as follows:
(i) in the case of a QIB, (X) the principal
amount of Notes owned by such QIB divided by (Y) the total
Outstanding principal amount of the QIB Notes; and
(ii) in the case of a Non-QIB, (X) the
principal amount of Notes owned by such Non-QIB divided by (Y)
the total Outstanding principal amount of the Non-QIB Notes.
(b) Within two Business Days after stockholder approval is
obtained, the Company shall deposit with the Trustee for distribution to the
Holders, the number of shares of Common Stock equal to the sum of the QIB shares
and the Non-QIB shares (as adjusted to account for fractional shares as set
forth in (a) above, the "CONVERSION SHARES").
(c) Upon receipt of the Conversion Shares, the Trustee shall
distribute the Conversion Shares to the Holders in accordance with the Holders'
Pro-Rata Portions as determined pursuant to Section 14.3(a) above.
Section 14.4 Taxes on Shares Issued.
The issue of stock certificates on conversions of Notes shall
be made without charge to the converting Holder for any tax in respect of the
issue thereof. 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
stock in any name other than that of the Holder of any Note converted, and the
Company shall not be required to issue or deliver any such stock certificate
unless and until the Person or Persons requesting the issue thereof shall have
paid to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
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Section 14.5 Reservation of Shares to Be Fully Paid;
Compliance with Governmental Requirements;
Listing of Common Stock.
The Company shall reserve, free from preemptive rights, out of
its authorized but unissued shares or shares held in treasury, sufficient shares
of Common Stock to provide for the conversion of the Notes.
The Company covenants that all shares of Common Stock which
may be issued upon conversion of Notes will upon issue be fully paid and
non-assessable by the Company and free from all taxes and Liens with respect to
the issue thereof.
The Company covenants that it will in good faith and as
expeditiously as possible comply with its obligations under the Registration
Rights Agreement.
The Company further covenants that so long as the Common Stock
shall be listed or quoted on the New York Stock Exchange, the Nasdaq Stock
Market (National Market) or any other national securities exchange the Company
will, if permitted by the rules of such exchange, list and keep listed so long
as the Common Stock shall be so listed on such market or exchange, all Common
Stock issuable upon conversion of the Notes.
ARTICLE FIFTEEN -
MISCELLANEOUS
Section 15.1 No Recourse Against Others.
A director, officer, employee, stockholder or incorporator, as
such, of any Obligor shall not have any liability for any obligations of such
Obligor under the Notes or this Indenture or for any claim based on, in respect
of or by reason of such obligations or their creation. Each Holder by accepting
a Note waives and releases all such liability.
Section 15.2 Execution in Counterparts.
This instrument may be executed in any number of counterparts,
each of which so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.
Section 15.3 Waiver of Trial by Jury.
EACH OF THE PARTIES TO THIS INDENTURE WAIVES THE RIGHT TO A
TRIAL BY JURY IN ANY ACTION UNDER THIS INDENTURE, THE NOTES OR ANY SUBSIDIARY
GUARANTEE OR ANY ACTION ARISING OUT OF THE TRANSACTIONS CONTEMPLATED HEREBY OR
THEREBY, REGARDLESS OF WHICH PARTY INITIATES SUCH ACTION OR ACTIONS.
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* * * * *
IN WITNESS WHEREOF, the parties hereto have caused this
Indenture to be duly executed, and their respective corporate seals to be
hereunto affixed and attested, all as of the day and year first above written.
ALTIVA FINANCIAL CORPORATION
By:
------------------------------------
Name: Edward B. "Champ" Meyercord
Title: Chief Executive Officer
Address: 1000 Parkwood Circle
6th Floor
Atlanta, Georgia 30339
Attest:
By:
--------------------------------
Title:
UNITED STATES TRUST COMPANY OF NEW
YORK, as Trustee
By:
------------------------------------
Name: John Stohlmann
Title: Vice President
Attest:
By:
--------------------------------
Title:
83
<PAGE> 1
EXHIBIT T3E1
OFFER TO EXCHANGE
ALL OUTSTANDING 12 1/2% SUBORDINATED NOTES DUE 2001
AND PREMIUM, IF ANY, AND INTEREST THEREON
($30,480,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR
$19,382,000 12% SECURED CONVERTIBLE SENIOR NOTES DUE 2006
OF
ALTIVA FINANCIAL CORPORATION
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MARCH 3,
2000, UNLESS EXTENDED.
SEE RISK FACTORS BEGINNING ON PAGE 20 FOR A DISCUSSION OF CERTAIN FACTORS WHICH
INVESTORS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE NEW NOTES OFFERED HEREBY.
This Confidential Private Placement Memorandum (the "Memorandum") relates
to the issuance of 12% Secured Convertible Senior Notes due 2006 by Altiva
Financial Corporation (the "Company") in exchange for currently outstanding
12 1/2% Subordinated Notes of the Company due 2001 (the "Old Notes"). The 12%
Secured Convertible Senior Notes being offered in exchange for the Old Notes are
substantially similar to $14,000,000 of Amended and Restated 12% Secured Senior
Convertible Notes due 2006 (the "Amended Notes") to be issued to Value Partners,
Ltd. ("Value Partners") upon consummation of the Exchange Offer, with the
exception of provisions dealing with conversion of the notes into common stock
of the Company, par value $.01 (the "Common Stock"). The Company has obtained
commitments from the holders of approximately $28.0 million principal amount of
its outstanding Old Notes to participate in the Exchange Offer. The $19,382,000
principal amount of new 12% Secured Convertible Senior Notes due 2006 to be
issued in the Exchange Offer will initially be issued in two types of global
notes. One type of these global notes will be mandatorily convertible into
Common Stock (the "Convertible New Notes") while the other type of these global
notes will not be convertible into Common Stock (the "Non-Convertible New
Notes," and together with the Convertible New Notes, the "New Notes"). Interest
on the New Notes is payable in cash semi-annually on June 15 and December 15 of
each year beginning on June 15, 2001. The Company may redeem the New Notes, in
whole but not in part, at any time after June 15, 2004, or earlier if Altiva's
common stock closes at $5.00 or above for 35 consecutive trading days after the
Expiration Date (as defined herein). The redemption price is described under the
heading "Description of New Notes -- Redemption" on page 120 of this Memorandum.
There is no sinking fund.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
MEMORANDUM IS TRUTHFUL AND COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Exchange Agent for the Exchange Offer is American Stock Transfer &
Trust Company. For information with respect to the Exchange Offer, call Isaac
Kagen at (718) 921-8200.
THE DATE OF THIS MEMORANDUM IS FEBRUARY 23, 2000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary......................... 5
Risk Factors.................... 21
Liquidity Risks............... 21
Risks Related to the Sale of
Loans...................... 22
Risks Associated with
Implementing Our New
Strategic Plan............. 23
Risks Associated with Our
Management Team............ 24
Performance of Future
Acquisitions............... 24
Risks Associated with Mortgage
Backed Securities.......... 25
Risks from the Sale of
Servicing Rights........... 27
Interest Rate Risks........... 27
Risk of Variations in
Quarterly Operating
Results.................... 28
Risks Associated with
Delinquencies and Defaults
on Loans................... 29
Litigation; Risk of Claims.... 29
Competition................... 30
Volatility of Stock Price..... 31
Risk of Failing to Comply with
the Listing Requirements of
the Nasdaq SmallCap
Market..................... 31
Factors Inhibiting Takeover;
Effect of Change of
Control.................... 31
Legislative and Regulatory
Risks...................... 32
Environmental Risks........... 32
Seasonality................... 33
Year 2000..................... 33
Restrictions Imposed by the
New Indenture.............. 33
Lack of a Public Market....... 34
Consequences of the Exchange
Offer on Non-Tendering
Holders of the Notes....... 34
Exchange Offer Procedure...... 34
Shares Eligible For Future
Sale....................... 35
The Exchange Offer.............. 36
Purpose and Effect of the
Exchange Offer............. 36
Terms of the Exchange Offer... 37
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Other Agreements.............. 42
Conditions of the Exchange
Offer...................... 44
Exchange Agent................ 44
Fees and Expenses............. 44
Consequences of Failure to
Exchange................... 45
Certain United States Federal
Tax Considerations............ 46
(1) Tax Consequences if the
Exchange Qualifies as a
Tax-Free
Recapitalization........... 47
(2) Tax Consequences if the
Exchange Fails to Qualify
as a Recapitalization...... 47
Use of Proceeds................. 56
Dividend Policy................. 56
Price Range of Common Stock..... 56
Capitalization.................. 58
Selected Financial Data......... 59
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations.................... 63
General....................... 63
Securitization Transactions... 64
Accounting for a
Securitization
Transaction................ 67
Revision of Assumptions....... 69
Results of Operations......... 72
Results of Operations......... 75
Liquidity and Capital
Resources..................... 80
Liquidity Uses................ 83
Quantitative and Qualitative
Disclosure About Market
Risk....................... 84
Effects of Changing Prices and
Inflation.................. 85
Recent Accounting Standards... 85
Impact of the Year 2000
Issue...................... 86
The Recapitalization............ 87
General....................... 87
Private Placements............ 87
Exchange Offer................ 88
Management.................... 88
Transactions with Strategic
Partners................... 88
Business........................ 90
General....................... 90
Strategic Initiatives......... 90
</TABLE>
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<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Mortgage Industry............. 91
Company Loan Products......... 92
Lending Operations............ 94
Loan Processing and
Underwriting............... 96
Quality Control............... 99
Technology Systems............ 99
Loan Servicing................ 99
Sale of Loans................. 101
Competition................... 101
Government Regulation......... 102
Seasonality................... 103
Employees..................... 104
Properties .................. 104
Legal Proceedings............. 104
Management...................... 106
Directors and Executive
Officers................... 106
Executive Compensation........ 108
Employment Agreements......... 110
Company Stock Option Plans.... 111
Compensation Committee
Interlocks and Insider
Participation.............. 113
Security Ownership of Certain
Beneficial Owners and
Management................. 113
Certain Transactions............ 116
Purchase of Participation
Interest in Secured Notes
by T. Rowe Price Recovery
Fund II, L.P............... 116
Relationship with Greenwich... 116
Tax Sharing and Indemnity
Agreement.................. 116
Management Services Agreement
with PEC................... 117
Sub-Servicing Agreement with
PEC........................ 117
Funding and Guarantees by Mego
Financial.................. 117
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Relationships with Friedman,
Billings, Ramsey Group,
Inc........................ 118
The Recapitalization.......... 119
Description of the New Notes.... 120
General....................... 120
Ranking; Relation to Secured
Notes...................... 120
Security...................... 120
Redemption.................... 121
Failure to Obtain Stockholder
Approval................... 121
Sinking Fund.................. 121
Payment on the New Notes...... 121
Certain Covenants............. 121
Defaults...................... 123
Amendments and Waivers........ 124
Transfer...................... 125
Defeasance.................... 125
Concerning the Trustee........ 125
Governing Law................. 126
Book-Entry; Delivery and
Form....................... 126
Certificated Securities....... 126
Description of Capital Stock.... 128
General....................... 128
Common Stock.................. 128
Preferred Stock............... 128
Certain Provisions of Delaware
Law........................ 129
Certain Charter and Bylaw
Provisions................. 129
Registration Rights........... 130
Transfer Agent................ 130
Shares Eligible for Future
Sale.......................... 131
Plan of Distribution............ 132
Where You Can Find More
Information................... 132
Legal Matters................... 133
</TABLE>
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4
<PAGE> 5
SUMMARY
Because this is a summary, it does not contain all the information that may
be important to you. You should read the entire Private Placement Memorandum
carefully before you purchase shares of our common stock. Unless otherwise
indicated, all information in this Memorandum gives effect to a 1,600-for-1
stock split that occurred in October 1996 and a 1-for-10 reverse stock split
that occurred in March 1999.
THE EXCHANGE OFFER
Altiva Financial Corporation (formerly Mego Mortgage Corporation, the
"Company") is a specialized consumer finance company that funds, purchases,
makes and sells consumer loans secured by deeds of trust on single family
residences. Due to a cash shortage that began in November 1999 and is continuing
(as described in more detail herein in "Management's Discussion and Analysis of
Results of Operation and Financial Condition -- Liquidity and Capital
Resources"), the Company is in the process of (1) trying to restructure its
currently outstanding debt obligations and (2) attempting to raise additional
cash to fund its working capital needs. This Memorandum relates to an offer by
the Company to exchange up to $19.4 million of New Notes for up to the entire
$30.5 million of outstanding Old Notes.
A failure by the Company to consummate the Exchange Offer and/or raise
additional cash will have a material adverse effect on the Company's ability to
remain solvent and continue its operations. See "Management's Discussion and
Analysis of Results of Operation and Financial Condition -- Liquidity and
Capital Resources."
THE COMPANY
Historically, the Company retained the right to service a substantial
portion of the loans it has sold. The Company's borrowers generally do not
qualify for traditional "A" credit mortgage loans. Typically, their credit
histories, income or other factors do not conform to the lending criteria of
government-chartered agencies (including GNMA, FNMA, FHLMC) that traditional
lenders rely on in evaluating whether to make loans to potential borrowers. The
Company has one wholly-owned operating subsidiary, The Money Centre, Inc.
The Company makes sub-prime residential mortgage loans for the purpose of
debt consolidation or creating liquidity from the borrower's home equity. The
type of loan products offered by the Company are determined by their
profitability and the liquidity of the after-market for loan sales. As such, the
Company's current product mix is comprised primarily of first and to a lesser
extent second mortgage products which have combined loan-to-value of up to 100%.
The Company exited the home improvement and Equity + loan markets (described
below) because they failed to meet targeted returns and after-market liquidity.
The Company's current loan products are first mortgage loans and home
equity loans ("Home Equity loans") typically secured by first liens, and in some
cases by second liens, on the borrower's residence. In making Home Equity loans,
the Company relies primarily on the appraised values of the borrowers'
residences. The Company determines the loan amount based on the appraised values
and the creditworthiness of the borrowers. These loans generally are used to
purchase residences and refinance existing mortgages.
5
<PAGE> 6
In prior years, the Company also made high loan-to-value loans ("Equity +
loans") based on the borrowers' credit. These loans typically were secured by
second liens on the borrowers' primary residences. The initial amount of an
Equity + loan, when added to other outstanding senior or secured debt on the
residences, resulted in a combined loan-to-value ratio that averaged 112% during
fiscal 1997 and 1998. The loan-to-value ratios on these loans might have been as
high as 125%. These loans generally were used to consolidate debt and make home
improvements.
The Company's loans are produced by its wholesale and retail divisions. The
wholesale division underwrites and funds loans originated by a network of
pre-approved mortgage brokers which numbered approximately 460 as of August 31,
1999. These brokers submit loan packages to the Company, which in turn funds
loans made to approved borrowers. The loans are made directly by the Company to
the borrower. Historically, the Company produced substantially all of its loans
by purchasing previously closed loans from approved mortgage bankers and other
financial intermediaries and purchasing closed loans insured under the Title I
credit insurance program of the Federal Housing Administration ("Title I loans")
from its network of home improvement contractors. All loans funded or purchased
by the Company are underwritten and graded by the Company's personnel. The
Company's current operating strategy is to sell all of the loans it produces for
cash to institutional purchasers. The Company currently does not intend to
produce a material amount of Title I loans in the future. The Company's retail
division makes loans directly to consumers and charges loan fees to the
borrowers that are intended to offset the total cost of making the loan.
Since the Company began operations in March 1994, it has substantially
changed its business strategy. The timeline below summarizes the changes to its
business.
TIME PERIOD ACTION
From March 1994 through
May 1996 The Company purchased home improvement contracts
Title I loans from mortgage bankers and home
improvement contractors. The Company began
purchasing Equity + loans from mortgage bankers.
March 1996 through
August 1997 The Company sold substantially all of the loans
it purchased in securitization transactions.
These securitization transactions resulted in
substantial negative cash flow, because the cash
proceeds from the sale of the loans were
substantially less than the total cost of
producing the loans sold.
September 1997 The Company established a retail division that
began making Equity + loans directly to
consumers.
December 1997 The Company began making Home Equity loans,
through its retail division, directly to
consumers.
January through June 1998 The Company substantially reduced its loan
production (fundings and purchases) because its
warehouse lender stopped making advances on the
Company's warehouse line of credit after the
Company violated certain borrowing agreements
with its warehouse lender. The Company had used
these warehouse loan advances to
6
<PAGE> 7
fund new loan production. The Company funded and
purchased $68.8 million of loans from January
1998 through June 1998 as compared to $312.0
million of loans in January 1997 through June
1997.
The Company implemented cost savings primarily
through a 32% reduction in personnel initiated
in January 1998. The Company closed its dealer
division, which traditionally had purchased
Title I and Equity + loans from its network of
home improvement contractors.
The Company substantially increased the sale of
its loan portfolio to generate cash to repay
outstanding indebtedness under its warehouse
line, to pay general and administrative expenses
for personnel retention and to maintain its
systems while it explored alternatives for
raising new capital.
July 1, 1998 The Company completed a recapitalization, (the
"Recapitalization") which raised approximately
$84.5 million in additional equity. By using
the $50.0 million in cash proceeds from the
Recapitalization, the Company began to
increase the funding and purchase of mortgage
loans.
September 1998 A liquidity shortage and a focus by the buyers
of asset backed bonds on U.S. treasury
securities impacted the specialty finance
industry.
October 1998 The Company formulated its recent strategic
initiatives (described in the next section of
this Memorandum), which are designed to return
the Company to a positive cash flow position and
to profitability.
January 1999 The Company purchased substantially all of the
assets of a retail production platform in Las
Vegas, Nevada for approximately $3.3 million in
cash.
July 1999 The Company purchased 100% of the outstanding
stock of The Money Centre, Inc., a retail
lending platform located in Charlotte, North
Carolina. A portion of the purchase price was
financed by the issuance of $7.0 million
principal amount of 12% Secured Convertible
Notes (which has subsequently been increased to
$10.0 million in principal amount, the "Original
Secured Notes") to Value Partners, Ltd. In
connection with the Exchange Offer, the Company
will issue $14,000,000 million of Amended Notes
in exchange for the Original Secured Notes and
the payment of $4,000,000.
7
<PAGE> 8
STRATEGIC INITIATIVES
The Company's strategic initiatives have been substantially impacted by
recent events in the capital markets and their effect on the specialty finance
industry. There has been a significant reduction in the number of institutions
willing to provide warehouse facilities to mortgage lenders producing home
equity and high loan-to-value loans. Additionally, there has been a reduction in
the number of buyers of senior interests issued in securitization transactions
backed by home equity and high loan-to-value loans, and a concurrent increase in
the yield (and a reduction in the price) demanded by such buyers on the senior
interests they purchase. Finally, the number of institutional investors
acquiring loans similar to the loans the Company produces has declined, along
with the premiums, if any, these investors are willing to pay for these loans.
These events have substantially reduced the liquidity available to companies in
the specialty finance industry to make new loans. With these events in mind the
Company redefined its strategic initiatives in October 1998.
The Company's Primary Focus Is To Produce Home Equity Loans. The Company
has reduced its reliance on Equity + loans with high loan-to-value ratios and
significantly increased the percentage and amount of our business devoted to the
production of Home Equity loans by expanding its network of brokers and
acquiring other entities that produce Home Equity loans. The Company produces
Home Equity loans solely for sale for cash, generally at premiums to their
principal amounts, to institutional purchasers in the secondary market without
recourse for credit losses or risk of prepayment.
Dual Production Platforms Should Lower The Company's Total Loan Production
Costs. While pursuing its mortgage broker wholesale loan programs, the Company
has purchased the assets of a retail loan production facility in January 1999.
Using this facility, the Company is pursuing loan production on a retail
(direct-to-consumer) basis. The Company's wholly owned subsidiary, The Money
Centre, Inc., acquired in July 1999, also produces approximately 20% of its
loans through retail channels. Although a retail loan platform is relatively
expensive, the Company expects it to produce loans at a lower cost than its
wholesale platform. When the Company makes a loan directly to a consumer, it
typically receives loan fees and avoids any premium due when the Company
purchases a loan from its network of mortgage brokers. The Company expects its
dual loan production platform strategy to lower its overall cost of producing
mortgage loans and improve its cash flow.
The Company Intends to Increase Production by Acquiring Other Mortgage
Lending Companies. The Company intends to increase its loan production by
acquiring companies that produce mortgage loans. The Company expects the current
lack of liquidity available in the specialized consumer finance industry to
create acquisition opportunities.
Selling Loans for Cash will be the Company's Primary Method of Loan
Disposition. The Company sells substantially all of the loans it produces for
cash to institutional purchasers in the secondary market. The Company expects
this method of loan sales to generate positive cash flow, because Home Equity
loans can generally be sold for more than their principal amount. To this end,
the Company has expanded the number of institutions with which it has loan
purchase and sale relationships.
The Company Intends to Continue to Implement Cost Saving Measures. The
Company has reduced its workforce from a peak of 475 employees in January 1998
to 267 employees as of November 30, 1999. This reduction and other cost saving
measures have
8
<PAGE> 9
significantly reduced the Company's monthly recurring general and administrative
expenses.
Our current cash shortage, which began in November 1999, has made it
difficult for us to pursue certain aspects of our strategic initiatives. If we
are unsuccessful in refinancing our outstanding indebtedness and raising
additional cash, or if these activities fail to raise sufficient cash or create
sufficient cash savings, we may continue to be unable to pursue certain aspects
of our strategic plan which may have a material adverse effect on our business.
9
<PAGE> 10
THE EXCHANGE OFFER
The Exchange Offer........... Subject to certain conditions continued in the
Exchange Agreement, we will issue up to $19.4
million principal amount of New Notes in
exchange for up to $30.5 million principal
amount of Old Notes, plus premium, if any, and
all accrued but unpaid interest thereon that are
validly tendered and not withdrawn (the
"Exchange Offer"). As of February 17, 2000 $30.5
million principal amount of Old Notes is
outstanding. See "The Exchange Offer" beginning
on page 35 of this Memorandum.
Upon stockholders approval at a meeting
currently scheduled for March 9, 2000, up to
$6,428,000 of the New Notes issued will
automatically convert into 6,428,000 shares of
Common Stock. The stockholders are also being
asked to approve the conversion of the Amended
Notes into 14,284,363 shares of Common Stock.
The conversion of the Amended Notes will be at
the option of each holder and will not be
automatic upon stockholder approval.
We are offering the New Notes for exchange in
order to restructure our debt obligations. If
your Old Notes are not tendered and accepted in
the Exchange Offer you will continue to hold
such Old Notes. In such case, you will be
entitled to all the rights and preferences and
subject to the limitations applicable thereto
under the indenture governing the Old Notes (the
"Old Indenture"), as the Old Indenture may be
amended. The Company anticipates that prior to
completion of the exchange pursuant to the
Exchange Offer ("Exchange"), it will solicit the
consent of the requisite number of the holders
of the Old Notes required to remove certain
covenants and events of default from the Old
Indenture. If this consent solicitation is
successful, the amount of protection for the
holders of the Old Notes under the Old Indenture
will be significantly weakened, and it may be
significantly more difficult for the holders of
the Old Notes to recover any amounts from the
Company if events occur that have a material
adverse effect on the Company's business.
Expiration Date.............. This Exchange Offer will expire on 5:00 p.m.,
New York City time, on March 3, 2000, unless we
extend it, in which case the term "Expiration
Date" shall mean the latest date and time to
which we extend it. We will publicly announce
any extension through a release to the Dow Jones
News Service and as otherwise required by
applicable law or regulations.
10
<PAGE> 11
Conditions to the Exchange
Offer........................ Consummation of the Exchange Offer is subject to
certain conditions, including:
- the declaration of effectiveness by the
Securities and Exchange Commission ("SEC") of
the Company's Form T-3 filed with respect to
the indenture governing the New Notes (the
"New Indenture"); and
- the entry into the Exchange Agreement by the
Company and by United States Trust Company of
New York ("US Trust"), pursuant to a power of
attorney granted to US Trust described below,
on behalf of holders of the Old Notes
representing not less than 92% of the
outstanding principal amount of the Old Notes.
Procedures for Tendering Old
Notes........................ If you want to exchange your Old Notes for New
Notes, you must:
(1) complete and sign the Letter of Transmittal
that accompanied this Memorandum; and
(2) You must mail or otherwise deliver the book
entry instructions and any other required
documentation to American Stock Transfer &
Trust Company, New York, the Company's
"Exchange Agent", at the facsimile number
set forth in this Memorandum on or prior to
the Expiration Date.
The Exchange
Agreement/Withdrawal of
Tender....................... Once executed by US Trust on your behalf and by
the Company, the Exchange Agreement will
constitute a legally-binding obligation on your
part and the Company's part to complete the
Exchange. The Exchange Agreement will not become
legally-binding until (1) both you and the
Company have signed it and (2) the Company
returns to you via facsimile a copy of the
signature page of the Exchange Agreement
executed by an authorized officer of the
Company. Once you have executed the Letter of
Transmittal and delivered the executed Exchange
Agreement to the Exchange Agent, whether via
facsimile or another method, you can withdraw
your tender of Old Notes at any time prior to
the time the Company sends to you via facsimile
a copy of the signature page of the Exchange
Agreement executed by an authorized officer of
the Company. In order to withdraw your tender of
Old Notes, you must send to the Exchange Agent
via facsimile a letter containing certain
information described herein.
11
<PAGE> 12
The execution of the Letter of Transmittal will
also confer upon US Trust a power of attorney to
execute the following documents on your behalf
with respect to the New Notes: (1) the Exchange
Agreement; (2) one of two pledge and security
agreements that will create a lien in your favor
on certain assets of the Company; and (3) an
intercreditor agreement which will determine
your rights as a creditor of the Company in
relation to certain other creditors of the
Company. These agreements are described in
detail below under "The Exchange Offer -- Other
Agreements."
In addition, by executing the Letter of
Transmittal, you will agree to all of the terms
of the Exchange Offer including, without
limitation, the exchange of all of the
outstanding Old Notes held by you, plus accrued
interest and premium, if any, for discounted New
Notes as described in this Memorandum.
Special Procedures for
Beneficial Owners............ If your Old Notes are registered in the name of
a broker, dealer, commercial bank, trust company
or other nominee and you want to tender your Old
Notes in the Exchange Offer, you should contact
such registered holder promptly and instruct
such registered holder to tender the Old Notes
on your behalf. If you want to tender your Old
Notes, you must, prior to completing and
executing the Letter of Transmittal and
delivering your Old Notes either make
appropriate arrangements to register ownership
of the Old Notes in your name or obtain a
properly completed bond power from the
registered holder. The transfer of registered
ownership may take considerable time and you may
not be able to complete it prior to the
Expiration Date. See "The Exchange
Offer -- Terms of the Exchange
Offer -- Procedures for Tendering Old Notes"
beginning on page 37 of this Memorandum.
Guaranteed Delivery/Lost Note
Procedures................... If you want to tender your Old Notes but your
Old Notes are not immediately available or you
cannot deliver your Old Notes, the Letter of
Transmittal or any other documents required by
the Letter of Transmittal to the Exchange Agent
prior to the Expiration Date, you must tender
your Old Notes according to the guaranteed
delivery procedures set forth in "The Exchange
Offer -- Terms of the Exchange
Offer -- Guaranteed Delivery Procedures"
beginning on page 38 of this Memorandum.
Acceptance of Old Notes and
Delivery of Old Notes........ Subject to certain conditions (as described more
fully in "The Exchange Offer -- Conditions of
the Exchange
12
<PAGE> 13
Offer" beginning on page 42 of this Memorandum),
we will accept for exchange any and all Old
Notes which are properly tendered in the
Exchange Offer and not withdrawn, prior to 5:00
p.m., New York City time, on the Expiration
Date. New Notes issued pursuant to the Exchange
Offer will be delivered as promptly as
practicable following the Expiration Date,
provided that in the event that the Expiration
Date is extended to on or after March 9, 2000
and the stockholders of the Company approve the
issuance of Common Stock upon mandatory
conversion of the new Notes. The
fully-discounted New Notes and Common Stock
shall be delivered after March 9, 2000.
Certain Federal Income Tax
Considerations............... For a discussion of federal income tax
considerations relating to the exchange of the
Old Notes for the New Notes, see "Certain
Federal Income Tax Considerations" beginning on
page 45 of this Memorandum.
Consequences of the Exchange
on Non-tendering Holders of
the Old Notes................ The Company anticipates that prior to completion
of the Exchange, it will solicit the consent of
the requisite number of the holders of the Old
Notes required to remove certain covenants and
events of default from the indenture governing
the Old Notes. Upon completion of this consent
solicitation, which the Company expects to be
successful, the amount of protection for the
holders of the Old Notes under the Old Indenture
will be significantly weakened, and it may be
significantly more difficult for the holders of
the Old Notes to recover any amounts from the
Company if events occur that have a material
adverse effect on the Company's business.
Trustee...................... U.S. Trust is the Trustee under the New
Indenture.
Exchange Agent............... American Stock Transfer & Trust Company is the
Exchange Agent. Its address is 40 Wall Street,
New York, New York 10005.
13
<PAGE> 14
SUMMARY OF THE TERMS OF THE NEW NOTES
This exchange offer applies to the issuance of up to $19,382,000 aggregate
principal amount of New Notes (prior to mandatory conversion of a portion
thereof, as described herein) in exchange for $30,480,000 aggregate outstanding
principal amount of Old Notes and all premium, if any and accrued but unpaid
interest thereon. The material terms of the New Notes are summarized below.
Issuer....................... Altiva Financial Corporation
Securities Offered........... Up to $19,382,000 aggregate principal amount of
New Notes
Maturity..................... June 15, 2006
Interest..................... 12% per annum, as adjusted pursuant to the terms
of the Indenture; payable in cash semi-annually
on June 15 and December 15 of each year,
commencing June 15, 2001
Conversion................... Upon approval by the Company's stockholders, up
to $6,428,000 principal amount of the New Notes
will be automatically converted into up to
6,428,000 shares of Common Stock. This Common
Stock will be distributed to the holders of the
New Notes based on the percentage of principal
amount of the Old Notes held by each holder
prior to the Exchange Offer.
Resale....................... Except as set forth below, based on
interpretations by the staff of the SEC set
forth in no-action letters issued to third
parties, we believe you may generally be able to
freely offer for resale the New Notes issued in
the Exchange Offer.
You will not, however, be able to freely resell
any shares of Common Stock that you may receive
upon conversion of the Convertible New Notes
(assuming approval of such conversion by the
stockholders of the Company). The Company
intends to file a registration statement with
the SEC promptly after the consummation of the
Exchange Offer and the sale of the Amended Notes
to provide for the resale of any shares of
Common Stock issued upon the mandatory
conversion of the Convertible New Notes and
shares of Common Stock issuable upon conversion
of the Amended Notes.
In addition, under the terms of the New
Indenture, the New Notes held by holders who are
Qualified Institutional Buyers as such term is
defined under the Securities Act ("QIBs") may
only be transferred to QIBs.
If, however, you tender Old Notes in the
Exchange Offer with the intention to
participate, or for the purpose
14
<PAGE> 15
of participating, in a distribution of the New
Notes, a broker-dealer or if you are one of our
"affiliates" (as that term is defined under Rule
405 of the Securities Act) you may not rely upon
these interpretations by the staff of the SEC
and, in the absence of an exemption therefrom,
you must comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with any secondary
resale transaction involving the New Notes or
any shares of Common Stock that may be issued
upon conversion of the Convertible New Notes. If
you do not comply with such requirements you may
be held liable under the Securities Act. We will
not indemnify you against any such liability.
Optional Redemption by the
Company...................... The New Notes are redeemable at our option, in
whole but not in part, prior to maturity at the
following redemption prices:
- after June 15, 2004 at 106%
- after June 15, 2005 at 100%
in either case plus accrued and unpaid interest
to the redemption date. In addition, the New
Notes may be redeemed prior to June 15, 2004 if
the closing price of our common stock is above
$5.00 per share for a period of 35 consecutive
trading days after the Expiration Date.
Mandatory Redemption......... None
Failure to Obtain Stockholder
Approval..................... If the Company does not obtain stockholder
approval of the conversion of up to $6,428,000
principal amount of the New Notes into Common
Stock or the issuance of Common Stock upon
voluntary conversion of the Amended Notes into
Common Stock (1) the interest rate on the New
Notes shall be increased 1% per annum on a
monthly basis to a maximum of 18% and (2) the
holders of the New Notes shall have the right to
have such New Notes repurchased by the Company
at a price equal to 112% of the principal amount
of such New Notes.
Sinking Fund................. None
Ranking/Security............. The New Notes and the outstanding $10.0 million
principal amount of 12% Secured Convertible
Senior Notes issued to Value Partners, Ltd. (the
"Original Secured Notes") (which we expect to
amend, restate and increase to $14.0 million
upon consummation of the Exchange Offer shall be
considered as a single class of pari passu
indebtedness of the Company. The New
15
<PAGE> 16
Notes are equivalent in right of payment of
principal and premium, if any, to the Amended
Notes and shall not be subordinate in right or
priority of payment to any existing or future
other indebtedness of the Company.
The New Notes received by "QIBs as a result of
the Exchange Offer will be secured, on an
equivalent or pari passu basis with the Amended
Notes, by a pledge by us of certain of our
mortgage-related securities and the capital
stock of our operating subsidiary, The Money
Centre, Inc. ("Money Centre"). The New Notes
received by non-QIBs as a result of the Exchange
Offer will be secured only by a pledge of the
capital stock of Money Centre. The security
interest of the non-QIB holders in the capital
stock of the Money Centre will be senior to that
of the QIB holders and the holders of the
Secured Notes; however, the recovery of the
non-QIB holders pursuant to this senior security
interest will be limited proportionately to the
amount recoverable by the QIB holders and the
holders of the Secured Notes pursuant to their
respective security interests in the collateral.
The Intercreditor Agreement (described below
under "The Exchange Offer -- Other Agreements")
provides for a pro-rata recovery by the holders
of the New Notes and the Amended Notes of the
proceeds of a liquidation of the collateral
pledged by the Company following a Default or an
Event of Default (each as defined in the New
Indenture), except that the holders of the New
Notes that are not QIBs may not receive proceeds
from the liquidation of certain collateral that
may only be pledged to QIBs, even if this fact
results in such non-QIB holders of the New Notes
receiving a lesser pro-rata recovery upon the
liquidation of the collateral than then QIB
holders of the New Notes and the holders of the
Amended Notes.
Covenants.................... The New Indenture pursuant to which the New
Notes will be issued contains certain covenants
for the benefit of the holders of the New Notes,
including, among others, covenants to limit the
incurrence of additional indebtedness, the type
of investments that we can make, the incurrence
of liens, transactions with affiliates and
certain mergers and consolidations, and status
as an "investment company." See "Description of
New Notes -- Certain Covenants" beginning on
page 120 of this Memorandum.
Amendment or Waiver of
Indenture Provisions......... Certain provisions of the New Indenture may be
amended or waived with the consent of the
holders of at
16
<PAGE> 17
least the majority in principal amount of the
then outstanding New Notes and the Secured Notes
acting as a single class of notes; however,
certain other covenants and events of default
under the Indenture may only be amended or
waived by the holders of 70% of the then
outstanding New Notes and the Secured Notes
acting as a single class of notes.
Book-Entry; Delivery and
Form......................... Beneficial interests in the New Notes will be
shown on, and transfers thereof will be effected
only through, records maintained in book-entry
form by The Depository Trust Company and its
participants. See "Description of the New
Notes -- Book Entry, Delivery and Form"
beginning on page 125 of this Memorandum.
17
<PAGE> 18
SUMMARY FINANCIAL DATA
You should read the summary financial information set forth below in
conjunction with our audited financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 48 of this Memorandum. However, due to substantial
changes to our business and operating strategy, we believe that our historical
financial and operating data are not likely to be indicative of our future
performance and our results of operation for fiscal 1999 are not comparable to
fiscal 1998.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED AUGUST 31, NOVEMBER 30,
----------------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 1998 1999
------- ------- ----------- ----------- ----------- ----------- -----------
(THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Gain (loss) on sale of
loans............... $12,233 $16,539 $ 45,123 $ (26,578) $ 1,207 $ 172 $ 4,241
Net unrealized gain
(loss) on mortgage
related securities(1). -- 2,697 3,518 (70,024) (3,317) 270 (624)
Loan servicing income,
net................. 873 3,348 3,036 999 375 240 96
Interest revenue, net
of interest expense
of $468, $1,116,
$6,374, $13,162,
$7,958, $1,764 and
$3,227.............. 473 988 3,133 1,624 (389) (162) (51)
------- ------- ----------- ----------- ----------- ----------- -----------
Total revenues (losses).. 13,579 23,572 54,810 (93,979) (2,124) 520 3,662
------- ------- ----------- ----------- ----------- ----------- -----------
Total expenses.......... 7,660 12,417 31,000 32,010 19,413 4,482 7,641
------- ------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes and
extraordinary
item(2)............... 5,919 11,155 23,810 (125,989) (21,537) (3,962) (3,979)
Income tax expense
(benefit) before
extraordinary
item(2)............... 2,277 4,235 9,062 (6,334) (8,249) (1,468) (1,488)
------- ------- ----------- ----------- ----------- ----------- -----------
Net (loss) before
extraordinary item.... 3,642 6,920 14,748 (119,655) $ (13,288) (2,494) (2,491)
Extraordinary item, net
of taxes of $2.9
million(5)............ 4,812 --
----------- ----------- -----------
Net income (loss)(2).... $ 3,642 $ 6,920 $ 14,748 $ (119,655) $ (8,476) $ (2,494) $ (2,491)
======= ======= =========== =========== =========== =========== ===========
Net income (loss) per
common share(3):
Basic................. $ 12.50 $ (77.18) $ (2.71) $ (.82) $ (.66)
=========== =========== =========== =========== ===========
Diluted............... $ 12.50 $ (77.18) $ (2.71) $ (.82) $ (.66)
=========== =========== =========== =========== ===========
Weighted-average number
of common shares(3)... 1,180,219 1,550,292 3,137,136 3,056,667 3,801,824
=========== =========== =========== =========== ===========
Weighted-average number
of common shares and
assumed conversions(3). 1,180,219 1,550,292 3,137,136 3,056,667 3,801,824
=========== =========== =========== =========== ===========
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
AS OF
AS OF AUGUST 31, NOVEMBER 30,
--------------------------------------------------- ------------
1995 1996 1997 1998 1999 1999
------- ------- -------- -------- -------- ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF FINANCIAL
CONDITION DATA:
Cash and cash equivalents...... $ 752 $ 443 $ 6,104 $ 36,404(4) $ 10,475 $ 11,341
Loans held for sale, net(4).... 3,676 4,610 9,523 10,975(5) 54,844 53,166
Mortgage related
securities(1)................ -- 22,944 106,299 34,830 31,757 31,827
Excess servicing rights(1)..... 14,483 12,121 -- -- -- --
Mortgage servicing rights...... 1,076 3,827 9,507 83 --
Total assets................... 24,081 50,606 156,554 104,535 135,386 132,608
Allowance for credit losses on
loans sold with recourse..... 886 920 7,014 2,472 -- --
Subordinated debt(5)........... -- -- 40,000 42,693 30,724 30,698
Total liabilities.............. 13,300 32,905 103,447 77,941 114,268 113,981
Stockholders' equity........... 10,781 17,701 53,107 26,594 21,118 18,627
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED AUGUST 31, NOVEMBER 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1998 1999
------- -------- -------- -------- -------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Loan production......... $87,751 $139,367 $526,917 $338,942 $119,112 16,518 100,485
Weighted-average
interest rate on loan
production............ 14.55% 14.03% 13.92% 13.89% 11.29% 13.89% 11.29%
Loans in servicing
portfolio (end of
period):
Company-owned(7)...... 3,720 4,698 9,563 12,450(5) -- -- --
Securitized........... 88,566 209,491 618,505 18,772 -- -- --
------- -------- -------- -------- -------- -------- --------
Total servicing
portfolio......... $92,286 $214,189 $628,068 $ 31,222 -- -- --
======= ======== ======== ======== ======== ======== ========
Cash used in
operations............ $ 3,619 $ 12,440 $ 72,438 $ 39,723 $ 34,984 $ 20,161 $ (2,753)
======= ======== ======== ======== ======== ======== ========
</TABLE>
- -------------------------
(1) Mortgage related securities are junior subordinated interests retained by
the Company in pools of mortgage loans sold by the Company in securitization
transactions. SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," required the Company,
as of January 1, 1997, to reclassify excess servicing rights (junior
subordinate interests retained by the Company in pools of mortgage loans
sold in transactions similar to a securitization) to mortgage related
securities. The fair value (the dollar amount on the Company's balance
sheet) of the Company's mortgage related securities was written down from
$106.3 million at the end of fiscal 1997 to $34.8 million at the end of
fiscal 1998 and $31.8 million at the end of fiscal 1999. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations:
and Notes 2, 5 and 17 to the Company's financial statements contained in the
Company's Annual Report on Form 10-K on the fiscal year ended August 31,
1999 accompanying this Memorandum (the "Form 10-K").
(2) The results of operations of the Company's operations were included in the
consolidated federal income tax returns filed by Mego Financial, through
19
<PAGE> 20
September 2, 1997, the date the shares of Common Stock of the Company were
distributed by Mego Financial to shareholders in a tax free spin-off. For
more details on this and other transactions with Mego Financial and its
affiliates, see "Certain Relationships and Related Transactions".
(3) Earnings per share for the fiscal years ended August 31, 1995 and 1996 are
not presented because, during these years, the company was a wholly owned
subsidiary of Mego Financial.
(4) Loans held for sale, net includes a valuation reserve which reflects the
company's best estimate of the amount that we expect to receive on the sale
of these loans.
(5) The Company sold $40.0 million principal amount of Original Notes in
November 1996 and an additional $40.0 million principal amount of Original
Notes in October 1997. As part of the recapitalization, the Company issued
$37.5 million of Preferred Stock and $41.5 million principal amount of Old
Notes in exchange for $79.0 million of Original Notes. The Company purchased
all of the Original Notes remaining outstanding as of October 31, 1998. In
February 1999, the Company repurchased $11 million principal amount of Old
Notes which resulted in an extraordinary gain, net of income tax, of $4.8
million.
20
<PAGE> 21
RISK FACTORS
Statements issued or made from time to time by Altiva Financial Corporation
or its representatives contain statements which may constitute "Forward-Looking
Statements" within the meaning of the Securities Act of 1933 and the Securities
Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act
of 1995. Such statements include statements regarding our intent, belief or
current expectations as well as the assumptions on which such statements are
based. Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
contemplated by such forward-looking statements. Important factors currently
known to management that could cause actual results to differ materially from
those in forward-looking statements are set forth in below. We undertake no
obligation to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of unanticipated events or changes to future
operating results over time.
LIQUIDITY RISKS
Risks Related to Warehouse Lines
Our business operations require continued access to adequate cash to fund,
purchase and make mortgage loans, to pay interest on, and repay, our debts and
to pay general and administrative expenses. We are currently dependent on the
line provided by Sovereign Warehouse (the "Sovereign Warehouse Line") and the
warehouse line provided by First Collateral Financial Services (the "First
Collateral Line") to fund, purchase and make mortgage loans before we sell them.
If either of these lines are terminated, for any reason, it could cause us to be
unable to continue to produce loans. If we successfully increase loan
production, we will need increasingly larger amounts of cash for our operations.
We are currently experiencing a liquidity shortage
During the period from August 31, 1999 to December 10, 1999, our cash and
cash equivalents decreased from $10.5 million to $909,000. This decrease was
attributable to operating performance being less than forecast and unexpected
losses on the rule of loans during the period. As a result of the decrease, the
Company's cash and cash equivalents currently on hand will not be sufficient to
enable the Company to sustain operations past December 31, 1999. In addition, as
a result of this decrease, the Company currently lacks sufficient liquidity to
pay its outstanding debts, including accrued interest on the Company's
outstanding indebtedness. While we are attempting to relieve our current
liquidity shortage through the refinancing of our existing Old Notes and the
sale of additional Amended Notes as described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources," there can be no assurances that we will be successful in
this effort. A failure to improve our current liquidity position will have a
serious adverse effects on the Company, which may include:
(1) defaults by the Company with respect to the Company's outstanding
indebtedness, including its Old Notes and Original Secured Notes;
(2) an inability by the Company to implement its strategic plan; and
(4) insolvency
21
<PAGE> 22
As of December 1, 1999, we went into default with respect to our
outstanding Old Notes due to our failure to make a scheduled interest payment.
We have 30 days to cure this default without penalty. As discussed in
"Management's Discussion of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" we are currently attempting to
refinance our Old Notes. There can be no assurances that their refinancing will
be successful.
RISKS RELATED TO THE SALE OF LOANS
We historically have principally relied on selling loans in securitization
transactions to generate cash. As a major part of our strategic initiatives, we
intend to generate positive cash flow mainly by selling loans to institutional
purchasers in the secondary market. Under the terms of the Flow Purchase
Agreement with Sovereign Bancorp (the "Flow Purchase Agreement"), we have agreed
to sell, and Sovereign Bancorp has agreed to buy, up to $100.0 million of our
mortgage loans per quarter through September 2001. Sovereign Bancorp also has a
right of first refusal to buy the balance of our loans, subject to our mutual
agreement as to the purchase terms. The right of first refusal could make it
more difficult for us to sell our loans to others if Sovereign Bancorp decides
not to acquire some of our loans or if we cannot negotiate mutually acceptable
terms for the purchase of our loans.
The value of, and markets for, selling our loans are dependent on, among
other things:
(1) the willingness of banks, thrifts and other institutional
purchasers to acquire Home Equity and Equity + loans;
(2) the premiums over the principal amount of these loans that
institutional purchasers are willing to pay; and
(3) the resale market for our loans.
The markets also are affected by more general factors, including general
economic conditions, interest rates and government regulations. These factors
currently affect, and may continue to affect, our ability to sell loans in the
secondary market for acceptable prices within reasonable time frames. A
reduction in the secondary market for first mortgage loans, home equity loans
and high loan-to-value loans would hurt our ability to sell loans in the
secondary market as well as our liquidity and future loan production. We cannot
predict whether the liquidity of the secondary market will continue to diminish
in the future.
Risks Associated with the Need For Alternative Financing
If the amounts available under the Sovereign Warehouse Line or the First
Collateral Line to fund our loan production prior to its sale are insufficient
to enable us to produce the volume of loans necessary for us to operate
profitably or on a positive cash flow basis, we will have to seek out other
sources of liquidity. This may include additional warehouse financing and debt
and/or equity securities offerings. The Sovereign Warehouse Line terminates at
the end of February 2000 and is renewable, at Sovereign's option, in six-month
intervals for up to five years. Sovereign may terminate the Sovereign Warehouse
Line if we do not sell them $100.0 million of loans in each fiscal quarter
beginning with the calendar quarter ending March 31, 1999. If either of these
events happens, we cannot guarantee that additional financing will be available
on favorable terms, or at all. If we are
22
<PAGE> 23
not successful in maintaining or replacing existing financing or obtaining
additional financing, we would be unable to continue to originate loans.
Except for certain financial covenants in a pledge and security agreement
entered into in April 1997, we are currently complying with the Sovereign
Warehouse Line and agreements with our other lenders.
Before the Recapitalization, we were in violation of our warehouse
agreement, the indenture governing the Original Notes and agreements with our
other lenders. If we breach or violate any covenant or condition contained in
our borrowing arrangements, we might be unable to obtain funding for our
operations which would have a material adverse effect on us.
Some of our borrowing arrangements limit the amount of advances that can be
made to us. These limitations are based on the value of, and the delinquency
experience relating to, our mortgage related securities pledged to the lender. A
decrease in the value of the pledged securities would reduce the amount of funds
that we can borrow under the facilities, requiring us to pay down the loans.
Risk of Violation of Representations Made to Loan Purchasers
We make representations and warranties to the purchasers of our mortgage
loans regarding compliance with laws, regulations and program standards and the
accuracy of information. Under certain circumstances we could become liable for
damages or be required to repurchase a loan if there has been a breach of these
representations or warranties. We generally receive similar representations and
warranties from our loan sources. If these representations and warranties are
breached, we would be subject to the risk that a loan source will not have the
financial capacity to repurchase loans or that a loan source will not otherwise
respond to our demands. We cannot guarantee that we will not experience losses
due to breaches of representations and warranties in the future.
RISKS ASSOCIATED WITH IMPLEMENTING OUR NEW STRATEGIC PLAN
Since February 1998, our business strategy has been substantially revised.
Our new business strategy has three main components:
(1) focusing on producing Home Equity loans and reducing our
historical focus on the production of Equity + loans;
(2) increasing loan production by acquiring other mortgage lending
companies; and
(3) selling loans produced by us for cash to institutional purchasers
in a secondary market instead of selling loans in securitization
transactions.
During the three months ended August 31, 1999, we produced only $18.6
million principal amount of mortgage loans. For the three months ended November
30, 1999, we produced only $10.5 million principal amount of mortgage loans. Our
ability to increase loan production will depend on many factors, including our
ability to:
- successfully acquire and integrate the operations of other mortgage
lending companies
- offer attractive loan products to prospective borrowers
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- successfully market our loan products
- establish, maintain and expand relationships with mortgage brokers and
bankers
- obtain and maintain increasingly larger lines of credit to fund loans
prior to their sale
- access capital markets
- attract and retain qualified funding, quality control and other personnel
You should consider our future prospects in light of the risks, delays,
expenses and difficulties frequently encountered by an early-stage business in a
highly-regulated, competitive environment. We cannot guarantee that we will
implement successfully our new business strategy, develop our current operations
in a timely or effective manner, or generate significant revenues, positive cash
flow or profits.
RISKS ASSOCIATED WITH OUR MANAGEMENT TEAM
We cannot guarantee that the our management team will be able to operate
effectively or implement successfully our new strategic plan. Our new management
team's ability to manage our growth as we implement our strategic initiatives
depends upon many factors, including their ability to:
(1) maintain appropriate procedures, policies and systems to ensure
that our loans perform at least in accordance with industry standards;
(2) satisfy our need for additional financing on reasonable terms;
(3) manage the costs associated with expanding our infrastructure,
including systems, personnel and facilities; and
(4) operate profitably and on a cash flow positive basis.
If management cannot execute successfully our new business strategy, it
will have a material adverse effect on our financial condition, results of
operations and cash flow.
Our expansion and development largely will be dependent upon the continued
services of the senior members of our new management team including Champ
Meyercord, our Chief Executive Officer, and J. Richard Walker, our Executive
Vice President and Chief Financial Officer. The loss of the services of Messrs.
Meyercord or Walker for any reason could have a material adverse effect on us.
In addition, our future success will require us to recruit and retain additional
key personnel, including additional sales and marketing personnel. We do not
maintain key person life insurance on any members of senior management.
PERFORMANCE OF FUTURE ACQUISITIONS
As part of our business strategy, we intend to acquire other mortgage
lending companies. By acquiring other mortgage lending companies, we believe we
can expand our loan production, while avoiding the time and expense required to
build new mortgage loan production platforms. The value of these companies
generally will be in their ability to immediately produce mortgage loans at a
low cost. This type of value will typically be a substantial portion of the
assets acquired and it is classified under generally accepted
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accounting principles as an intangible. Generally acceptable accounting
principles require us to amortize (write off) expenses related to goodwill and
other intangible assets that we acquire. This will reduce our earnings. Future
acquisitions may also result in dilutive issuances of equity securities and our
incurrence of additional debt. All of these factors could have a material
adverse effect on our financial condition, results of operations and cash flows.
Future acquisitions would involve numerous additional risks, including:
- difficulties in the integration of the acquired company's operations,
services, products and personnel
- entry into markets in which we have little or no direct prior experience
- the potential loss of the acquired company's key employees
Mortgage lending companies that we acquire in the future may not perform in
accordance with our expectations. We cannot predict whether we will identify
acquisition opportunities, whether we can negotiate acquisitions on favorable
terms or whether any acquisition will result in profitable operations in the
future or be successfully integrated with our existing business.
Acquisitions in which all or a portion of the purchase price is in shares
of Common Stock would require, in certain cases, the written consent of each of
City National Bank and Sovereign. We cannot guarantee that we would be able to
obtain any such consent.
RISKS ASSOCIATED WITH MORTGAGE BACKED SECURITIES
Risks Related to our Junior Interest
We historically have sold the greater portion of our Equity + and Title I
loans in securitization transactions. As a result, we are at risk because these
loans back our mortgage related securities. In a securitization transaction, the
cash flow from the mortgage loans backing the securitization, principal and
interest is first paid to the owners of the senior interests according to a
pre-established schedule of required interest and principal payments. Payment of
cash flow to our mortgage related securities is junior to the scheduled
principal and interest payments to the senior interests.
If the borrowers do not make their payments on the loans backing a
securitization or if the payments are insufficient to make required principal
and interest payments on the senior interests, the amounts that would be paid to
us will be used to cover the shortfall. This would reduce or in some cases
eliminate the stream of revenues that would have been paid to us on our mortgage
related securities. If payments received from the loans backing a securitization
are less than the amounts we anticipated at the time we sold the loans in a
securitization transaction, we may be required to write down the fair value of
our mortgage related securities retained in that securitization. This would
result in a charge to earnings. We cannot guarantee that estimates of future
losses on loans backing our mortgage related securities will be adequate in the
future.
Risk of Write Down of the Value of Mortgage Backed Securities due to Poor
Performance of Mortgage Loans
We had to write down the fair value of our mortgage related securities
during fiscal 1998. This write down resulted from unexpectedly high rates of
prepayments, delinquen-
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cies, default, and credit losses. As a result, we substantially increased the
anticipated prepayment rates, delinquency rates, default rates and credit losses
on the mortgage loans backing our mortgage related securities. The new
assumptions significantly decreased the cash flow we expected to receive on
these securities in the future, which required us to reduce the fair value of
our mortgage related securities to $34.8 million on August 31, 1998 compared to
$106.3 million on August 31, 1997.
In the future, we may have to make additional reductions in the carrying
value of our mortgage related securities. We cannot guarantee that the
prepayment rate, delinquency rate, default rate, and credit losses on the
mortgage loans backing the securities will not increase above the levels we
currently anticipate. If we have to further write down these securities' value,
we may incur losses in the quarter when we write them down. We may then violate
the net worth covenants in our borrowing agreements. Any of these events could
have a material adverse effect on our financial condition and operations. For
additional details concerning the valuation of our mortgage backed securities,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Securitization Transactions" and Notes 2, 5 and 17 to our
financial statements located in the Company's Form 10-K.
Risks Related to Over-Collateralization
As part of the sale of loans in securitization transactions, we are
required to establish over-collateralization and/or build over-collateralization
levels by retaining distributions of excess cash flow otherwise payable to us on
our mortgage related securities. Excess cash flow results from the positive
difference between the higher interest rate paid by our borrowers on the
mortgage loans sold in the securitization and the lower yield paid to the owners
of the senior interests in the trust established to own the loans sold by us.
Over-collateralization serves as credit enhancement for the owners of the senior
interests and is available to absorb losses realized on loans backing the
securitization. Were it not for these over-collateralization requirements, we
would be able to use the excess cash flow in our operations. Because of those
requirements, if borrowers default on principal and interest payments on their
loans, the securitization trust holding the mortgages would have to use part of
the over-collateralization to pay the owners of the senior interests. This could
delay, reduce or eliminate the excess cash flow otherwise payable to us on our
mortgage related securities.
Risk Related to Interest Rate Spread
During fiscal 1997, we sold $398.4 million principal amount of mortgage
loans, that had a weighted-average interest rate of 14.0%, in securitization
transactions. The $390.1 million principal amount of senior interests sold to
institutional investors as part of these securitizations had an initial
weighted-average interest rate of 6.88%. The $8.3 million difference between the
amount of mortgage loans sold and the amount of senior interests sold creates
the initial over-collateralization. The 7.1% difference between the interest
paid by the borrowers and the interest paid to the owners of the senior
interests (the "spread") declines over time primarily because of payoffs
(including defaults) of the loans backing the securitization. The initial spread
would be equal to 7.1% times $390.1 million, or $27.7 million annually plus
interest at 14.0% on the $8.3 million principal amount of loans in the
over-collateralization account. We use the spread and the cash flow from the
loans in an initial over-collateralization to reduce the principal balances of
the senior interests or fund the additional over-collateralization.
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The initial over-collateralization and retained amounts are determined by
the entity that, as a condition to obtaining insurance, issues any guarantee of
the related senior interests and/or by the rating agencies as a condition to
obtaining the desired rating on the senior interests. If we use the spread and
the cash flow from the loans in an initial over-collateralization in this
manner, we will continue to be subject to the risks of faster than anticipated
rates of voluntary prepayments, delinquencies, defaults and credit losses on
foreclosure on the mortgage loans backing our mortgage related securities that
we sold in prior securitizations.
In addition, using the spread to fund reserves delays or in some cases
eliminates cash distributions that we would be entitled to receive on our
mortgage related securities. For a detailed explanation of excess cash flow,
mortgage related securities and securitization transactions, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Securitization Transactions".
Risks Related to Loan Repurchases
We agree to repurchase or replace loans that do not conform to our
representations and warranties at the time we sell the loans. If we were
required to repurchase or replace loans, we cannot guarantee that the loans
repurchased or replaced could be sold at a price equal to our total cost of
acquisition. For additional details, see "Business -- Loan Servicing" and
"-- Sale of Loans" and Note 2 to our financial statements as contained in the
Company's Form 10-K.
RISKS FROM THE SALE OF SERVICING RIGHTS
We historically have sold substantially all of our mortgage loans with
servicing retained. This means that we retained the right to service the loans.
As part of the Recapitalization, we sold our existing mortgage loan servicing
rights, including the right to service all of the mortgage loans backing our
mortgage related securities, to City Mortgage Services. To the extent that City
Mortgage Services is ineffective in servicing these loans, we would experience
increased delinquencies, defaults and credit losses, which would have an adverse
effect on us. Consequences could include the additional write downs of the fair
value of our mortgage related securities and a restriction on our ability to
access capital markets for our future financing requirements.
The delinquency and default rates on the mortgage loans backing our
mortgage related securities has increased significantly since we sold the
servicing rights on these loans to City Mortgage Services. In the past, this
increase in delinquencies and defaults has caused us to write down the fair
value of these securities. We cannot guarantee that City Mortgage Services will
perform up to industry standards, which could result in the adverse consequences
described above. If City Mortgage Services does not perform well, we have the
right to terminate City Mortgage Services. However, we would have to find a new
servicer for these loans after such a termination. We might be unable to find an
appropriate servicer or, if identified, we may not be able to hire such servicer
on favorable terms.
INTEREST RATE RISKS
Changes in interest rates affect our business by decreasing the demand for
loans during periods of higher interest rates and increasing prepayment rates
during periods of
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lower interest rates. The profits we realize from loans are, in part, a function
of the difference between the fixed long term interest rates we charge to
borrowers and the adjustable short term interest rates we pay on the Sovereign
Warehouse Line, which we use to fund loans until we sell them.
Generally, short-term rates are lower than long-term rates. We benefit from
the positive interest rate differential during the time we own the loans pending
their sale. During the period from 1994 to the present, the interest rate
differential was high. Interest rates are not predictable or controllable, and
we cannot predict whether the positive interest rate differential will continue
in the future. A change in the differential could have a material adverse effect
on our financial position, results of operations and cash flows.
Changes in interest rates during the period between the establishment of
the borrowers' interest rate on a loan and the sale of the loan affect the
revenues we realize. As part of our loan production process, we issue loan
commitments (sometimes referred to as "interest rate locks") for periods of up
to 30 days to mortgage bankers and brokers. The period of time between the
closing of a loan and the sale of the loan generally ranges from 10 to 90 days.
Increases in interest rates during these periods will result in lower gains (or
even losses) on loan sales than would be recorded if interest rates had remained
stable or had declined. We intend to expand our loan production, increase the
amount of our borrowings under the warehouse lines of credit and increase the
amount of loans held for sale, which will increase our exposure to the risk of
interest rate increases.
Increases in interest rates also may require us to write down the fair
value of our mortgage related securities, which could have a material adverse
effect on our financial condition, results of operations, and cash flows. This
interest rate is the rate we believe would be used by a third party in
determining the value of our mortgage related securities. Increasing the rate at
which we discount to present value the cash flow we expect to receive on our
mortgage related securities reduces their fair value. Decreases in interest
rates may result in increased prepayment rates which may require us to write
down the fair value of our mortgage related securities.
RISK OF VARIATIONS IN QUARTERLY OPERATING RESULTS
Several factors affecting our business can cause significant variation in
our quarterly operating results. Variations in the volume of our production,
differences between our costs of borrowings and the average interest rates paid
by our borrowers, our inability to complete scheduled loan sale transactions and
the condition of the mortgage loan industry and the specialty finance industry
can result in significant increases or decreases in our revenues from quarter to
quarter. A delay in closing a particular loan sale transaction during a
particular quarter would postpone recognition of revenues and gain or loss on
the sale of those loans. In addition, unanticipated delays in closing a
particular loan sale transaction would also increase our exposure to interest
rate fluctuations by lengthening the period during which our variable rate
borrowings under the Sovereign Warehouse Agreement are outstanding. If we were
unable to sell a sufficient number of loans at a premium in a particular
reporting period, our revenues for that period would decline, resulting in lower
net income and possibly a net loss for that period. This could have a material
adverse effect on our financial condition and results of operations.
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RISKS ASSOCIATED WITH DELINQUENCIES AND DEFAULTS ON LOANS
Potential loan delinquencies and defaults by our borrowers expose us to
risks of loss and reduced net earnings. During economic slowdowns or recessions,
loan delinquencies, defaults and credit losses generally increase. In addition,
significant declines in market values of residences securing the loans reduce
homeowners' equity in their homes. The limited borrowing power of our customers
also increases the likelihood of delinquencies, defaults and credit losses on
foreclosure. For Home Equity loans, we rely primarily on the appraised value of
the borrower's home and for Equity + loans we rely on the creditworthiness of
the borrower. We determine the amount of a loan based on the loan-to-value ratio
and the borrower's creditworthiness. After a default by a borrower, we, or the
servicer of the mortgage loan, evaluates the cost effectiveness of foreclosing
on the property. Such default may cause us to charge our allowances for credit
losses on loans held for sale, except to the extent that FHA insurance proceeds
are available. If we must take losses on a loan backing our mortgage related
securities or loans that exceed our allowances, our financial position, results
of operations and cash flows could suffer.
Many of our borrowers have limited access to consumer financing for a
variety of reasons, including insufficient home equity value and unfavorable
past credit histories. We are subject to various risks associated with these
borrowers, including, but not limited to, the risk that borrowers will not pay
interest and principal due, and that the value received from the sale of the
borrower's residence in a foreclosure will not be sufficient to repay the
borrower's obligation to us.
The risks associated with the our business increase during an economic
downturn or recession. These periods also may be accompanied by decreased demand
for consumer credit and declining real estate values. Any material decline in
real estate values reduces the ability of borrowers to use the value of their
homes to support borrowings and increases the loan-to-value ratios of our loans
and the loans backing our mortgage related securities. This weakens collateral
values and the amount, if any, obtained upon foreclosures.
The frequency and severity of losses generally increases during economic
downturns or recessions. Because our borrowers generally do not satisfy criteria
of government agencies that traditional lenders rely on in evaluating whether to
make loans to potential borrowers, these borrowers do not qualify for
traditional "A" credit loans. The actual rate of delinquencies, foreclosures and
credit losses on these loans are often higher under adverse economic conditions
than those currently experienced in the mortgage loan industry in general
because of the lower credit quality of the borrower. Any sustained period of
increased delinquencies, foreclosures and losses could hurt our financial
condition, results of operations and cash flows.
LITIGATION; RISK OF CLAIMS
In the ordinary course of business, we are subject to claims made by
borrowers and private investors from, among other things, losses allegedly
incurred as a result of potentially breaches of fiduciary obligations and
misrepresentations, errors and omissions of our employees, officers and agents.
Industry participants are frequently named as defendants in litigation involving
alleged violations of federal and state consumer lending laws because of the
consumer-oriented nature of the industry and uncertainties with respect to the
application of various laws and regulations. Pending claims and any claims made
in the future may result in legal expenses or liabilities which could have a
material
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adverse effect on our financial condition, results of operations and cash flows.
For details about pending litigation, see "Business -- Legal Proceedings"
located elsewhere in this Memorandum.
COMPETITION
We face intense competition in producing and selling Home Equity loans and
Equity + loans. Our competitors include other consumer finance companies,
mortgage banking companies, commercial banks, credit unions, thrifts, credit
card issuers and insurance finance companies. Many of these competitors are
substantially larger than we are. In addition, our competitors may have more
capital and other resources and a lower cost of capital than we do. In addition,
we may face competition from government-sponsored entities which have entered
the market for non-conforming mortgage loans. Existing mortgage loan purchase
programs may be expanded by the Federal National Mortgage Association ("FNMA"),
the Federal Home Loan Mortgage Corporation ("FHLMC"), or the Government National
Mortgage Association ("GNMA") to include non-conforming mortgages, particularly
loans similar to our Home Equity loans. Entries of government-sponsored entities
into the non-conforming loan market may reduce the interest rate borrowers are
willing to pay on our mortgage loans and may reduce or eliminate premiums on
their sale.
Industry participants compete for business in many ways. Some provide
borrowers more convenience in obtaining a loan, some have better customer
service and others have strong marketing and distribution channels. This
industry has a relatively low barrier to entry, which permits new competitors to
enter the broker-sourced loan market quickly. This may lower the rates we can
charge borrowers, potentially lowering gains on future loan sales. If any of our
competitors significantly expand their activities in our markets, such action
could have a material adverse effect on us.
Changes in interest rates and general economic conditions may also affect
our competition. During periods of increasing interest rates, competitors who
have locked in low borrowing costs may have a competitive advantage. During
periods of declining rates, competitors have solicited, and may in the future
solicit, our customers to refinance their loans. To the extent these
solicitations are successful, the prepayment rates on the loans backing our
mortgage related securities may increase beyond the levels currently anticipated
which may result in a write down in the fair value of these securities.
We depend on mortgage brokers and bankers for substantially all of our
mortgage loan production. These mortgage brokers and bankers generally deal with
multiple lenders for each prospective borrower. Our competitors also attempt to
establish relationships with these entities, none of which are contractually or
otherwise obligated to deal exclusively, or to continue to do business, with us.
In addition, we expect the volume of broker and mortgage banker-sourced loans
funded and purchased by us to increase significantly. Our future operating and
financial results may be more susceptible to fluctuations in the volume and cost
of our broker and mortgage banker-sourced loans from, among other things,
competition from other purchasers of these loans.
As we expand our retail, broker and mortgage banker-sourced loan production
into new geographic markets, we will face competition from lenders with
established positions in these markets. We cannot predict whether we will be
able to compete successfully with those established lenders.
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VOLATILITY OF STOCK PRICE
The price of our Common Stock has experienced significant volatility since
our initial public offering in November 1996. The market price of our common
stock, as adjusted to reflect a one-for-ten reverse stock split which became
effective on March 22, 1999, has ranged from a high of $15.30 per share to a low
of $1.00 per share through February 3, 2000. As of February 23, 2000, the last
sale price of our Common Stock as reported on the Nasdaq SmallCap Market was
$1.75 per share. The stock market recently has experienced extreme price and
volume fluctuations which may be unrelated to the operating performance of
particular companies. Market conditions in the specialty finance industry and
factors such as legislative and regulatory changes, announcements of new
products and services by us, our competitors or third parties, and changes in
earnings estimates by analysts may have a significant effect on the price of our
Common Stock.
RISK OF FAILING TO COMPLY WITH THE LISTING REQUIREMENTS OF THE NASDAQ SMALLCAP
MARKET
The Nasdaq SmallCap Market requires that all listed companies maintain
certain levels with respect to each of the following:
- net tangible assets
- number of publicly held shares
- value of capital stock traded in the Nasdaq SmallCap Market
- bid price
- number of stockholders
- number of market makers
If we fail to comply with any of these requirements, our shares of Common Stock
could be delisted from the Nasdaq SmallCap Market. If our Common Stock was
delisted, we cannot guarantee that there would be a market for you to trade in
the Common Stock.
FACTORS INHIBITING TAKEOVER; EFFECT OF CHANGE OF CONTROL
Sovereign and City Holding Company each has a right of first refusal to
acquire us if our board of directors decides to offer us for sale. In addition,
the change of control provisions of the Old Notes, as well as the change in for
sale control provisions of certain of our other credit arrangements and
employment agreements with our senior executives, could inhibit a takeover
attempt by a third party.
Certain provisions of our Certificate of Incorporation and Bylaws may
delay, defer or prevent a takeover attempt by a third party. Our Certificate of
Incorporation authorizes the Company's board of directors ("Board of Directors")
to determine the rights, preferences, privileges and restrictions of unissued
series of preferred stock of the Company (the "Preferred Stock") and to fix the
number of shares and designation of any series of Preferred Stock without any
vote or action by our stockholders. The issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change of control, since the terms
of the Preferred Stock that might be issued could potentially prohibit or
otherwise restrict our ability to consummate any merger, reorganization, sale of
substantially all of our assets, liquidation or other extraordinary corporate
transaction without the approval of the holders of the outstanding shares of the
Preferred Stock. Other provisions of our Certificate of Incorporation and Bylaws
provide that special meetings of
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the stockholders may be called only by the Board of Directors or upon the
written demand of the holders of not less than 30% of the votes entitled to be
cast at a special meeting.
LEGISLATIVE AND REGULATORY RISKS
Our business is subject to extensive regulation, supervision and licensing
by federal, state and local governmental authorities. These rules and
regulations, among other things, impose licensing obligations on us, establish
eligibility criteria for mortgage loans, prohibit discrimination, provide for
inspections and appraisals of properties, govern credit reports on loan
applicants, regulate assessment, collection, foreclosure and claims handling,
investment and interest payments on escrow balances and payment features,
mandate disclosures and notices to borrowers and, in some cases, fix maximum
interest rates, fees and mortgage loan amounts. If we do not comply with these
requirements, many of which are highly technical, we could lose our approved
status, our servicing contracts could be terminated or suspended without
compensation to the servicer, we could face demands for indemnification or
mortgage loan repurchases, we may suffer the exercise of certain rights of
rescission for mortgage loans by our borrowers, and we may be subject to class
action lawsuits and administrative enforcement actions.
The Internal Revenue Service is considering a rule that would require
lenders to "flag" all of their high loan-to-value loans and to inform consumers
that some portion of their interest payments on high loan-to-value loans are not
tax-deductible. The adoption of this change could have an adverse affect on our
Equity + loan production. In addition, Congress is considering a recommendation
of the National Bankruptcy Review Commission that, if adopted, would treat in a
consumer bankruptcy proceeding the portion of a second mortgage loan that
exceeds the value of a house as unsecured debt. Adoption of these or more
restrictive laws, rules and regulations would have an adverse effect on our
financial condition, results of operations and cash flows.
Members of Congress and government officials periodically have suggested
the elimination of the mortgage interest as a deduction for federal income tax
purposes in certain situations, based on, among other things, borrower income,
type of loan or the principal amount of the loan. Because many of our loans are
used by borrowers to consolidate consumer debt, make home improvements or for
other consumer needs, the reduction or elimination of these tax benefits could
substantially reduce the demand for the type of loans that we offer.
ENVIRONMENTAL RISKS
In the course of our business, we have acquired, and may acquire in the
future, residences that are the collateral or security for loans that are in
default. There is a risk that hazardous substances or waste, contaminants,
pollutants or their sources could be discovered on-site after these residences
are acquired by us. In that event, we may be required by law to remove the
substances from the residences at our cost and expense. We cannot guarantee
that: (1) the cost of removal would not substantially exceed the value of the
residence that is the collateral or security for a loan; (2) we would have
adequate remedies against the prior owner or other responsible parties; or (3)
we would be able to sell the residence prior to or following the removal.
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SEASONALITY
The Company's production of residential mortgages is seasonal to the extent
that borrowers use the proceeds for home improvement contract work. The
Company's production of loans for this purpose tends to build during the spring
and early summer months, particularly where the proceeds are used for pool
installations. This change in seasons also precipitates the need for new siding,
window and insulation contracts. Production declines dramatically from the
holiday season (November and December) through the winter months. While the
Company does not have substantial experience making loans to borrowers who
intend to use the proceeds to purchase a residence, management believes that the
market for such loans will follow the home sale cycle, higher in the spring
through early fall than during the remainder of the year.
YEAR 2000
The Company previously recognized the material nature of the business
issues surrounding computer processing of dates into and beyond the Year 2000
and began taking corrective action. Management believes the Company has
completed all of the activities within its control to ensure that the Company's
systems are Year 2000 compliant and the Company has experienced no interruptions
to normal operations due to the start of the Year 2000.
The Company's Year 2000 readiness costs were approximately $99,000 to
purchase or upgrade its own hardware/software. The Company does not currently
expect to apply any further funds to address Year 2000 issues.
As of February 16, 2000, the Company has not experienced any material
disruptions of its internal computer systems or software applications and has
not experienced any problems with the computer systems or software applications
of its third party vendors, suppliers or service providers. The Company will
continue to monitor these third parties to determine the impact, if any, on the
business of the Company and the actions the Company must take, if any, in the
event of non-compliance by any of these third parties. Based upon the Company's
assessment of compliance by third parties, there appears to be no material
business risk posed by any such non-compliance.
Although the Company's Year 2000 rollover did not present any material
business disruption, there are some remaining Year 2000 related risks, including
risks due to the fact that the Year 2000 is a leap year. Management believes
that appropriate actions has been taken to address these remaining Year 2000
issues and contingency plans are in place to minimize the financial impact to
the Company. Management, however, cannot be certain that Year 2000 issues will
not have a material adverse impact on the Company, since it is early in the Year
2000.
RESTRICTIONS IMPOSED BY THE NEW INDENTURE
The New Indenture contains certain restrictive covenants, including, among
others, covenants limiting the our ability to:
- incur additional indebtedness,
- pay dividends,
- make certain investments,
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- consummate certain asset sales,
- enter into transactions with affiliates,
- incur liens,
- merge or consolidate with any other person or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of the
assets of the Company.
Although the covenants are subject to some exceptions, there can be no
assurance that such restrictions will not adversely affect our ability to
finance their future operations or capital needs or engage in business
activities which may be in the best interest of the Company.
The ability of the Company to comply with such provisions may be determined
by factors beyond our control, such as interest rate fluctuations and other
similar occurrences which may affect our industry generally. A breach of any of
these covenants could result in a default under the New Indenture, the Amended
Notes or other agreements, which could adversely affect our ability to make
payments on the New Notes.
LACK OF A PUBLIC MARKET
The New Notes will constitute a new issue of securities with no established
trading market. The Company does not intend to list the New Notes on any
national securities exchange or seek approval for quotation through any
automated quotation system. There can be no assurance that an active trading
market for the New Notes will develop. Future trading prices of the New Notes
will depend on many factors, including, among other things, prevailing interest
rates, the Company's results of operations and the market for similar
securities. Depending on prevailing interest rates, the markets for similar
securities and other factors, including the financial condition of the Company,
the Notes may trade at a discount from their principal amount.
In addition, under the terms of the New Indenture, the New Notes held by
QIBs may only be transferred to QIBs.
CONSEQUENCES OF THE EXCHANGE OFFER ON NON-TENDERING HOLDERS OF THE OLD NOTES
The Company anticipates that prior to completion of the Exchange, it will
solicit the consent of the requisite number of the holders of the Old Notes
required to remove certain covenants and events of default from the indenture
governing the Old Notes. Upon completion of this consent solicitation, which the
Company expects to be successful, the amount of protection for the holders of
the Old Notes under the Old Indenture will be significantly weakened, and it may
be significantly more difficult for the holders of the Old Notes to recover any
amounts from the Company if events occur that have a material adverse effect on
the Company's business.
EXCHANGE OFFER PROCEDURE
Issuance of the New Notes in exchange for the Old Notes pursuant to the
Exchange Offer will be made only after timely receipt by the Exchange Agent of
such Old Notes, a properly completed and duly executed Letter of Transmittal and
all other required documents. Therefore, holders of the Old Notes desiring to
tender such Old Notes in exchange for New Notes should allow sufficient time to
ensure timely delivery. The
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Company is under no duty to give notification of defects or irregularities with
respect to tenders of Old Notes for exchange. In addition, any holder of Old
Notes who tenders in the Exchange Offer for the purpose of participating in a
public distribution of the New Notes may be deemed to be an "underwriter"
(within the meaning of Section 2(11) of the Securities Act) of the New Notes
and, if so, will be required to comply with the registration and prospectus
delivery requirements in the Securities Act in connection with any resale
transaction. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities, must
acknowledge in the Letter of Transmittal that accompanies this Memorandum that
it will deliver a prospectus in connection with any resale of such New Notes.
See "Plan of Distribution." To the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Old Notes could be adversely affected. See "The Exchange Offer."
SHARES ELIGIBLE FOR FUTURE SALE
The sale of substantial amounts of our Common Stock into the market or the
prospects of a sale could have a material and adverse effect on the market price
of our Common Stock. As of January 17, 2000, there were 4,062,697 shares of
Common Stock outstanding.
In addition, as of January 17, 2000, there were 3,760,636 shares of Common
Stock issuable upon the conversion of outstanding Preferred Stock of the
Company. Furthermore, assuming stockholder approval of the mandatory conversion
of the Convertible New Notes and the voluntary conversion of the Amended Notes,
the Convertible New Notes will automatically convert into 6,428,000 shares of
Common Stock, and the Amended Notes may be converted into 14,284,363 shares of
Common Stock.
Sovereign Bancorp and City National Bank each have the option to purchase
666,666 shares of Common Stock, subject to adjustment, at an exercise price of
$15.00 per share which, if exercised in full, would add 1,333,333 shares of
Common Stock to the number of shares of Common Stock outstanding. Our stock
option plans currently authorize the granting of options to purchase an
aggregate of 1.4 million shares of Common Stock, of which options to purchase
786,859 shares of Common Stock have been granted.
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<PAGE> 36
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
Currently, all of the Old Notes are held of record in book-entry form by
The Depository Trust Company ("DTC"). The term "Holder" with respect to the
Exchange Offer means any person in whose name Old Notes are held of record by
DTC.
Due to a cash shortage that began in November 1999 and is continuing (as
described in more detail herein in "Management's Discussion and Analysis of
Results of Operation and Financial Condition -- Liquidity and Capital
Resources"), the Company is in the process of (1) trying to restructure its
currently outstanding debt obligations and (2) attempting to raise additional
cash to fund its working capital needs. The Company has obtained commitments
from the holders of approximately $28.0 million principal amount of its
outstanding Old Notes to participate in the Exchange Offer.
A failure by the Company to consummate the Exchange Offer and/or raise
additional cash will have a material adverse effect on the Company's ability to
remain solvent and continue its operations. See "Management's Discussion and
Analysis of Results of Operation and Financial Condition -- Liquidity and
Capital Resources."
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the New
Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for sale, resold or otherwise transferred by any holder without
compliance with the registration and prospectus delivery provisions of the
Securities Act. Based on interpretations by the staff of the Commission set
forth in no-action letters issued to third parties, the Company believes the New
Notes issued pursuant to the Exchange Offer in exchange for Old Notes, may be
offered for resale, resold and otherwise transferred by any holder thereof
(other than broker-dealers, as set forth below, and any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that
- the New Notes are acquired in the ordinary course of such holder's
business; and
- such holder has no arrangement or understanding with any person to
participate in the distribution of such New Notes.
Any holder who tenders in the Exchange Offer with the intention to
participate, or for the purpose of participating, in a distribution of the New
Notes or who is an affiliate of the Company may not rely upon such
interpretations by the staff of the Commission and, in the absence of an
exemption therefrom, must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction. Failure to comply with such requirements in such instance may
result in such holder incurring liabilities under the Securities Act for which
the holder is not indemnified by the Company.
You will not, however, be able to freely resell any shares of Common Stock
that you may receive upon conversion of the Convertible New Notes (assuming
approval of such conversion by the stockholders of the Company). The Company
intends to file a registration statement with the SEC promptly after the
consummation of the Exchange Offer and the sale of the Amended Notes to provide
for the resale of any shares of
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<PAGE> 37
Common Stock issued upon the mandatory conversion of the Convertible New Notes
and shares of Common Stock issuable upon conversion of the Amended Notes.
In addition, under the terms of the New Indenture, the New Notes held by
QIBs may only be transferred to QIBs.
The Exchange Offer is not being made to, nor will the Company accept
surrenders for exchange from, holders of Old Notes in any jurisdiction in which
this Exchange Offer or the acceptance thereof would not be in compliance with
the securities or blue sky laws of such jurisdiction.
By tendering in the Exchange Offer, each holder of Old Notes will represent
to the Company that, among other things:
- the New Notes acquired pursuant to the Exchange Offer are being obtained
in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the holder;
- neither the holder of Old Notes nor any such other person has an
arrangement of understanding with any person to participate in the
distribution of such New Notes;
- if the holder is not a broker-dealer, or is a broker-dealer but will not
receive New Notes for its own account in exchange for Old Notes, neither
the holder nor any such other person is engaged in or intends to
participate in the distribution of such New Notes; and
- neither the holder nor any such other person is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act or, if
such holder is an "affiliate," that such holder will comply with the
resale requirements of the Securities Act to the extent applicable.
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Notes are urged to
consult their financial and tax advisors in making their own decisions on
whether to participate in the Exchange Offer.
TERMS OF THE EXCHANGE OFFER
General. Upon the terms and subject to the conditions set forth in this
memorandum the Letter of Transmittal and the Exchange Agreement, the Company
will accept any and all Old Notes validly tendered and not withdrawn prior to
5:00 p.m., New York City time, on the Expiration Date. The New Notes are
issuable only in registered form, without coupons, in denominations of $1,000
and any integral thereof. The Company will issue $19,382,000 aggregate amount of
New Notes in exchange for $30.5 million principal amount of outstanding Old
Notes plus premium, if any, and accrued but unpaid interest thereon, accepted in
the Exchange Offer. Holders may tender some or all of their Old Notes pursuant
to the Exchange Offer. However, Old Notes may be tendered only in integral
multiples of $1,000.
The main differences between the Old Notes and the New Notes are:
- we will not be required to make any interest payments with respect to the
New Notes until August 2001;
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- the maturity date under the New Notes will be December 31, 2006;
- the New Notes will be secured, in some cases by the pledge of the capital
stock of Money Centre and in some cases by the pledge of the capital
stock of the Money Centre and certain of our mortgage-related securities;
and
- upon stockholder approval, $6,428,000 principal amount of the New Notes
will be automatically converted into 6,428,000 shares of Common Stock.
For a more detailed description of the terms of the New Notes, see
"Description of the New Notes" located later in this Memorandum.
As of February 1, 2000, $30.5 million aggregate principal amount of the Old
Notes were outstanding. This Memorandum, the Letter of Transmittal and the
Exchange Agreement are being sent to such registered holders of the Old Notes.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the Delaware General Corporation Law or the Old Indenture in connection with the
Exchange Offer. Old Notes which are not tendered for exchange in the Exchange
Offer will remain outstanding and interest thereon will continue to accrue.
The Company shall be deemed to have accepted validly tendered Old Notes
when the Company shall have received an executed signature page of the Exchange
Agreement from the Holder of such Old Notes and returned an signature page of
the Exchange Agreement executed by an authorized officer of the Company to such
Holder of such Old Notes.
The Exchange Agent will act as agent for the tendering holders for the
purposes of receiving the New Notes from the Company.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes described below, in connection with the
Exchange Offer. See "-- Fees and Expenses."
Expiration Date; Extension; Amendments. The term "Expiration Date" shall
mean 5:00 p.m., New York City time, on March 3, 2000, unless the Company, in its
sole discretion, extends the Exchange Offer, in which case the term "Expiration
Date" shall mean the latest date and time to which the Exchange Offer is
extended. Although the Company has no current intention to extend the Exchange
Offer, the Company reserves the right to extend the Exchange Offer at any time
and from time to time by giving oral or written notice to the Exchange Agent and
by timely public announcement. During any extension of the Exchange Offer, all
Old Notes previously tendered pursuant to the Exchange Offer will remain subject
to the Exchange Offer. The date of the exchange of the New Notes for Old Notes
will be the first Nasdaq Stock Market trading day following the Expiration Date.
In all cases, issuance of the New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent, of a properly completed and duly executed Letter of
Transmittal and all other required documents; however, the Company reserves the
absolute right to waive any conditions of the Exchange Offer or defects or
irregularities in the tender of Old Notes.
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Interest on the New Notes. Holders of Old Notes that are accepted for
exchange will not received accrued interest or any other amount that may be due
thereon at the time of exchange. However, each New Note will bear interest from
the date the first New Note is issued.
Procedures for Tendering Old Notes. A holder of the Old Notes may tender
such Old Notes by (1) properly completing and signing the Letter of Transmittal
accompanying this memorandum, and the Book Entry Instructions accompanying this
document or facsimiles thereof and delivering the same via facsimile to the
Exchange Agent at (718) 921-8334, or (2) complying with the guaranteed delivery
procedures described below.
ALL DOCUMENTS TO BE DELIVERED PURSUANT TO THE EXCHANGE MUST BE DELIVERED
VIA FACSIMILE TO THE EXCHANGE AGENT AT ITS FACSIMILE NUMBER (718) 921-8334. IN
ADDITION, THE ORIGINAL SIGNED DOCUMENTS MUST BE RETURNED TO THE EXCHANGE AGENT
IN THE ENVELOPE PROVIDED. NO DOCUMENTS SHOULD BE SENT TO THE COMPANY DIRECTLY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
The Company understands that the Exchange Agent will make a request after
the date of this Memorandum to establish an account with respect to the Old
Notes at DTC for the purpose of facilitating the Exchange Offer. Subject to the
establishment thereof, any financial institution that is a participant in DTC's
system may make book-entry delivery of Old Notes by causing DTC to transfer such
Old Notes into the Exchange Agent's account with respect to the Old Notes in
accordance with DTC's procedure for such transfer. Although delivery of the Old
Notes may be effected through book-entry transfer into the Exchange Agent's
account at DTC, an appropriate Letter of Transmittal and all other required
documents must in each case be transmitted to and received or confirmed by the
Exchange Agent at the address set forth in the Letter of Transmittal on or prior
to the Expiration Date, or, if the guaranteed delivery procedures described
below are compiled with, within the time period provided under such procedures.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by a confirmation of book-entry transfer of such Old Notes into the
Exchange Agent's account at DTC, is received by the Exchange Agent or (ii) a
Notice of Guaranteed Delivery or letter, telegram or facsimile transmission to
similar effect (as provided below) from an Eligible Institution is received by
the Exchange Agent, Issuances of New Notes in exchange for Old Notes tendered
pursuant to a Notice of Guaranteed Delivery or letter, telegram or against
submission of a duly signed Letter of Transmittal (and any other required
documents) and deposit of the tendered Old Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Notes will be
determined by the Company, whose determination will be final and binding. The
Company reserves the absolute right to reject any or all tenders not in proper
from or the acceptance for exchange of which may, in the opinion of the
Company's counsel, be unlawful. The Company also reserves the absolute right to
waive any of the conditions of the Exchange Offer or any defect or irregularity
in the tender of any Old Notes. None of the Company, the Exchange Agent or
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<PAGE> 40
any other person will be under any duty to give notification of any defects or
irregularities in tenders or incur any liability for failure to give any such
notification.
In addition, the Company reserves the right in its sole discretion (1) to
purchase or make offers for any Old Notes that remain outstanding subsequent to
the Expiration Date and (2) to the extent permitted by applicable law, to
purchase Old Notes in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers will differ from the terms
of the Exchange Offer.
Guaranteed Delivery Procedures. If the holder desires to accept the
Exchange Offer and (i) cannot deliver a Letter of Transmittal or any other
required document to the Exchange Agent before the Expiration Date or (ii) the
procedure for book-entry transfer cannot be completed on a timely basis, such
person may effect a tender if the Exchange Agent has received at its office, on
or prior to the Expiration Date, a facsimile transmission from an Eligible
Institution setting forth the name and address of the tendering holder, the
name(s) in which the Old Notes are registered and the certificate number(s) of
the Old Notes to be tendered, and stating that the tender is being made thereby
and guaranteeing that, within three Nasdaq Stock Market trading days after the
date of execution of such facsimile transmission by the Eligible Institution, a
confirmation of book-entry transfer of such Old Notes into the Exchange Agent's
account at DTC, will be delivered by such Eligible Institution together with a
properly completed and duly executed Letter of Transmittal (and any other
required documents). Unless Old Notes being tendered by the above-described
method are deposited with the Exchange Agent within the time period set forth
above (accompanied or preceded by a properly completed Letter of Transmittal and
any other required documents), the Company may, at its option, reject the
tender. Copies of Notice of Guaranteed Delivery which may be used by Eligible
Institutions for the purposes described in this paragraph are available from the
Exchange Agent.
Terms and Conditions of the Letter of Transmittal. The Letter of
Transmittal contains, among other things, the following terms and conditions,
which are part of the Exchange Offer:
- the party tendering Old Notes for exchange (the "Transferor") exchanges,
assigns and transfers the Old Notes to the Company and irrevocably
appoints the Exchange Agent as the Transferor's agent and
attorney-in-fact to cause the Old Notes to be exchanged;
- the Transferor represents and warrants that it has full power and
authority to tender, exchange, assign and transfer the Old Notes and to
acquire New Notes issuable upon the exchange of such tender Old Notes;
- the Transferor also warrants that it will, upon request by the Company,
execute any additional documents deemed by the Company to be desirable to
complete the Exchange Offer
In addition, by executing the Letter of Transmittal, you will agree to all
the terms of the Exchange Offer including, without limitation, the exchange of
all the outstanding Old Notes held by you, plus accrued interest and premium, if
any, for discounted New Notes as described in this Memorandum.
The execution of the Letter of Transmittal will also confer upon US Trust a
power of attorney to execute the following documents on your behalf with respect
to the New Notes: (1) the Exchange Agreement (2) one of two pledge and security
agreements which
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will create a lien in your favor on certain assets of the Company; and (3) an
intercreditor agreement which will determine your rights as a creditor of the
Company in relation to certain other creditors of the Company. See, "The
Exchange Offer -- Other Agreements," below.
Effect of Exchange Agreement / Withdrawal of Tenders of Old Notes. Once
executed on your behalf by US Trust pursuant to a power of attorney contained in
the Letter of Transmittal, the Exchange Agreement will constitute a
legally-binding obligation on your part and the Company's part to complete the
Exchange. The Exchange Agreement will not become legally-binding until (1) both
you and the Company have signed it and (2) the Company returns to you via
facsimile a copy of the signature page of the Exchange Agreement executed by an
authorized officer of the Company. Once you have executed the Exchange Agreement
and delivered the executed Exchange Agreement to the Exchange Agent, whether via
facsimile or another method, you can withdraw your signature to the Exchange
Agreement at any time prior to the time the Company sends to you via facsimile a
copy of the signature page of the Exchange Agreement executed by an authorized
officer of the Company. In order to withdraw your signature to the Exchange
Agreement, you must send to the Exchange Agent via facsimile a letter which
shall:
- specify the name of the Holder having deposited the Old Notes to be
withdrawn;
- identify the Old Notes to be withdrawn (including the principal amount of
such Old Notes);
- contain a statement that such holder is withdrawing his signature to the
Exchange Agreement and his tender of Old Notes;
- specify the name and number of the account at the book-entry transfer
facility;
- be signed by the Holder in the same manner as the original signature on
the Exchange Agreement and the Letter of Transmittal by which such Old
Notes were tendered or be accompanied by documents of transfer sufficient
to have the Trustee with respect to the Old Notes register the transfer
of such Old Notes in the name of the person withdrawing the tender;
- specify the name in which any such Old Notes are to be registered, if
different from that of such Holder.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by the Company, whose determination
shall be final and binding on all parties. Any Old Notes so withdrawn will be
deemed not to have been validly tendered for purposes of the Exchange Offer and
no New Notes will be issued with respect thereto unless the Old Notes so
withdrawn are validly retendered. Any Old Notes which have been tendered but
which are not accepted for exchange will be returned to the Holder thereof
without cost to such Holder as soon as practicable after withdrawal, rejection
of tender or termination of the Exchange Offer. Property withdrawn Old Notes may
be retendered by following one of the procedures described above under
"-- Procedures for Tendering Old Notes" at any time prior to the Expiration
Date.
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OTHER AGREEMENTS
The following discussion describes certain agreements to be entered into by
the Company on behalf of the holders of the New Notes in connection with the
Exchange Offer. A holder of New Notes who executes the Letter of Transmittal
will grant to US Trust a power of attorney to execute any instrument which the
US Trust may deem necessary or advisable to accomplish the purposes of the
Exchange Offer, now or in the future, including the documents described below
and the Exchange Agreement, on behalf of such holder of New Notes.
Stock Pledge Agreement
Pursuant to the Stock Pledge Agreement between the Company and U.S. Trust
as collateral agent (the "Collateral Agent") on behalf of the non-QIB holders of
the New Notes, the Company will pledge to the non-QIB holders of the New Notes
all of the issued and outstanding capital stock of Money Centre as collateral
security for the payment of the New Notes held by such non-QIB holders. The lien
granted to the non-QIB holders shall be senior to the pledge of the capital
stock of Money Centre granted to the holders of the Amended Notes and the QIB
holders to secure the Amended Notes and the New Notes held by QIBs. Upon an
Event of Default under the Indenture, the Collateral Agent shall have the right,
subject to the terms and conditions set forth in the Stock Pledge Agreement and
subject to the Intercreditor and Collateral Sharing Agreement described below,
to sell or otherwise dispose of all or any part of the pledged collateral, or to
retain the pledged collateral, in either case in satisfaction of the secured
indebtedness.
Pledge and Security Agreement (QIB holders)
Pursuant to the Pledge and Security Agreement by and between the Company
and the Collateral Agent, on behalf of holders of the New Notes that are QIBs,
the Company will pledge to the QIB holders of the New Notes (1) all of the
issued and outstanding capital stock of Money Centre and (2) certain
mortgage-related securities as collateral security for the payment of the New
Notes owned by QIBs. The mortgage-related securities which are being pledged to
holders of New Notes which are owned by QIBs are not being pledged to secure New
Notes held by non-QIBs because generally only QIBs may hold or have an interest
in such securities pursuant to their terms. The lien granted to the QIB holders
in the capital stock of Money Centre shall be junior to the pledge of the
capital stock of Money Centre granted to the non-QIB holders to secure the New
Notes held by non-QIB holders. The lien granted to the QIB holders in the
capital stock of Money Centre and in the mortgage-related securities shall be
ranked pari passu with the lien granted to holders of the Amended Notes in the
capital stock of Money Centre and in the mortgage-related securities to secure
the Amended Notes. Upon an Event of Default under the Indenture, the Collateral
Agent shall have the right, subject to the terms and conditions set forth in the
Pledge and Security Agreement and subject to the Intercreditor and Collateral
Sharing Agreement described below, to sell or otherwise dispose of all or any
part of the pledged collateral, or to retain the pledged collateral, in either
case in satisfaction of the secured indebtedness.
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Intercreditor and Collateral Sharing Agreement
Pursuant to the Intercreditor and Collateral Sharing Agreement between the
Company and the Collateral Agent, on behalf of the holders of the New Notes and
the holders of the Amended Notes (the "Intercreditor Agreement"), the parties
set out their respective rights and obligations with respect to collateral that
is pledged to more than one party. In the event of a Default or Event of Default
(each as defined in the Indenture) and a liquidation of the collateral securing
the New Notes and the Amended Notes, the Intercreditor Agreement provides a
mechanism for the distribution of the proceeds of the liquidation. Under the
Intercreditor Agreement the holders of the New Notes held by QIBs (the "New QIB
Notes") and the holders of the Amended Notes shall share equally in the proceeds
of the liquidation of the mortgage-related securities pledged by the Company.
The holders of the New Notes held by non-QIBs (the "New Non-QIB Notes") shall be
paid first out of the proceeds of the liquidation of the pledged capital stock
of Money Centre, with any remaining proceeds being shared equally among the
holders of the Amended Notes and the holders of the New QIB Notes.
The parties to the Intercreditor Agreement will agree to pool the amounts
recovered by each party as a result of their respective security interest in
order to effect a pro-rata recovery among all the holders, with respect to the
principal amount of notes held by each holder in the pledged collateral.
Notwithstanding this pro-rata recovery principal, the holders of the New Non-QIB
Notes may not receive proceeds from the liquidation of mortgage-related
securities pledged to the holders of the New QIB Notes and the Amended Notes,
even if this results in the holders of the Non-QIB Notes receiving a lesser pro
rata recovery from the Collateral than the holders of the New QIB Notes and the
Amended Notes. In addition, the recovery of the holders of the Non-QIB Notes
pursuant to their senior security interest in the capital stock of Money Centre
will be limited proportionately to the amount recoverable by the QIB holders and
the holders of the Amended Notes pursuant to their respective security interests
in the collateral.
Registration Rights Agreement
The Company will enter into a Registration Rights Agreement with the
holders of the New Notes (the "Registration Rights Agreement") to provide for
the registration for resale of the Common Stock to be issued upon a mandatory
conversion of the Convertible New Notes upon approval by the Company's
stockholders. Pursuant to the Registration Rights Agreement, the Company will
agree to file a registration statement (the "Resale Statement") on or before the
Filing Target Date (as defined) and will use its reasonable best efforts to
cause the Resale Statement to become effective on or the Effectiveness Target
Date (as defined).
If (i) the Company fails to file the Resale Statement on or before the
Filing Target Date, (ii) the Resale Statement is not declared effective before
the Effectiveness Target Date or (iii) the Resale Statement is declared
effective but thereafter ceases to be effective and a replacement is not filed
within 10 days, or is filed but fails to be declared effective within 30 days
(each a "Registration Default"), then the holders of the New Notes shall receive
liquidated damages in the amount of $.05 per week for every $1,000 principal
amount of New Notes held. Such liquidated damages will increase by $.05 per week
until such Registration Default is cured up to a maximum of $.50 per week.
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CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, or any extension of
the Exchange Offer, the Company shall not be required to accept for exchange, or
exchange New Notes for, any Old Notes, and may terminate the Exchange Offer as
provided herein before the acceptance of such Old Notes, if, among other things:
(a) any statute, rule or regulation shall have been enacted, or any
action shall have been taken by any court or governmental authority which
would prohibit, restrict or otherwise render illegal consummation of the
Exchange Offer,
(b) the Company has not entered into the Exchange Agreement with at
the holders of at least 92% of the outstanding Old Notes, or
(c) the SEC shall not have declared effective the Registration
Statement on Form T-3 filed by the Company with respect to the Exchange
Offer.
EXCHANGE AGENT
American Stock Transfer & Trust Company has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Memorandum or of the Letter of Transmittal and
requests for Notices of Guaranteed Delivery should be directed to the Exchange
Agent Addressed as follows:
American Stock Transfer
& Trust Company
40 Wall Street
New York, NY 10005
Attn: Isaac Kagen
Facsimile Transmission: (718) 921-8334
Confirm by Telephone:
(718) 921-8200
For information with respect to the Exchange Offer, call
Isaac Kagen of the Exchange Agent:
(718) 921-8200
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telecopy, telephone or in person by officers and regular
employees of the Company. No additional compensation will be paid to any such
officers and employees who engage in soliciting tenders.
The Company has not retained any dealer-manager or other soliciting agent
in connection with the Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptance of the Exchange Offer. The Company,
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse if for its reasonable out-of-pocket expenses in
connection therewith. The Company may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Memorandum, the Letter of
Transmittal and related documents to the beneficial owners of the Old Notes and
in handling or forwarding tenders for exchange.
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The expenses incurred in connection with the Exchange Offer will be paid by
the Company. Such expenses include fees and expenses of the Exchange Agent and
transfer agent and registrar, accounting and legal fees and printing costs,
among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Old Notes pursuant to the Exchange Offer. If, however, New Notes, or Old
Notes for principal amounts not tendered or accepted for exchange, are to be
delivered to, or are to be issued in the name of, any person other than the
registered holder of the Old Notes tendered or if a transfer tax is imposed for
any reason other than the exchange of the Old Notes pursuant to the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes that are not exchanged for New Notes pursuant to the Exchange
Offer will remain governed by the Old Indenture, as the Old Indenture may be
amended from time to time. The Company has been in negotiations with certain of
the Old Note holders regarding amending the Old Indenture prior to finalization
of the Exchange Offer. The proposed amendments would not affect the maturity
date, interest rate, interest payment dates or redemption rights of the holders
of the Old Notes; however, the proposed amendments, which the Company expects to
be adopted, would significantly weaken or remove certain covenants of the
Company contained in the Old Indenture, especially covenants relating to the
Company's conduct of its business.
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CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following summary describes the material United States federal income
and estate tax considerations of the Exchange of the Old Notes for New Notes and
the ownership and disposition of the New Notes and of Common Stock into which
the Convertible New Notes may be converted, but does not purport to be a
complete analysis of all the potential tax considerations relating thereto. This
discussion is based on currently existing provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), existing and proposed Treasury
regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all as in effect or proposed on the date hereof and all
of which are subject to change, possibly with retroactive effect, or to
different interpretations. This discussion assumes that all of the New Notes and
Common Stock into which the Convertible New Notes may be converted will be held
as capital assets (i.e., generally assets that are held for investment), within
the meaning of Section 1221 of the Code, and will not be part of a straddle, a
hedge or a conversion transaction, within the meaning of Section 1258 of the
Code. The discussion is for general information only, and does not address all
of the tax consequences that may be relevant to particular holders in light of
their personal circumstances, or to certain types of purchasers (such as certain
financial institutions, insurance companies, tax-exempt entities, dealers in
securities or persons that have a "functional currency" other than the U.S.
dollar). HOLDERS OF OLD NOTES SHOULD CONSULT THEIR TAX ADVISORS WITH REGARD TO
THE APPLICATIONS OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO THEIR
PARTICULAR SITUATIONS, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF
ANY STATE, LOCAL, OR FOREIGN TAXING JURISDICTIONS.
As used herein, the term "United States Holder" means a beneficial owner of
a New Note or Common Stock that for United States federal income tax purposes is
(i) a citizen or resident of the United States, (ii) treated as a domestic
corporation or domestic partnership, or (iii) an estate or trust other than a
"foreign estate" or "foreign trust" as defined in Section 7701(a)(31) of the
Code. If Notes are held by an entity that is classified as a partnership for
federal income tax purposes, the tax treatment of a partner will generally
depend upon the status of the partner and upon the activities of the
partnership. Partners of partnerships holding New Notes or Common Stock should
consult their tax advisors regarding the effect of the partnership on their tax
consequences.
United States Holders
EXCHANGE OF OLD NOTES FOR NEW NOTES. The tax treatment of a United States
Holder's Exchange of Old Notes for New Notes will depend on whether the Exchange
is treated as a recapitalization. The exchange will be treated as a
recapitalization only if both the Old Notes and the New Notes constitute
"securities," within the meaning of the provisions of the Code governing
reorganizations.
Whether a debt instrument constitutes a security depends on a number of
factors, including the term of the instrument, the purpose of the advances, the
degree of participation and continuing interest in the borrower's business that
is represented by the instrument, and the circumstances under which the debt
instrument was issued. The term of the instrument is generally thought to be the
single most important factor. While no specific "bright line test" has been
adopted by the Internal Revenue Service ("IRS") or the courts, it is generally
thought, based on existing IRS rulings and case law, that a debt instrument with
a maturity of ten years or more is a security, while an instrument with a
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maturity of less than five years is not a security. While not free from doubt,
the Company has previously taken the position that, for federal income tax
purposes, the Old Notes were part of the 12 1/2% Senior Subordinated Notes
originally issued on November 22, 1996, which indebtedness had an original term
of slightly more than 5 years, and that the Old Notes are securities for tax
purposes. Consistent with that position, the Company intends to take the
position that both the Old Notes and New Notes are securities and that the
Exchange will be treated as a recapitalization, although such position is not
free from doubt and may be subject to challenge by the IRS.
(1) TAX CONSEQUENCES IF THE EXCHANGE QUALIFIES AS A TAX-FREE RECAPITALIZATION.
If the exchange of Old Notes for New Notes constitutes a recapitalization,
a United States Holder will not recognize gain or loss on the exchange, except
to the extent that, under Section 354(a)(2)(B) of the Code, the value of the New
Notes received represents accrued interest on the Old Notes that has accrued
since the United States Holder's holding period for the Old Notes began and that
has not previously been included in income of such Holder. Treasury Regulations
issued under Section 446 of the Code generally treat payments made under a debt
instrument as being allocable first to accrued and unpaid interest and then to
principal. However, the legislative history of Section 354(a)(2)(B) of the Code
suggests that the parties may have the discretion to allocate payments between
principal and accrued interest in a different manner. Accordingly, the Exchange
Agreement will provide that the issue price of each New Note issued in exchange
for an Old Note will be allocated first to the payment of principal of the Old
Note, and then to the payment of any accrued but unpaid interest. Because the
principal amount of each Old Note surrendered in the Exchange will exceed the
issue price of each New Note received, no amount should be treated as the
receipt of accrued but unpaid interest if the foregoing allocation is respected
for tax purposes. If a United States Holder has included in income any accrued
but unpaid interest on the Old Notes, such Holder should be able to claim a loss
(possibly ordinary in nature, although the law is unclear) to the extent that
such interest is not deemed paid in the Exchange. A United States Holder will
receive a tax basis in the New Notes equal to such Holder's adjusted tax basis
in the Old Notes exchanged for the New Notes. The United States Holder's holding
period for the New Notes will include the period during which the United States
Holder held the Old Notes.
(2) TAX CONSEQUENCES IF THE EXCHANGE FAILS TO QUALIFY AS A RECAPITALIZATION.
Assuming the Exchange of Old Notes for New Notes does not constitute a
recapitalization, the United States Holder will recognize gain or loss from the
Exchange equal to the difference between such holder's adjusted tax basis in the
Old Notes and the issue price of the New Notes received, as determined under the
provisions dealing with original issue discount. See "-- Payment of Interest and
Original Issue Discount."
If a United States Holder recognizes gain or loss on the Exchange, the
character of such gain or loss as capital or ordinary and, if capital, whether
short-term or long-term, will depend on a number of factors, including (i) such
Holder's tax status (e.g., is the Holder a financial institution subject to
special tax rules), (ii) whether the Old Notes are held as capital assets by
such Holder, (iii) whether the Old Notes have been held for more than one year,
and (iv) the extent to which such Holder has previously claimed a loss, bad debt
deduction, or charge to a reserve for bad debts with respect to the Old Notes.
Any gain recognized on the exchange should be capital gain, except to the extent
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that the value of the New Notes received represents a deemed payment of accrued
interest on the Old Notes that has not been included in income, which will be
taxable as ordinary income. As noted above, the Exchange Agreement allocates the
issue price of each New Note issued in exchange for an Old Note first to the
payment of principal of the Old Note, and then to the payment of any accrued but
unpaid interest. If such allocation is respected for federal income tax
purposes, then because the principal amount of each Old Note surrendered in the
Exchange will exceed the issue price of each New Note received, no amount should
be treated as the receipt of accrued but unpaid interest.
Under the market discount rules (which would generally apply only to a
United States Holder that purchased an Old Note from a previous holder after its
original issue, and only to the extent that the amount paid for such Old Note
was less than its principal amount), any gain recognized by a United States
Holder will be ordinary income to the extent of accrued market discount which
has not previously been included in income. The tax rate applicable to capital
gain will depend, among other things, upon the United States Holder's holding
period for the Old Notes that are exchanged. A United States Holder's tax basis
in each New Note received in the Exchange will be equal to its issue price. The
United States Holder's holding period for the New Note will begin on the day
after the date of the Exchange.
PAYMENT OF INTEREST AND ORIGINAL ISSUE DISCOUNT. The New Notes will be
treated as issued with original issue discount ("OID") if the excess of the New
Notes' "stated redemption price at maturity" over their issue price is equal to
or greater than a de minimis amount. The de minimis amount equals 1/4 of 1%
multiplied by the number of complete years to maturity of the New Notes
multiplied by their stated redemption price to maturity.
The issue price of a New Note depends on whether either the Old Notes or
the New Notes are publicly traded. If the New Notes are traded on an
"established market" at any time during the 60-day period ending 30 days after
the date of the Exchange, then the issue price of the New Notes will be their
fair market on such date. If the New Notes are not traded on an established
market during such period, but the Old Notes are so traded during such period,
then the issue price of the New Notes will be the fair market value of the Old
Notes for which they are exchanged, determined as of the date of the Exchange.
The Treasury Regulations provide that a debt instrument is not treated as traded
on an established market solely because it is convertible into stock that is so
traded.
If neither the Old Notes nor the New Notes are traded on an established
market, then the issue price of the New Notes will equal their principal amount
if the New Notes have "adequate stated interest." In general, this will be case
if the stated interest on the New Notes equals or exceeds the applicable federal
rate at the time the New Notes are issued, which the Company expects will be the
case. The stated redemption price at maturity of the New Notes equals the sum of
all payments due under the New Notes other than payments of "qualified stated
interest," which are payments of interest that are unconditionally required to
be paid at least annually. Because the first interest payments under the New
Notes are not due until after the first anniversary of the New Notes, none of
the stated interest payments will constitute qualified stated interest, and
therefore all stated interest payments will be included in the New Notes' stated
redemption price at maturity. This will cause the New Notes to be issued with
OID regardless of whether the issue price of the New Notes is determined to be
less than their stated principal amount. Consequently, all stated interest will
be required to be reported by the United States Holder on a constant yield basis
without regard to when such interest is actually paid or
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whether the Holder uses the cash or accrual method of accounting. As a result,
the United States Holder may be required to report taxable income attributable
to such interest in advance of the receipt of the related cash payment.
The amount of OID includible in income by a United States Holder is the sum
of the daily portions of OID with respect to the New Note for each day during
the taxable year or portion thereof on which the United States Holder holds the
New Note, which we refer to as "accrued OID." The daily portion is determined by
allocating to each day in any "accrual period" a pro rata portion of the OID
allocable to that accrual period. Accrual periods with respect to a New Note may
be of any length selected by the United States Holder and may vary in length
over the term of the New Note so long as no accrual period is longer than one
year, and each scheduled payment of interest or principal on the New Note occurs
on either the final or first day of an accrual period.
The amount of OID allocable to an accrual period will equal the product of
the New Note's adjusted issue price at the beginning of the accrual period and
such New Note's yield to maturity (determined on the basis of compounding at the
close of each accrual period and properly adjusted for the length of the accrual
period). The "adjusted issue price" of a New Note at the beginning of any
accrual period is the issue price of the New Note increased by the amount of
accrued OID for each prior accrual period, and decreased by the amount of any
payments of stated interest or principal previously made on the New Note.
The amount of OID allocable to an initial short accrual period may be
computed using any reasonable method if all other accrual periods other than a
final short accrual period are of equal length. The amount of OID allocable to
the final accrual period is the difference between the amount payable at the
maturity of the New Note and the New Note's adjusted issue price as of the
beginning of the final accrual period.
The Company will file an IRS form 8281 within 30 days of the Expiration
Date that will set forth the issue price, amount of OID, yield to maturity and
other information required with respect to each New Note issued pursuant to the
Exchange Offer.
TREATMENT OF ADDITIONAL INTEREST AND LIQUIDATED DAMAGES PAYABLE TO HOLDERS
OF NEW NOTES IF STOCKHOLDER APPROVAL IS NOT OBTAINED. In the event that
stockholder approval of the conversion of the Convertible New Notes into Common
Stock is not obtained on or before March 9, 1999 (or as extended), then, among
other things, (i) the interest rate on all New Notes will increase by an amount
equal to 1% per annum for each month thereafter, up to a maximum of 18%, and if
stockholder approval is subsequently obtained following such an interest rate
adjustment, the interest rate on the New Notes will revert to the stated
interest rate, and (ii) subject to certain conditions contained in the
Registration Rights Agreement the Company will be required to pay Liquidated
Damages to the holders of the New Notes (the amount of any such additional
interest, together with the amount of any Liquidated Damages, is referred to as
"Additional Interest").
The Treasury Regulations governing the determination of OID provide special
rules for debt instruments which provide for contingent payments. If a
contingency is remote or incidental, it is ignored until the date on which the
contingency occurs, at which time the debt instrument is generally treated
(solely for purposes of the OID rules) as retired on such date and subsequently
reissued for an amount equal to the adjusted issue price of the instrument, and
the determination of OID and yield to maturity are adjusted to reflect the
change in circumstances. While not free from doubt, the Company intends to take
the
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position, in determining OID in respect of the New Notes, that the failure to
obtain stockholder approval on a timely basis is a remote contingency that is
disregarded until it occurs.
AMORTIZABLE BOND PREMIUM AND ACQUISITION PREMIUM. As discussed above, a
United States Holder's initial tax basis in the New Notes will depend in part on
the tax treatment of the Exchange to such Holder, including whether the United
States Holder reports the Exchange as a taxable transaction. If a United States
Holder's initial tax basis in the New Notes is greater than the stated
redemption price at maturity, such Holder generally will not be required to
include OID in income. In addition, such United States Holder will have
"amortizable bond premium" with respect to the New Notes, which may be
deductible to the United States Holder over the term of the New Notes to the
extent that the premium is not attributable to the conversion feature on the New
Note (if any).
If a United States Holder's initial tax basis in the New Notes is greater
than the issue price of the New Notes but less than the stated redemption price
at maturity, such United States Holder generally will be considered to have
"acquisition premium" with respect to the New Notes, which may reduce the amount
of OID that the United States Holder is required to include in income.
SALE, EXCHANGE, OR REDEMPTION OF THE NEW NOTES. Upon the sale, exchange or
redemption of a New Note, a United States Holder will recognize taxable gain or
loss equal to the difference between the amount realized on the sale, exchange
or redemption (excluding, in the case of a cash basis taxpayer, any amount
attributable to accrued interest, which is taxable as such) and such Holder's
adjusted tax basis in the New Note. Gain or loss recognized on the sale,
exchange or redemption of a New Note generally will be capital gain or loss and
will be long-term capital gain or loss if at the time of sale, exchange or
redemption such New Note has been held for more than one year. However, under
the market discount rules, any gain recognized by a United States Holder will be
ordinary income to the extent of the accrued market discount which has not
previously been included in income. For these purposes, if the Exchange of Old
Notes for New Notes was treated as a recapitalization for tax purposes, any
market discount that the United States Holder had with respect to the Old Notes
not previously included in income will be considered to be market discount with
respect to the New Notes.
CONVERSION OF THE CONVERTIBLE NEW NOTES. A United States Holder generally
will not recognize any income, gain or loss upon conversion of the Convertible
New Notes into Common Stock except to the extent of ordinary income recognized
with respect to accrued and unpaid interest on such Convertible New Notes. A
United States Holder also will recognize capital gain or loss upon the receipt
of cash in lieu of a fractional share of Common Stock equal to the amount of
cash received less the United States Holder's tax basis in this fractional
share. The United States Holder's tax basis in the Common Stock received on
conversion of a Convertible New Note will be the same as that Holder's adjusted
tax basis in the Convertible New Note at the time of conversion (reduced by any
basis allocable to a fractional share interest), and the holding period for the
Common Stock received on conversion will generally include the holding period of
the Convertible New Note converted.
DIVIDENDS. Dividends paid on the Common Stock generally will be includible
in the income of a United States Holder as ordinary income to the extent of the
Company's current or accumulated earnings and profits, then as a tax-free return
of capital to the
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extent of such Holder's tax basis in the Common Stock, and thereafter as gain
from the sale or exchange of that stock.
In general, a dividend distribution to a corporate United States Holder
will qualify for the 70% dividends received deduction if the United States
Holder owns less than 20% of the voting power or value of the outstanding stock
of the Company (other than certain non-voting, non-convertible,
non-participating preferred stock). A corporate United States Holder that owns
20% or more of the voting power and value the Company (other than certain
non-voting, non-convertible, non-participating preferred stock) generally will
qualify for an 80% dividends received deduction. The dividends received
deduction is subject, however, to certain holding period, taxable income and
other limitations.
SALE OR EXCHANGE OF COMMON STOCK. Upon the sale or exchange of Common
Stock, a United States Holder generally will recognize capital gain or loss
equal to the difference between (i) the amount of cash and the fair market value
of any property received upon the sale or exchange, and (ii) that Holder's
adjusted tax basis in the Common Stock. The tax rate applicable to this capital
gain will depend, among other things, upon the United States Holder's holding
period for the shares of Common Stock that are sold or exchanged. However, under
the market discount rules, any gain recognized by a United States Holder will be
ordinary income to the extent of the accrued market discount on the Convertible
New Notes from which the Common Stock sold or exchanged was converted that had
not previously been included in income. For these purposes, if the Exchange of
Old Notes for New Notes was treated as a recapitalization for tax purposes, any
market discount that the United States Holder had in the Old Notes that carried
over to the Convertible New Notes, and that had not been previously included in
income, will be considered to be market discount with respect to the Convertible
New Notes from which such Common Stock was converted, and thus will increase the
amount of ordinary income recognized. A United States Holder's basis and holding
period in Common Stock received upon conversion of a Convertible New Note are
determined as discussed above under "-- Conversion of the New Notes."
BACKUP WITHHOLDING AND INFORMATION REPORTING. In general, the 31% "backup"
withholding and information reporting requirements apply to certain payments of
principal, premium (if any) and interest on a New Note, payments of dividends on
Common Stock, and payments of the proceeds of the sale or exchange of a New Note
or of Common Stock. Backup withholding will apply only if the United States
Holder fails to furnish its taxpayer identification number (social security
number or employer identification number) to certify that such Holder is not
subject to backup withholding, otherwise to comply with the applicable
requirements of the backup withholding rules. Any amount withheld under these
backup withholding rules will be creditable against the Holder's federal income
tax liability. Certain Holders (including, among others, corporations) are not
subject to the backup withholding and information reporting requirements.
Non-United States Holders
As used herein, the term "Non-United States Holder" means any beneficial
owner of a New Note or Common Stock that is not a United States Holder. The
rules governing the United States federal income and estate taxation of a
Non-United States Holder are complex, and no attempt will be made herein to
provide more than a summary of such rules. NON-UNITED STATES HOLDERS SHOULD
CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE THE EFFECT OF FEDERAL, STATE,
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LOCAL AND FOREIGN TAX LAWS, INCLUDING TREATIES, WITH RESPECT TO AN INVESTMENT IN
THE NEW NOTES AND COMMON STOCK, INCLUDING ANY REPORTING REQUIREMENTS.
EXCHANGE OF OLD NOTES FOR NEW NOTES. Even if the Exchange of Old Notes for
New Notes is not treated as a recapitalization for tax purposes, a Non-United
States Holder will generally not be subject to United States federal income tax
or withholding tax on any gain realized on the Exchange unless (i) the gain is
effectively connected with a United States trade or business of the Non-United
States Holder, (ii) in the case of a Non-United States Holder who is an
individual, the Holder is present in the United States for a period or periods
aggregating 183 days or more during the taxable year of the Exchange, and either
the Holder has a "tax home" in the United States or the disposition is
attributable to an office or other fixed place of business maintained by that
Holder in the United States, or (iii) the Non-United States Holder is subject to
tax pursuant to the provisions of the Code applicable to certain United States
expatriates.
Any capital loss recognized on the Exchange by a Non-United States Holder
can be used to offset gains from other United States sources that are
effectively connected with a United States trade or business of the Non-United
States Holder only if the capital loss on the Exchange is also effectively
connected with a United States trade or business of such Holder. If such loss on
the Exchange is not effectively connected with a United States trade or business
of the Non-United States Holder, but such Holder is an individual and is present
in the United States for a period or periods aggregating 183 days or more during
the taxable year of the Exchange, then such Holder can offset any other U.S.
source capital gains incurred during such taxable year with any capital loss
incurred on the Exchange.
PAYMENT OF INTEREST AND ORIGINAL ISSUE DISCOUNT. Because the New Notes
will be registered debentures, interest income and OID of a Non-United States
Holder will qualify for the "portfolio interest exemption" and therefore will
not be subject to United States federal income tax or withholding tax, provided
that such income is not effectively connected with a United States trade or
business of the Non-United States Holder and provided that the Non-United States
Holder (i) does not actually or constructively own 10% or more of the combined
voting power of all classes of stock of the Company entitled to vote, (ii) is
not a controlled foreign corporation related to the Company actually or
constructively through stock ownership, (iii) is not a bank receiving interest
on a loan entered into in the ordinary course of business, and (iv) either (a)
provides a Form W-8 (or suitable substitute form) signed under penalties of
perjury that includes its name and address and certifies as to its non-United
States status in compliance with applicable law and regulations, or (b) a
securities clearing organization, bank or other financial institution that holds
the New Note provides a statement to the Company or its agent under penalties of
perjury in which it certifies that such a Form W-8 (or suitable substitute form)
has been received by it from the Non-United States Holder or qualifying
intermediary and furnishes the Company or its agent with a copy thereof.
Recently released United States Treasury Regulations provide alternative
methods for satisfying the certification requirements described in clause (iv)
above. These Regulations are generally effective for payments made after
December 31, 2000, subject to certain transition rules. Non-United States
Holders are urged to consult their own tax advisors regarding the new United
States Treasury Regulations.
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Except to the extent that an applicable treaty otherwise provides, a
Non-United States Holder generally will be taxed in the same manner as a United
States Holder with respect to interest (or OID) if the interest income (or OID)
is effectively connected with a United States trade or business of the
Non-United States Holder. Effectively connected interest (or OID) received by a
corporate Non-United States Holder may also, under certain circumstances, be
subject to an additional "branch profits tax" at a 30% rate (or, if applicable,
a lower treaty rate). Even though such effectively connected interest (or OID)
is subject to income tax, and may be subject to the branch profits tax, it is
not subject to withholding tax if the Non-United States Holder delivers IRS Form
4224 (or suitable substitute form) annually to the payor.
SALE, EXCHANGE, OR REDEMPTION OF THE NEW NOTES. A Non-United States Holder
of a New Note generally will not be subject to United States federal income tax
or withholding tax on any gain realized on the sale, exchange or redemption of
the New Notes (including the receipt of cash in lieu of fractional shares upon
conversion of a New Note into Common Stock) unless one of the three conditions
described in "-- Non-United States Holders -- Exchange of Old Notes for New
Notes" above is met.
CONVERSION OF THE NEW NOTES. In general, no United States federal income
tax or withholding tax will be imposed upon the conversion of a Convertible New
Note into Common Stock by a Non-United States Holder except with respect to the
receipt of cash in lieu of fractional shares by Non-United States Holders upon
conversion of a Convertible New Note where any of the conditions described above
under "-- Non-United States Holders -- Exchange of Old Notes for New Notes" is
satisfied.
DIVIDENDS. Dividends paid on Common Stock to a Non-United States Holder
(excluding dividends that are effectively connected with the conduct of a trade
or business in the United States by that Holder and are taxable as described
below) will be subject to United States federal withholding tax at a 30% rate
(or lower rate provided under any applicable income tax treaty). Except to the
extent that an applicable tax treaty provides otherwise, a Non-United States
Holder will be taxed in the same manner as a United States Holder on dividends
paid (or deemed paid) that are effectively connected with the conduct of a trade
or business in the United States by the Non-United States Holder. If that
Non-United States Holder is a foreign corporation, it may also be subject to
United States branch profits tax on this effectively connected income at a 30%
rate (or a lower rate as may be specified by an applicable income tax treaty).
Even though these effectively connected dividends are subject to income tax, and
may be subject to the branch profits tax, they will not be subject to U.S.
withholding tax if the Holder delivers IRS Form 4224 (or suitable substitute
form) annually to the payor.
Under currently applicable United States Treasury Regulations, dividends
paid to an address in a foreign country are presumed to be paid to a resident of
that country (unless the payor has knowledge to the contrary) for purposes of
the withholding discussed above and for purposes of determining the
applicability of a tax treaty rate. Under recently issued United States Treasury
Regulations, however, Non-United States Holders of Common Stock who wish to
claim the benefit of an applicable treaty rate would be required to satisfy
certain certification requirements. These Regulations are generally effective
for payments made after December 31, 2000, subject to certain transition rules.
Non-United States Holders are urged to consult their own tax advisors regarding
the new United States Treasury Regulations.
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SALE OR EXCHANGE OF COMMON STOCK. A Non-United States Holder of Common
Stock will generally not be subject to United States federal income tax or
withholding tax on any gain realized on the sale or exchange of the Common Stock
unless one of the three conditions described in "-- Non-United States
Holders -- Exchange of Old Notes for New Notes" above is met.
CERTAIN UNITED STATES FEDERAL ESTATE TAX CONSIDERATIONS. A New Note
beneficially owned by an individual who is not a citizen or resident of the
United States at the time of death will not be includible in the decedent's
gross estate for United States federal estate tax purposes, provided that such
Non-United States Holder did not at the time of death actually or constructively
own 10% or more of the combined voting power of all classes of stock of the
Company entitled to vote, and provided that, at the time of death, payments with
respect to such New Note would not have been effectively connected with the
Holder's conduct of a trade or business within the United States.
Common Stock actually or beneficially held (other than through a bona fide
foreign corporation) by an individual who is not a citizen or resident of the
United States at the time of his or her death (or previously transferred subject
to certain retained rights or powers) will be subject to United States federal
estate tax unless otherwise provided by an applicable estate tax treaty.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX. United States
information reporting requirements and backup withholding tax will not apply to
payments on a New Note to a Non-United States Holder if the statement described
in "-- Non-United States Holders -- Payment of Interest" is duly provided by
such Holder or the Holder otherwise establishes an exemption, provided that the
payor does not have actual knowledge that the Holder is a United States person.
Information reporting requirements and backup withholding tax will not
apply to any payment of the proceeds of the sale of a New Note or of Common
Stock effected outside the United States by a foreign office of a "broker" (as
defined in applicable Treasury Regulations), unless the broker (i) is a United
States person, (ii) derives 50% of more of its gross income for certain periods
from the conduct of a United States trade or business, or (iii) is a controlled
foreign corporation as to the United States. Payment of the proceeds of any such
sale effected outside the United States by a foreign office of any broker that
is described in (i), (ii) or (iii) of the preceding sentence will not be subject
to backup withholding, but will be subject to information reporting unless the
broker has documentary evidence in its records that the beneficial owner is a
Non-United States Holder and certain other conditions are met, or the beneficial
owner otherwise establishes an exemption. Payment of the proceeds of any such
sale to or through the United States office of a broker is subject to
information reporting and backup withholding requirements, unless the beneficial
owner of the New Note provides the statement described in "-- Non-United States
Holders -- Payment of Interest" or otherwise establishes an exemption.
If paid to an address outside the United States, dividends on Common Stock
held by a Non-United States Holder generally will not be subject to the
information reporting and backup withholding requirements described in this
section. However, under recently issued United States Treasury Regulations,
dividend payments will be subject to information reporting and backup
withholding unless certain certification requirements are satisfied. These
Regulations are generally effective for payments made after December 31, 2000,
subject to certain transition rules. Prospective investors should consult their
own tax
54
<PAGE> 55
advisors as to the effect, if any, of the final regulations on their purchase,
ownership and disposition of the New Notes and Common Stock.
CERTAIN TAX CONSEQUENCES RELATING TO THE COMPANY. The Company will
recognize cancellation of indebtedness ("COD") income for federal income tax
purposes to the extent that the aggregate accreted amount of the Old Notes
exceeds the aggregate issue price of the New Notes, and will recognize
additional COD income to the extent that the principal amount of the Convertible
New Notes exceeds the fair market value of the Common Stock into which such
Notes are subsequently converted. The Company has substantial net operating loss
carryforwards ("NOLs"), a portion of which is subject to an annual limitation on
their use under Section 382 of the Code as a result of an "ownership change"
which the Company experienced on June 29, 1998. The balance of the NOLs,
however, is not currently subject to any limitation under Section 382. The
Company anticipates that such NOLs will be sufficient to offset such COD income
for regular income tax purposes. In computing the Company's liability for the
alternative minimum tax, such NOLs may be deducted only to the extent of 90% of
the Company's alternative minimum taxable income.
The Company's ability to utilize its NOLs to shelter COD income or taxable
income realized in future taxable periods is subject to possible limitation
under Section 382 of the Code if the Company should undergo an "ownership
change" as a result of cumulative changes in the ownership of the Company's
stock (such as the mandatory conversion of New Notes or voluntary conversion of
the Amended Notes into Common Stock) that occur during any three-year period and
exceed 50 percentage points. The provisions of Section 382 and the applicable
Treasury Regulations that govern the determination of whether an ownership
change has occurred are extremely complex, require numerous factual
determinations, and involve many legal issues as to which there is little or no
interpretive authority. While the Company believes that the Exchange and the
subsequent mandatory conversion of the Convertible New Notes into Common Stock
(if and when approved by the Company's stockholders) should not, taken together
with other changes in ownership of the Company's stock that have occurred since
its last ownership change, cause a new ownership change, there can be no
assurance that subsequent events or shifts in the ownership of the Company's
stock (such as a conversion into Common Stock of the Amended Notes which the
Company expects to issue to Value Partners), over which the Company may have no
control, would not cause an ownership change. In that event, the Company's
ability to utilize its NOLs in taxable periods following the ownership change
may be severely restricted or eliminated.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR
SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE EXCHANGE AND THE OWNERSHIP AND DISPOSITION OF THE
NEW NOTES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER
TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
55
<PAGE> 56
USE OF PROCEEDS
The Company will not receive any proceeds from the issuance of the New
Notes offered hereby. In consideration for issuing the New Notes as contemplated
in this Memorandum (and the issuance of Common Stock upon the mandatory
conversion of the Convertible New Notes), the Company will receive in exchange
Old Notes with a higher principal amount. The Old Notes surrendered in exchange
for New Notes will be retired and canceled and cannot be reissued. Accordingly,
issuance of the New Notes will result in a decrease in the indebtedness of the
Company and, upon mandatory conversion of the Convertible New Notes, an increase
in the stockholders' equity of the Company.
DIVIDEND POLICY
The Company has never paid cash dividends on its common stock, and the
Board of Directors currently intends to retain any earnings for use in the
Company's business for the foreseeable future. Any future payment of dividends
will depend on the Company's financial condition, results of operations, cash
requirements and other factors that the Board of Directors believes are
important.
PRICE RANGE OF COMMON STOCK
The Company completed its initial public offering on November 19, 1996 and,
until March 23, 1999, the Common Stock traded on the Nasdaq National Market
under the symbol "MMGC". The Common Stock currently under the symbol "ATVA." On
June 4, 1999 the Common Stock began trading on the Nasdaq SmallCap Market. The
following table sets forth the high and low sales prices of the Common Stock as
reported on the Nasdaq National Market or the Nasdaq Small Cap Market for the
periods indicated. The information set forth in the table below has been
adjusted to reflect a one-for-ten reverse stock split that was completed on
March 22, 1999.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL YEAR 1998:
First Quarter............................................ $150.00 $ 95.64
Second Quarter........................................... 102.50 30.00
Third Quarter............................................ 33.75 18.75
Fourth Quarter........................................... 20.62 10.00
FISCAL YEAR 1999:
First Quarter............................................ $ 15.31 $ 3.75
Second Quarter........................................... 8.13 3.75
Third Quarter............................................ 8.50 1.00
Fourth Quarter........................................... 3.56 6.50
FISCAL YEAR 2000:
First Quarter............................................ $ 6.25 $ 2.50
Second Quarter (through February 18, 2000)............... 2.63 1.00
</TABLE>
As of February 22, 2000, there were 1,655 holders of record of the
Company's Common Stock.
The Company has never paid cash dividends on its Common Stock, and the
Board of Directors currently intends to retain any earnings for use in the
Company's business for the
56
<PAGE> 57
foreseeable future. Any future determination as to the payment of such cash
dividends would depend on a number of factors including future earnings, results
of operations, capital requirements, the Company's financial condition and any
restrictions under credit agreements or the terms of the Company's outstanding
debt securities existing from time to time, as well as such other factors as the
Board of Directors might deem relevant. No assurance can be given that the
Company will pay any dividends in the future.
57
<PAGE> 58
CAPITALIZATION
The following table sets forth the capitalization of the Company at August
31, 1998 and November 30, 1999. This table should be read in conjunction with
the financial statements contained in the Company's Form 10-K, the related
notes, and the other financial information appearing elsewhere in this
Memorandum.
<TABLE>
<CAPTION>
AUGUST 31, 1999 NOVEMBER 30, 1999
---------------------- -----------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Debt:
Revolving lines of credit................. $ 63,198 $ 72,326
Other notes and contracts payable......... 12,292 1,327
12 1/2% Senior Subordinated Notes due
2001("Original Notes")(1).............. -- --
12 1/2% Subordinated Notes due 2001 ("Old
Notes")................................ 30,724 30,698
-------- --------
Total debt........................... 106,214 104,351
-------- --------
Stockholders' equity:
Preferred Stock, par value $.01 per share;
5,000,000 shares authorized; 62,500
shares issued and outstanding as of
August 31, 1999 and 57,825 shares
outstanding at November 30, 1999....... 1 1
Common Stock, par value $.01 per share;
400,000,000 shares authorized;
3,656,666 shares issued and outstanding
as of August 31, 1998 and 3,968,108
shares issued and November 30, 1999;
shares issued and outstanding as
adjusted(2)............................ 37 40
Additional paid-in capital................ 125,412 125,409
Accumulated deficit....................... (104,332) (106,823)
-------- --------
Total stockholders' equity........... 21,118 18,627
-------- --------
Total capitalization................. $127,332 $122,978
======== ========
</TABLE>
- -------------------------
(1) As of October 31, 1998, the Company had completed the repurchase of all the
outstanding Original Notes.
(2) Does not include: (1) 1,000 shares of Common Stock reserved for issuance
upon the exercise of stock options granted and available to be granted under
the Company's 1996 Employee Stock Option Plan; (2) 200,000 shares of Common
Stock reserved for issuance upon the exercise of stock options granted and
available to be granted under the Company's 1997 Stock Option Plan; and (3)
an aggregate of approximately 481,859 shares of Common Stock reserved for
issuance upon the exercise of stock options granted to management. For
details on the Company's stock option plans, see "Management -- Company
Stock Option Plans" located later in this memorandum.
58
<PAGE> 59
SELECTED FINANCIAL DATA
The selected financial data set forth below has been derived from our
audited financial statements. The financial data as of August 31, 1998 and 1999
and for each of the three years in the period ended August 31, 1999 have been
derived from financial statements audited by the Company's independent auditors
and are included in the Company's Form 10-K. The financial data as of August 31,
1995, 1996 and 1997, and for the years ended August 31, 1995 and 1996 have been
derived from audited financial statements not included herein. The income
statement data for the three months ended November 30, 1998 and 1999 and the
balance sheet data as of November 30, 1999 have been derived from unaudited
interim financial statements in the Company's Form 10-K, which in the opinion of
management, include all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of the information set forth
therein. We have reclassified certain items to conform to prior years. You
should read the selected financial information set forth below in conjunction
with the financial statements contained in the Company's Form 10-K, the related
notes, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations". However, due to substantial changes to our business and
operating strategy, we believe that our historical financial and operating data
are not likely to be indicative of our future performance, and our results of
operation for fiscal 1999, are not comparable to fiscal 1998.
<TABLE>
<CAPTION>
THREE MONTHS
FOR THE YEARS ENDED AUGUST 31, ENDED NOVEMBER 30,
------------------------------------------------------- ---------------------
1995 1996 1997 1998 1999 1998 1999
------- ------- ---------- ---------- --------- --------- ---------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Gain (loss) on sale of loans... $12,233 $16,539 $ 45,123 $ (26,578) $ 1,207 $ 172 $ 4,241
Net unrealized gain (loss) on
mortgage related
securities(1)................ -- 2,697 3,518 (70,024) (3,317) 270 (624)
Loan servicing income, net..... 873 3,348 3,036 999 375 240 96
Gain on retirement of debt..... -- -- -- -- 7,700 -- --
Interest income................ 941 2,104 9,507 14,786 7,526 1,602 3,176
Less: interest expense......... (468) (1,116) (6,374) (13,162) (7,958) (1,764) (3,227)
------- ------- ---------- ---------- --------- --------- ---------
Net interest income
(expense).................. 473 1,104 3,133 1,624 (432) 520 51
------- ------- ---------- ---------- --------- --------- ---------
Total revenues (losses).... 13,579 23,572 54,810 (93,979) 9,568 520 3,662
------- ------- ---------- ---------- --------- --------- ---------
Expenses:
Provision for credit losses
(benefit), net............... 864 55 6,300 (3,198) 52 43 --
Depreciation and
amortization................. 403 394 672 1,013 1,129 215 434
Other interest................. 187 167 245 439 124 42 27
General and administrative:
Payroll and benefits......... 4,163 6,328 13,052 18,582 8,976 1,979 4,399
Supplies and postage......... 84 284 289 1,281 426 71 256
Rent and lease expenses...... 249 338 1,199 1,616 1,407 359 539
Professional services........ 1,043 1,771 2,271 4,783 3,025 964 522
Insurance.................... 231 572 558 1,017 853 185 191
Sub-servicing fees........... 232 709 1,874 2,160 325 22 38
Taxes and licensing fees..... 1,352 164 413 62 61
Communications............... 256 293 617 752 499 119 209
Bank and wire fees........... -- 422 356 137 68
Travel and entertainment..... 107 677 1,005 1,159 571 109 273
Legal settlement............. -- -- 1,305 -- --
Other........................ (159) 829 1,566 1,820 809 175 624
------- ------- ---------- ---------- --------- --------- ---------
Total costs and expenses... 7,660 12,417 31,000 32,010 19,413 4,482 7,641
------- ------- ---------- ---------- --------- --------- ---------
</TABLE>
59
<PAGE> 60
<TABLE>
<CAPTION>
THREE MONTHS
FOR THE YEARS ENDED AUGUST 31, ENDED NOVEMBER 30,
------------------------------------------------------- ---------------------
1995 1996 1997 1998 1999 1998 1999
------- ------- ---------- ---------- --------- --------- ---------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes
and extraordinary item(2)...... 5,919 11,155 23,810 (125,989) (21,537) (3,962) (3,979)
Income tax expense (benefit)
before extraordinary item(2)... 2,277 4,235 9,062 (6,334) 8,249 (1,468) (1,488)
------- ------- ---------- ---------- --------- --------- ---------
Net income (loss) before
extraordinary item............. 3,642 6,920 14,748 (119,655) (13,288) (2,494) (2,491)
Extraordinary item, net of taxes
($2.9 million)................. -- -- -- -- 4,812 -- --
------- ------- ---------- ---------- --------- --------- ---------
Net Income (Loss)................ $ 3,642 $ 6,920 $ 14,748 $ (118,655) $ (8,476) $ (2,494) $ (2,491)
======= ======= ========== ========== ========= ========= =========
Net income (loss) per share(3)
Basic:........................... $ 12.50 $ (77.18) $ (2.71) $ (0.82) $ (0.66)
========== ========== ========= ========= =========
Diluted:......................... $ 12.50 $ (77.18) $ (2.71) $ (0.82) $ (0.66)
========== ========== ========= ========= =========
Weighted -- average number of
common shares(3)............... 1,180,219 1,550,292 3,137,136 3,056,667 3,801,824
========== ========== ========= ========= =========
Weighted -- average number of
common shares and assumed
conversions(3)................. 1,180,219 1,550,292 3,137,136 3,056,667 3,801,824
========== ========== ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF
FISCAL YEAR ENDED AUGUST 31, NOVEMBER 30,
--------------------------------------------------- ------------
1995 1996 1997 1998 1999 1999
------- -------- -------- -------- -------- ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION DATA:
Cash and cash equivalents.................. $ 752 $ 443 $ 6,104 $ 36,404 $ 10,475 $ 11,341
Loans held for sale, net(4)................ 3,676 4,610 9,523 10,975 54,844 53,166
Mortgage related securities(1)............. 14,483 35,065 106,299 34,830 31,757 31,827
Mortgage servicing rights.................. 1,076 32,827 9,507 83 -- --
Total assets............................... 24,081 50,606 156,554 104,535 135,386 132,608
Allowance for credit losses on loans sold
with recourse............................ 886 920 7,014 2,472 -- --
Subordinated debt(5)....................... -- -- 40,000 42,693 30,724 30,698
Total liabilities.......................... 13,300 32,905 103,447 77,941 114,268 113,981
Stockholders' equity....................... 10,781 17,701 53,107 26,594 21,118 18,627
OPERATING DATA:
Loan production............................ $87,751 $139,367 $526,917 $338,942 $119,112 $100,485
Weighted -- average interest rate on loan
production............................... 14.55% 14.03% 13.92% 13.89% 11.29% 0.00%
Loan in servicing portfolio (end of
period):
Company -- owned:
Equity+................................ $ -- $ 922 $ 8,661 $ 8,217 $ -- $ --
Home Equity
Title I................................ 3,720 3,776 902 4,233 -- --
------- -------- -------- -------- -------- --------
Total Company -- owned............... 3,720 4,698 9,563 12,450
Securitized:
Equity+................................ -- 10,501 363,961 -- -- --
Home Equity --
Title I................................ 85,666 198,990 254,544 18,772 -- --
------- -------- -------- -------- -------- --------
Total securitized.................... 88,566 209,491 618,505 18,772 --
------- -------- -------- -------- --------
Total servicing portfolio............ $92,286 $214,189 $628,068 $ 31,222 $ -- $ --
======= ======== ======== ======== ======== ========
Cash used in operations.................... $ 3,619 $ 12,440 $ 72,438 $ 39,723 $ 34,984 $ 2,753
======= ======== ======== ======== ======== ========
</TABLE>
60
<PAGE> 61
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31, AS OF NOVEMBER 30,
--------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1998 1999
------- -------- -------- -------- -------- -------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Loan production.................. $87,751 $139,367 $526,917 $338,942 $119,112 $ 16,518 $100,485
Weighted -- average interest rate
on loan production............. 14.55% 14.03% 13.92% 13.89% 11.29% 13.19% 11.29%
Loans in servicing portfolio (end
of period):....................
Company -- owned:
Equity+...................... $ -- $ 922 $ 8,661 $ 8,217 $ -- $ -- $ --
Home Equity..................
Title I...................... 3,720 3,776 902 4,233 -- -- --
------- -------- -------- -------- -------- -------- --------
Total Company -- owned..... 3,720 4,698 9,563 12,450
Securitized:
Equity+...................... -- 10,501 363,961 -- -- -- --
Home Equity.................. --
Title I...................... 85,666 198,990 254,544 18,772 -- -- --
------- -------- -------- -------- -------- -------- --------
Total securitized.......... 88,566 209,491 618,505 18,772 --
------- -------- -------- -------- --------
Total servicing
portfolio................ $92,286 $214,189 $628,068 $ 31,222 $ -- $ -- $ --
======= ======== ======== ======== ======== ======== ========
Cash used in operations.......... $ 3,619 $ 12,440 $ 72,438 $ 39,723 $ 34,984 $ 20,161 $ (2,753)
======= ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED AUGUST 31, NOVEMBER 30,
--------------------------------------------------- ------------------
1995 1996 1997 1998 1999 1999 1999
------- -------- -------- -------- -------- ------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Loan production..................... $87,751 $139,367 $526,917 $338,942 $119,112 $16,518 $100,485
Weighted-average interest rate on
loan production................... 14.55% 14.03% 13.92% 13.89% 11.29% 13.89% 11.29%
Loans in servicing portfolio (end of
period):
Company-owned(7):................. 3,720 4,698 9,563 12,450(5) -- -- --
</TABLE>
- -------------------------
(1) Mortgage related securities are junior subordinated interests retained by
the Company in pools of mortgage loans sold by the Company in securitization
transactions. SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," required the Company,
as of January 1, 1997, to reclassify excess servicing rights (junior
subordinate interests retained by the Company in pools of mortgage loans
sold in transactions similar to a securitization) to mortgage related
securities. The fair value (the dollar amount on the Company's balance
sheet) of the Company's mortgage related securities was written down from
$106.3 million at the end of fiscal 1997 to $34.8 million at the end of
fiscal 1998 and $31.8 million at the end of fiscal 1999. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Notes 2, 5 and 17 to the Company's financial statements located in the
Company's Form 10-K accompanying this Memorandum.
(2) The results of the Company's operations were included in the consolidated
federal income tax returns filed by Mego Financial through September 2,
1997, the date the shares of common stock of the Company were distributed by
Mego Financial to its shareholders in a tax free spin-off. For more details
on this and other transactions with
61
<PAGE> 62
Mego Financial and its affiliates, see "Certain Relationships and Related
Transactions".
(3) Earnings per share for the fiscal years ended August 31, 1995 and 1996 are
not presented because, during these years, the Company was a wholly owned
subsidiary of Mego Financial.
(4) Loans held for sale, net includes a valuation reserve which reflects the
Company's best estimate of the amount that the Company expects to receive on
the sale of these loans.
(5) The Company sold $40.0 million principal amount of Original Notes in
November 1996 and an additional $40.0 million principal amount of Original
Notes in October 1997. As part of the recapitalization, the Company issued
$37.5 million of Series A convertible Preferred Stock and $41.5 million
principal amount of Old Notes in exchange for $79.0 million of Original
Notes. The Company purchased all of the Original Notes remaining outstanding
as of October 1998. In February 1999, the Company repurchased $11 million
principal amount of Old Notes which resulted in an extraordinary gain, net
of income tax, of $4.8 million.
62
<PAGE> 63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The purpose of Management's Discussions and Analysis of Financial Condition
and Results of Operations is to provide a detailed explanation of the Company's
financial performance in fiscal 1997, 1998, and 1999, the factors that had a
significant impact on the Company's performance in those periods and a
description of any trends affecting financial performance during the periods
discussed. We also describe the amount of the Company's cash on hand at the end
of fiscal 1999, the amount that the Company owed to its lenders on that date,
and the additional amounts, if any, available to be borrowed by the Company. You
should read this section in conjunction with the Company's financial statements,
including the notes to the financial statements, which are contained in the
company's Form 10-K.
During the last eight months of fiscal 1998, the Company's operations
consisted principally of (1) liquidating its portfolio of loans to repay
outstanding debt; (2) maintaining its systems and retaining personnel necessary
to resume operations while exploring alternatives to locate new capital; and (3)
designing and beginning to implement its strategic initiatives. During fiscal
year 1999, the Company continued to pursue its strategic initiatives, including
the purchase of lending platforms in Las Vegas, Nevada and Charlotte, North
Carolina.
Due to the substantial changes to the Company's business and operating
strategy effected during the year, we believe that the Company's historical
financial and operating data are not likely to be indicative of the Company's
future performance and the Company's results of operations for fiscal 1999,
1998, and 1997 are not comparable.
GENERAL
The Company substantially expanded its operations during fiscal 1997 and
the first four months of fiscal 1998. During these periods the Company's loan
production was $139.4 million (fiscal 1996), $526.9 million (fiscal 1997) and
$268.5 million (first four months of fiscal 1998). As it expanded its business,
the Company's general and administrative expenses increased from $11.8 million
in fiscal 1996 to $23.8 million in fiscal 1997 and $13.8 million in the first
four months of fiscal 1998.
During these periods, a substantial majority of the Company's loan
production was sold in securitization transactions. The sale of loans by the
Company in securitization transactions, as described below, typically results in
substantial negative cash flow, because the cash proceeds from the sale of loans
in a securitization transaction is substantially less than the Company's total
costs of producing the loans sold. The combination of negative cash flow from
the sale of loans in securitization transactions and increases in general and
administrative expenses caused the Company, historically, to operate on a
substantial negative cash flow basis. The Company's negative cash flow from
operations was $12.4 million for fiscal 1996, $72.4 million for fiscal 1997, and
$49.7 million for the first four months of fiscal 1998.
As a result of a $11.7 million loss in the first quarter of fiscal 1998 and
continuing cash flow deficits, the Company violated certain provisions of its
warehouse line. In February 1998, the warehouse lender requested that the
Company repay a significant portion of the principal balance of the line or be
declared in default. Since a default on the warehouse line would have triggered,
among other things, a default on the Company's $80
63
<PAGE> 64
million principal amount of outstanding Old Notes, the Company agreed to reduce
the outstanding balance of the warehouse line from $55.0 million periodically.
The Company repaid the balance on June 29, 1998.
To generate cash to reduce the outstanding balance of the warehouse line
and continue to operate, the Company began to liquidate, through sales for cash,
its mortgage loan portfolio, and the warehouse lender refused to make further
advances under the line. In addition, because the Company's old warehouse line
was used to fund loans produced by the Company prior to their sale, the Company
substantially curtailed its loan production beginning in January 1998. The cash
received from the Company's sale of loans from its loan portfolio was used to
pay down the old warehouse line and other Company borrowings and to pay
substantial general and administrative expenses to retain personnel and maintain
the Company's operations while it sought to locate new capital.
On July 1, 1998, the Company completed the Recapitalization. As part of the
Recapitalization, the Company received $50.0 million in proceeds from the
private placement of approximately 1.67 million shares of Common Stock at a
price of $15.00 per share and 25,000 shares of Preferred Stock at a price of
$1,000 per share. In addition, the Company issued $37.5 million of Preferred
Stock and $41.5 million principal amount of Old Notes in exchange for
approximately $79.0 million principal amount of Original Notes. The
Recapitalization resulted in approximately $84.5 million of new equity.
In January 1999, the Company purchased substantially all of the assets of a
retail production platform in Las Vegas, Nevada for approximately $3.3 million
in cash. On July 15, 1999, the Company purchased all of the outstanding stock of
The Money Centre, Inc., a retail production platform headquartered in Charlotte,
North Carolina. The principal components of the purchase price were $7.0 million
of cash, $3.0 million of the Company's Common Stock (600,000 shares valued at $5
per share), and 20% of the pre-tax net cash flow of the post-acquisition
division, for a period not to exceed 48 months. The Company believes these
purchases fit well with its strategic initiatives, and will provide the Company
with a low cost production platform for its retail and direct-to-consumer loans.
In February 1999, the Company repurchased $11 million principal amount of
Old Notes which resulted in an extraordinary gain, net of income tax, of $4.8
million.
Although the Company is no longer entering into any securitization
transactions, the following discussion is provided to help the reader understand
the Company's historical results of operations.
SECURITIZATION TRANSACTIONS
Securitization transactions historically had been the main source of the
Company's revenue and income. In a securitization transaction, a specific group
of the Company's mortgage loans having similar characteristics, loan type
(Equity + or Title 1) and loan amounts are pooled for sale. By selling loans in
a securitization transaction, the Company could sell a very large group of loans
at one time. The Company sold an average of $79.7 million of mortgage loans in
each of the five securitizations completed in fiscal 1997. However, the sale of
loans in a securitization transaction generates a significant cash flow deficit,
because the cash received by the Company from the sale of the loans is
significantly less than the Company's total cost of producing the loans sold.
64
<PAGE> 65
The purchaser of the loans in a securitization transaction is a special
trust created:
(1) to purchase and hold title to the loans;
(2) to sell debt securities or ownership interests backed by the cash
flow to be received on the loans owned by the trust, i.e., the
principal and interest payments from the Company's borrowers; and
(3) to distribute payments over time to the holders of securities
issued by the trust.
Once the trust purchases the loans from the Company it generally has no
recourse against the Company other than for breaches of certain representations
and warranties made by the Company at the time the loans were sold. Likewise,
after the trust purchases the loans from the Company, creditors of the Company
have no recourse against the loans in the event the Company experiences
financial difficulties. The trust purchases the loans from the Company with
money it obtains by selling the securities.
The trust sells both senior "rated" securities and issues an unrated
subordinate residual security to the Company. Only qualified institutional
investors, such as insurance companies, banks and thrifts, can purchase the
senior securities sold by the trust.
Because the Company's Equity + loans are not insured and its Title I loans
have only limited FHA insurance, the trust, as the owner of these mortgage
loans, has credit risk. If the borrowers default on their loans, the trust (as
the owner of the loans) typically will lose its entire investment (except to the
extent of the limited FHA insurance on Title I loans). As a result of these
potential losses, the purchasers of the trust's senior securities are willing to
buy the securities only if they receive additional assurance that they will get
paid. This assurance is provided by a rating from the national rating agencies,
such as Standard & Poor's and Moody's.
As a general matter, the more predictable the cash flow to the senior
securities, the higher the rating on the senior securities and the lower the
yield that will be demanded by purchasers of the senior securities relative to
prevailing market yields. The lower the yield paid to the senior security
holders, the greater the positive spread (the "spread") between the interest
paid by the Company's borrowers on the mortgage loans in the trust and (i) the
interest costs of the senior securities sold and (ii) fees paid to the trustee
and the servicer for servicing the mortgage loans. In general, the greater the
spread, the greater the amount of cash flow in excess of the principal and
interest payments to the senior security holders the Company anticipates it will
receive on the mortgage related securities issued to the Company in the
securitization, and the greater their fair value. During fiscal 1997, the
Company sold $398.4 million principal amount of loans in securitization
transactions that had a weighted-average interest rate of 14.0% and in which the
senior securities sold had an initial weighted-average yield of 6.88%.
In order for the senior securities to gain a sufficiently high rating to
attract investors, the rating agencies require that the trust create various
forms of credit enhancement to increase the likelihood that the loans in the
trust will generate sufficient cash flow to pay the interest and principal
payments on the senior securities. Credit enhancement may be achieved in several
ways. The trust may purchase the loans the Company sells in the securitization
transaction for a combination of cash and by issuing the Company a subordinated
residual interest in the securitization. The security issued by the trust to the
Company receives cash flow only after required payments of interest and
principal have been made to the senior security holders, and absorbs any losses
from defaults or
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<PAGE> 66
foreclosures on the loans in the trust. The junior subordinated interests issued
to the Company in securitization transactions are called mortgage related
securities. Another credit enhancement is a "guaranty," a form of insurance
issued by an insurance company. While some of the Company's securitizations have
included guaranty insurance, the Company has always received a subordinate
mortgage related security and has provided over-collateralization as credit
enhancement in order to achieve acceptable ratings.
Credit enhancement may also be achieved through "over-collateralization".
National rating agencies will give higher ratings if the senior securities
receive assurance that they will be paid. This is achieved by requiring an
initial level of over-collateralization and by building more
over-collateralization through the trust's retaining cash flow (from the spread)
that would otherwise be paid to the Company on its mortgage related securities.
The initial over-collateralization is created by having the principal amount of
loans sold to the trust be greater than the principal amount (and cash proceeds
from the sale) of senior interests sold. In the five securitization transactions
during fiscal 1997, the trusts purchased $398.4 million principal amount of
loans from the Company, but the trusts sold only $379.2 principal amount of
senior securities.
As borrowers make their monthly mortgage loan payments to the servicer of
the loans in the trust, the payments are remitted by the servicer to a trustee
that collect these payments and make payments of interest and principal to the
holders of the senior securities pursuant to a pre-established schedule. The
priority of the payments is determined by the terms of an indenture.
The mortgage related securities owned by the Company, while offering the
potential of a substantially higher yield than the senior securities, have very
high credit risk. The Company's mortgage related securities absorb all losses
caused by defaults on the mortgage loans backing the securitization. The
Company's mortgage related securities are highly speculative and are subject to
the special risks.
Sample Securitization Transaction
In order to make the concept of negative cash flow that results from the
sale of mortgage loans in a securitization transaction more understandable, the
Company has provided the following example.
THE EXAMPLE BELOW ILLUSTRATES THE MECHANICS OF A SECURITIZATION AND THE
RESULTING NEGATIVE CASH FLOW BUT DOES NOT REFLECT (1) AN ACTUAL SALE OF MORTGAGE
LOANS BY THE COMPANY IN A SECURITIZATION TRANSACTION OR (2) THE ACTUAL AMOUNT OF
NEGATIVE CASH FLOW FROM THE DISPOSITION OF LOANS IN THIS MANNER. ACTUAL RESULTS
WILL BE MATERIALLY DIFFERENT FROM THE EXAMPLE.
This example is based on five assumptions:
(1) mortgage bankers originated $100.0 million of mortgage loans
having a weighted average interest rate of 13.98%;
(2) the Company purchased the loan from mortgage bankers for a premium
of $4.0 million (the mortgage bankers received an aggregate of $104.0
million for the loans);
(3) the Company sells the loans to the securitization trust for $97.0
million in cash, the trust sells $97.0 million of senior securities having
a weighted average
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<PAGE> 67
interest rate of 6.88% and issues a subordinate mortgage related security
to the Company;
(4) the securitization process costs $1.0 million in fees and costs
paid to investment bankers, attorneys, accountants and others; and
(5) Standard & Poor's and Moody's require (A) an initial level of
"over-collateralization" of 3% ($3.0 million) of the original amount of
loans sold in the securitization and (B) that the level of
over-collateralization must reach 6% of the original principal amount of
loans ($6.0 million) before the cash flow will be paid by the trustee to
the holder of the subordinate mortgage related security.
In this example, the sale of this pool of $100.0 million of mortgage loans
would result in negative cash flow of $8.0 million. The negative cash flow
results from the following factors:
- $104.0 million, representing the total cost of producing the loans sold
in the securitization minus
- $97.0 million is received by the trust from the sale of the senior
securities, all of which is paid to the Company, minus
- $1.0 million of fees and expenses.
The $3.0 million difference between the $100.0 million of mortgage loans
purchased by the trust and the $97.0 million of senior securities sold by the
trust creates the 3.0% initial over-collateralization. The senior securities
have the "protection" or credit enhancement of the cash flow, principal and
interest received on the $3.0 million of loans plus the spread initially equal
to $7.4 million per year. The spread represents 7.1% (the difference between
13.98%, the interest paid by borrower on the loans in the trust, and 6.88%, the
interest paid by the trust on the senior securities) on the $97.0 million of
loans plus 13.98% on the $3.0 million of loans in the over-collateralization
account. The trust would retain the spread until the over-collateralization
reaches $6.0 million.
After the required level of over-collateralization is achieved, the trustee
pays all of the cash flow, after the payment of interest and principal to the
holders of the senior securities, to the Company's mortgage related securities.
Loan delinquencies and defaults reduce this over-collateralization. If the
amount in the account falls below 6.0% of the amount of loans sold to the trust,
the trustee stops the payment of cash to the Company's mortgage related
securities and retains it until the 6.0% level is again achieved.
ACCOUNTING FOR A SECURITIZATION TRANSACTION
Under generally accepted accounting principles, the sale of mortgage loans
by the Company in securitization transactions requires the Company to recognize
revenue on the completion of the securitization transaction based on the
discounted present value of the estimated future cash flow stream ("gain on sale
accounting") to be received by the Company on its mortgage related securities.
As described in more detail later in this "Management's Discussion and Analysis
of Financial Condition and Results of Operation", the Company determines the
fair value of each of its mortgage related securities using prepayment,
delinquency, default and credit loss assumptions on the mortgage loans backing
each of its mortgage related securities that the Company believes to be
appropriate for the particular mortgage loans. The anticipated cash to be
received by the
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<PAGE> 68
Company's mortgage related securities from the mortgage loans is discounted to
present value to establish the fair value of the mortgage related securities
shown on the Company's balance sheet.
Accounting for specialty finance companies that sell assets in
securitization transactions is particularly complex. The most complex item is
the source of the Company revenues. The Company gets its revenues from the
following items:
- Gain (loss) on the sale of loans;
- Unrealized gain (loss) on mortgage related securities retained in
securitization transactions;
- Interest income, net; and
- Loan servicing income, net.
"Gain (Loss)" on the Sale of Loans. Historically, the most significant
portion of the Company's revenues comes from Gain (Loss) on the sale of loans.
One component is the Gain (Loss) resulting from the sale of loans in
securitization transactions. Refer to the example the Company used earlier,
where the sale of $100.0 million of our loans in the securitization transaction
resulted in negative cash flow of $8.0 million. Assume the mortgage related
security issued by the trust to the seller of the loans from that securitization
had a fair value of $18.0 million (see discussion on "gain on sale" accounting
above). The seller then would have received a total $115.0 million from the
securitization, consisting of $97.0 million in cash and a mortgage related
security having a fair value of $18.0 million. The total cost of the loans sold
in the securitization were $105.0 million, consisting of the total cost of
producing the loans of $104.0 million and $1.0 million in fees and expenses for
the securitization. In this example, the revenues recorded from this
securitization would be $10.0 million. This amount is divided between two
revenue items, Gain (Loss) on sale of loans and Net unrealized gain (loss) on
mortgage related securities. The division of the revenues between these two
items is determined by allocating the total revenues of $10.0 million,
proportionately between the cash proceeds from the sale of the loans, in this
case $97.0 million (allocated to revenues from "Gain (Loss) on the Sale of
Loans"), and the fair value of the mortgage related security issued by the trust
to the seller of the loans in the securitization, in this case $18.0 million
(allocated to revenues from "Unrealized gain (loss) on mortgage related
securities").
Another component represents the Gain (Loss) on the sale of loans for cash.
It is equal to the Company's total cost (expense) of producing loans including
any premiums paid when the Company purchases loans from its network of mortgage
bankers, minus the amount received by the Company at the time the loans are sold
for cash to an institutional purchaser. For example, if the Company purchased a
$100,000 principal balance loan from a mortgage banker for $104,000 and sold
that loan to an institutional purchaser for $107,000, the Company would
recognize $3,000 of revenue from gain on the sale of loans.
Unrealized Gain (Loss) on Mortgage Related Securities Retained in
Securitization Transactions. Revenues from "Unrealized gain (loss)" on mortgage
related securities results from the allocation of total revenues from the sale
of mortgage loans in securitization transactions described immediately above and
from two other sources. Revenues from the amortization on the Company's mortgage
related securities generally, is equal to the amount of cash flow received on
the Company's mortgage related securities.
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In addition, Unrealized gain (loss) on mortgage related securities generates
negative revenues equal to (i) the write down, if any, of the fair value of the
Company's mortgage related securities; and (ii) positive revenues from the write
up, if any, of those securities.
Interest Income, Net. Interest income, net, is the interest received by
the Company on its portfolio of mortgage loans prior to their sale plus
accretion interest on its mortgage related securities minus the Company's
interest expense on its borrowings including its subordinated debt, warehouse
line of credit and other borrowings.
Loan Servicing Income, Net. "Loan servicing income, net", are the fees
paid to the Company for servicing loans owned by the Company or loans sold with
servicing retained. The prepayment penalties, if any, received from the
Company's borrowers who repay their loan prior to their scheduled maturity date
are included in Loan servicing income, net. As discussed earlier, the Company
historically retained the servicing on a substantial majority of loans it sold.
The Company uses "net" as a part of the revenues from loan servicing because,
under generally accepted accounting principles, the amount of servicing fees
earned is reduced by the amortization of the Company's servicing rights. The
Company values the anticipated maturity and discounts the anticipated cash flow
to its present value similar to the way the Company determines the fair value of
its mortgage related securities. Historically, the Company's fee for servicing a
loan was 1% of the loan's outstanding principal balance. The fair value of the
anticipated cash flow is recorded on the Company's balance sheet as "Mortgage
servicing rights". As servicing revenues are received, the discounted present
value of the future cash flow is reduced. The amount of the reduction is the
"amortization". Revenue from mortgage servicing rights will not be significant
in the future, because the Company sold all of its rights to City Mortgage
Servicing as part of the Recapitalization.
REVISION OF ASSUMPTIONS
The most significant source of the Company's revenues and income
historically has resulted from the sale of loans produced by the Company and
sold in securitization transactions and the fair value of the mortgage related
security issued to the Company by the trusts. The Company projects the
anticipated cash flow to be received from the loans backing its mortgage related
securities based on assumptions of voluntary prepayment speeds and losses. When
prepayments, delinquencies, default and credit losses on the mortgage loans
backing the Company's mortgage related securities exceed the Company's
assumptions, the Company is required to modify its assumptions as to the
prepayments, delinquencies, defaults, and credit loss rates on the mortgage
loans backing its mortgage related securities. This generally reduces the
anticipated cash flow to be received from the mortgage loans and results in a
write down in the fair value of the particular mortgage related securities. The
amount of the write down is treated as negative revenues from Unrealized gain
(loss) on mortgage related securities.
The fair value of the Company's mortgage related securities are affected
by, among other things, changes in market interest rates and prepayment and loss
experience of these and similar securities. The Company estimates the fair value
of its mortgage related securities using prepayment and credit loss assumptions
on the mortgage loans backing these securities that the Company believes to be
appropriate for the characteristics (weighted-average interest rate, weighted
average maturity date, etc.) of the mortgage loans backing each particular
securitization. The Company discounts the projected cash flow at the rate it
believes an independent third-party would require as a rate of return.
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During the fiscal year ended August 31, 1998, the Company experienced
prepayment activity and delinquencies with respect to its securitized Equity +
loans, which substantially exceeded the levels that had been assumed for the
applicable time frame. As a result of this increase, the Company adjusted the
assumptions previously utilized in calculating the carrying value of its
mortgage related securities. The application of these revised assumptions to the
Company's portfolio of Equity + and Title I loans backing its mortgage related
securities caused the Company to adjust the carrying value of the securities by
approximately $72.1 million during fiscal 1998. The changes in prepayment and
credit loss assumptions also caused the Company to write down the fair value of
its mortgage servicing rights by $1.1 million during fiscal 1998. The fair value
of the Company's mortgage related securities and the fair value of its mortgage
servicing rights are determined in a similar manner.
The Company's assumptions are based on information from a variety of
sources including, among other things, the Company's experience with its own
portfolio of loans, pertinent information from a variety of market sources and
consultations with its financial advisors. However, the Company has not obtained
an independent evaluation of the assumptions utilized in calculating the
carrying value of its mortgage related securities for any period subsequent to
August 31, 1997. To the Company's knowledge, there is not active market for the
sale of these securities. During the year ended August 31, 1998, negative
adjustments of approximately $72.1 million were recognized. During the year
ended August 31, 1999, negative adjustments of approximately $3.3 million were
recognized.
Although the Company believes that it has made reasonable estimates of the
prepayment and default rates in determining the fair value of the Company's
mortgage related securities, the rate of prepayments and defaults utilized are
estimates, and actual experience will vary from these estimates and such
variances may be material. There can be no assurance that the prepayment and
loss assumptions used to determine the fair value of the Company's mortgage
related securities and mortgage servicing rights will remain appropriate for the
life of the loans backing such securities. If actual loan prepayments or credit
losses vary from the Company's estimates, the fair value of the Company's
mortgage related securities and mortgage servicing rights, if any, may have to
be adjusted through a charge or credit to earnings.
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The Company's revised prepayment assumptions used for Title I loans at
August 31, 1999 reflect an annualized rate of 23.0% of the life of the
portfolio. Actual annualized prepayment rates of the Title I loans backing the
Company's mortgage related securities were 17.46% for the fiscal year ended
August 31, 1999 and % for the three months ended November 30, 1999. These
loss assumptions for Title I loans at August 31, 1999 are based on a historical
"migration" analysis of delinquent loans that the Company anticipates will
become "defaulted loans." The assumed default rate and the restricted rates are
shown below in the following model and historical default rates:
<TABLE>
<CAPTION>
HISTORICAL DEFAULT RATES
FOR THE PERIODS ENDED
AUGUST 31, 1999
ASSUMED DEFAULT -------------------------------
DELINQUENCY (DAYS) STATUS RATES 12 MONTHS 6 MONTHS 3 MONTHS
- ------------------------- --------------- --------- -------- --------
<S> <C> <C> <C> <C>
31-60........................... 2-10% 1.85% 1.49% 1.98%
61-90........................... 20-25 14.69 12.83 16.82
91-120........................... 50 40.58 38.09 43.09
121-150........................... 80 62.56 59.33 68.47
151-180........................... 95 82.25 80.40 90.92
Over 180........................... 100 97.68 97.25 100.00
</TABLE>
The Company assumes that a defaulted Title I loan will result in loss of
95.0% of the loan balance and that all Title I insurance has been exhausted. On
a cumulative basis, the assumptions anticipate aggregate losses of 11.9% of the
original principal balance of Title I loans.
The prepayment assumptions for Equity + loans were also increased at the
end of fiscal 1998 to reflect an annualized prepayment rate of 4.5% in the first
month following the completion of the securitization with the annualized rate
increases in level monthly increments so that by the 18th month the annualized
prepayment rate is 18.75%. The annualized prepayment rate is maintained at that
level through the 36th month at which time it is assumed to decline in level
monthly increments to 15.25% by the 43rd month, and is maintained at 15.25% for
the remaining life of the portfolio. The weighted average annualized prepayment
speed for the loans backing the Company's mortgage related securities was 14.89%
during fiscal 1999 and 17.4% during fiscal 1998.
The loss assumptions for the Equity + loans backing the Company's mortgage
related securities have also been increased to reflect losses commencing in the
second month following a securitization and building in level monthly increments
until a 4.25% annualized loss rate is reached in the 15th month. The annualized
loss rate is maintained at that level through the 43rd month at which time it is
assumed to decline in level monthly increments to 4.0% at month 48 and is
maintained for the life of the portfolio. On a cumulative basis this model
assumes aggregate losses of approximately 16% of the initial principal balance
of Equity + loans backing the Company's mortgage related securities. The actual
losses on Equity + loans backing the Company's mortgage related securities
during fiscal 1999 and 1998 were approximately 3.53% and 2.5% or the original
principal balance, respectively.
The Company utilized a 16% discount rate at August 31, 1998 and 1999 to
discount to their present sale of the cash flow streams to be received by the
Company on its mortgage related securities. During fiscal 1997, the Company used
an annual weighted average discount rate of 12% for Title I and Equity + loans
and generally utilized annual prepayment assumptions ranging from 1% to 15%,
annual estimated losses of up to 1.75%
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of Equity + loans resulting in an aggregate loss of 15%, and estimated losses on
Title I loans based on the then current migration analysis and assuming
recoveries of 20% after exhaustion of insured reserves.
RESULTS OF OPERATIONS
Three Months Ended November 30, 1999 Compared to Three Months Ended November
30, 1998
Loan Production
The following table sets forth certain data regarding loans produced by the
Company during the three months ended November 30, 1998 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NOVEMBER 30,
-----------------------------------
1998 1999
--------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Principal balance of loans produced:
Wholesale:
Title I................................. $ 4 0.0% $ -- 0.0%
Equity + loans.......................... 2,942 17.8 -- 0.0
Home Equity............................. 11,584 70.2 79,903 79.5
------- ----- -------- -----
Total Wholesale....................... 14,530 88.0 79,903 79.5
------- ----- -------- -----
Retail:
Equity + loans.......................... 1,965 11.9 -- --
Home equity............................. 23 0.1 20,582 20.5
------- ----- -------- -----
Total retail.......................... 1,988 12.0 20,582 20.5
------- ----- -------- -----
Total principal amount of loans
produced........................... $16,518 100.0% 100,485 100.0%
======= ===== ======== =====
</TABLE>
Loan Sales
Sales of loans in securitization transactions had historically been the
main source of the Company's revenue and income. In a securitization
transaction, a specific group of the Company's mortgage loans having similar
characteristics, (loan type and loan amounts) were pooled for sale.
The gain on sale of loans can vary for several reasons, including the
relative amounts of Equity +, Home Equity and Title I Loans, each of which type
of loan has different (i) estimated prepayment rates, (ii) weighted-average
interest rates, (iii) weighted-average maturities and (iv) estimated future
default rates. Typically, the gain on sale of loans through securitizations is
higher than on whole loan sales; however, engaging in securitizations requires
an up-front cash expenditure and can have an adverse effect on a company's
financial condition due to unanticipated write downs in the value of the
residual securities retained by the company which may be caused by, among other
things, unanticipated changes in prepayment and default rates assumed by the
company. The Company entered into no securitizations during the three months
ended November 30, 1998 and 1999.
As the holder of residual securities issued in securitizations, the Company
is entitled to receive certain excess cash flows. These excess cash flows are
calculated as the difference between (a) principal and interest paid by
borrowers and (b) the sum of
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(i) pass-through interest and principal to be paid to the holders of the regular
securities and interest only securities, (ii) trustee fees, (iii) third-party
credit enhancement fees, (iv) servicing fees and (v) estimated loan pool losses.
The Company's right to receive the excess cash flows is subject to the
satisfaction of certain reserve or over-collateralization requirements that are
specific to each securitization and are used as a means of credit enhancement.
The following table sets forth the principal amount of loans sold and
related Gain (Loss) on sale for the three months ended November 30, 1998 and
1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NOVEMBER 30,
------------------
1998 1999
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Principal Amount of loans Sold(1):
Title I................................................ $ 810 $ --
Equity +............................................... 12,143 2,382
Home Equity............................................ 24 94,491
======= =======
Total............................................... $12,977 $96,873
======= =======
Gain on sale of loans.................................... $ 172 $ 4,241
======= =======
Net Unrealized gain (loss) on mortgage related
securities............................................. $ 270 $ (624)
======= =======
Gain on sale of loans as a percentage of principal
balance of loans sold.................................. 2.0% 4.4%
======= =======
Gain on sale of loans plus net unrealized loss on
mortgage related securities as a percentage of
principal balance of loans sold........................ 5.2% 3.7%
======= =======
</TABLE>
- -------------------------
(1) Includes approximately $4.5 million principal amount of repurchased loans
sold in the three months ended November 30, 1998.
As part of its current business strategy, the Company is no longer pursuing
securitization transactions but is instead, selling its whole loans produced.
Loan Delinquencies
The following table sets forth the Equity + and Home Equity loan
delinquencies as of the dates indicated.
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
1999 1999
---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Home Equity and Equity + data(1):
31-60 days past due................................... 7.23% 4.54%
61-90 days past due................................... 2.24 7.57
91 days and over past due............................. 13.50 46.58
----- -----
Total past due..................................... 22.97% 61.69%
===== =====
</TABLE>
- -------------------------
(1) Represents the dollar amount of delinquent loans as a percentage of the
total dollar amount of loans.
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In the last eight months of fiscal 1998 and the first months of fiscal
1999, the Company focused on (1) liquidating its loan portfolio for cash to
reduce its indebtedness while it explored alternatives to raise new capital and
(2) initiating new strategic initiatives to return the Company to profitability.
The Company did not begin to produce significant loan volume until July 1999.
Such volume was attributable to production by The Money Centre, Inc. which was
acquired by the Company in July 1999. As a result, the Company does not believe
that its results for the three months ended November 1999, are comparable to the
Company's results for the three months ended November 1998.
Total Revenues. Total revenues increased $3.1 million to $3.7 million
during the three months ended November 30, 1999 from $520,000 during the three
months ended November 30, 1998. The increase was attributable to loan production
by The Money Centre, Inc.
Gain on sale of loans increased $4.1 million to $4.2 million during the
three months ended November 30, 1999 from $172,000 during the three months ended
November 30, 1998. The increase was primarily the result of an increase in the
volume of loans sold in the three months ended November 30, 1999 compared to the
three months ended November 30, 1998.
Net Unrealized gain (loss) on mortgage related securities decreased to a
loss of $624,000 during the three months ended November 30, 1999 from a gain of
$270,000 during the three months ended November 30, 1998, a change of $894,000.
This decrease is due to a mark to market adjustment made by the Company in
November 1999.
Loan servicing income, net, decreased $144,000 to $96,000 during the three
months ended November 30, 1999 from $240,000 during the three months ended
November 30, 1998. This decrease was a result of the reduction in loan
prepayment penalties earned during the three months ended November 30, 1999.
Interest expense, net of interest income, decreased $111,000, from a net
expense of $162,000 to a net expense of $51,000 during the three months ended
November 30, 1999. The decrease was primarily the result of increased interest
income on loans produced by The Money Centre, Inc., partially offset by
increased interest expense on the warehouse lines due to increased loan
origination volume.
Total General and Administrative Expenses. General and administrative
expenses increased $3.0 million to $7.2 million for the three months ended
November 30, 1999 from $4.2 million for the three months ended November 30,
1998. The increase is a result of the inclusion of the expenses incurred at the
Las Vegas platform and The Money Centre, Inc. platform, acquired by the Company
during second and fourth quarters of fiscal 1999, respectively. The general and
administrative expenses decreased $1.9 million for the Atlanta platform to $2.3
million for the three months ended November 30, 1999, due to the cost reduction
implemented by management. The total consolidated general and administrative
expenses include $579,000 for the Las Vegas platform and $4.2 million for The
Money Centre, Inc. during the same period.
Payroll and benefits expense increased $2.4 million to $4.4 million for the
three months ended November 30, 1999 from $2.0 million for the three months
ended November 30, 1998. This increase can be attributed to an increase in staff
due to the acquisition of The Money Centre, Inc.
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Supplies and postage expense increased $185,000 to $256,000 during the
three months ending November 30, 1999 from $71,000 during the three months ended
November 30, 1998. This increase can be attributed to the increase in business
between the two periods due to the acquisition of The Money Centre, Inc.
Professional services expense decreased $442,000 to $522,000 during the
three months ended November 30, 1999 from $964,000 during the three months ended
November 30, 1998. This decrease is attributed to reduced expenditures of
contractual services and a decrease in legal and audit fees.
During the three months ending November 30, 1999, travel and entertainment
expenses increased $164,000, from $109,000 during the three months ending
November 30, 1998, to $273,000 during the three months ended November 30, 1999.
This increase can be attributed to the travel necessary for operational
management of the Las Vegas and The Money Centre, Inc. platforms.
Net Loss. As a result of the foregoing, the Company did not have a
significant change in the loss reported during the three months ended November
30, 1999 as compared with the three months ended November 30, 1998. This can be
attributed to the increase in the net revenues offset by the increase in the
total general and administrative expenses.
Extraordinary Item-Purchase of Subordinated Notes. In February 1999, the
Company repurchased $11.0 million of the Company's Old Notes, which resulted in
a gain, net of tax, of $4.8 million.
RESULTS OF OPERATIONS
Fiscal Year Ended August 31, 1999 Compared to Fiscal Year Ended August 31, 1998
The Company substantially reduced its loan production after January 1, 1998
as compared to the first four months of fiscal 1998. In the last eight months of
fiscal 1998, the Company focused on (1) liquidating its loan portfolio for cash
to reduce its indebtedness while it explored alternatives to raise new capital
and (2) initiating new strategic initiatives to return the Company to
profitability. The Company did not begin to produce significant loan volume
until July 1999. Such production was attributable to production by The Money
Centre, Inc. which was acquired by the Company in July 1999. As a result, the
Company does not believe that its results for the fiscal year ended August 31,
1999 are comparable to the Company's results for the fiscal year ended August
31, 1998.
The Company produced $119.1 million of loans during fiscal 1999 compared to
$338.9 million in fiscal 1998 and $526.9 in fiscal 1997.
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The Company's loan production by month during fiscal 1997, 1998 and 1999 is
illustrated in the chart below:
[LOAN PRODUCTION CHART]
Net Revenues. Net losses decreased $91.9 million to $2.1 million in fiscal
year ending August 31, 1999 from net losses of $94.0 million during fiscal year
ending August 31, 1998. The loss for the twelve months ended August 31, 1998 was
primarily the result of continued low loan production and difficulty in selling
closed loans. The decrease in net losses for the twelve months ending August 31,
1999 resulted from the reduction in the Company's business while the Company
pursued its new strategic initiatives and from a substantially lower mark down
on the Company's mortgage related securities during this period. Additionally,
during fiscal year 1998, sales of loans were generally made for cash, and were
for less than par value, thus contributing to losses. Loan originations during
the fiscal year ended August 31, 1999 were $119.1 million, as compared to
originations of $338.9 million during the twelve months ended August 31, 1998.
Sales of loans during the twelve months ended August 31, 1999 were $106.1
million, while during the fiscal year ended August 31, 1998 they were $347.6
million.
Gain (Loss) on sale of loans totalled $1.2 million during the twelve months
ended August 31, 1999 from a loss of $26.6 million during the twelve months
ended August 31, 1998, representing a total increase of $27.8 million. The gain
was primarily the result of higher premiums received on a lower volume of loans
sold in the twelve months ended August 31, 1999 compared to the twelve months
ended August 31, 1998.
Net unrealized loss on mortgage related securities decreased to a loss of
$3.3 million during the twelve months ended August 31, 1999 from a loss of $70.0
million during the twelve months ended August 31, 1998, a change of $66.7
million. The valuation adjustments recorded for the fiscal year ended August 31,
1999 were $3.3 million.
Loan servicing income, net, decreased $624,000 to $375,000 during the
twelve months ended August 31, 1999 from $999,000 during the twelve months ended
August 31, 1998. This decline was the result of the elimination of most of the
servicing revenue previously
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earned by the Company due to the sale of its servicing rights to City Mortgage
Services in fiscal 1998.
Interest income on loans held for sale and mortgage related securities, net
of interest expense, decreased $2.0 million to an expense of $389,000 during the
twelve months ended August 31, 1999 from income of $1.6 million during the
twelve months ended August 31, 1998. The decline was primarily the result of a
decrease in the average balance of loans held for sale during the fiscal year
ended August 31, 1999 to $26.9 million compared to the average during the fiscal
year ended August 31, 1998 of $41.9 million.
Total General and Administrative Expenses. General and administrative
expenses decreased $15.7 million to $18.1 million for the twelve months ended
August 31, 1999 from $33.8 million for the twelve months ended August 31, 1998.
This decline can be attributed to reductions in business activity, along with
the cost reductions implemented by management since the Company's
Recapitalization in 1998.
Payroll and benefits expense decreased $11.1 million to $7.5 million for
the twelve months ended August 31, 1999 from $18.6 million for the twelve months
ended August 31, 1998. This reduction can be attributed to staff reductions
which have occurred over the past year.
Supplies and postage expense declined $857,000 to $424,000 during the
fiscal year ended August 31, 1999 from $1.3 million during the fiscal year ended
August 31, 1998. This decrease can be attributed to the reduction in business
between the two periods and to steps taken to control costs.
Professional services expense decreased $1.5 million to $3.3 million during
the twelve months ending August 31, 1999 from $4.8 million during the twelve
months ended August 31, 1998. This decline is attributed to the elimination of
the management overhead fees formerly paid to Preferred Equities Corporation
("PEC"), reduced expenditures for inspection fees due to the reduction of loan
originations and reduced employee recruiting costs, offset, in part, by
increased legal and audit fees.
Sub-servicing fees paid decreased $1.8 million to $325,000 during the
twelve months ended August 31, 1999 from $2.2 million during the twelve months
ended August 31, 1998. This decline resulted from a decrease in loan volume.
During the twelve months ending August 31, 1999, travel and entertainment
expenses decreased $588,000, to $571,000 during the twelve months ending August
31, 1999 from $1.16 million during the twelve months ended August 31, 1998. This
reduction can be attributed to reductions in business and to cost control
measures implemented over the past year.
Net Loss. The Company incurred a net loss before taxes and extraordinary
items of $21.5 million during the twelve months ended August 31, 1999, compared
with a net loss before taxes of $126.0 million for the twelve months ended
August 31, 1998. An income tax benefit of $6.3 million and $8.2 million was
recorded in fiscal 1998 and 1999, respectively. In February 1999, the Company
repurchased $11.0 million of the Company's outstanding Old Notes, which resulted
in a gain, net of tax, of $4.8 million. As a result of the above, the Company
incurred a net loss of $8.5 million in fiscal 1999 compared to a loss of $119.7
million for fiscal 1998.
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Fiscal Year Ended August 31, 1998 Compared to Fiscal Year Ended August 31, 1997
Net Revenues. Net revenues were negative $94.0 million during fiscal 1998
compared with positive $54.8 million during the fiscal year ended August 31,
1997. The Company's revenues were determined largely by special accounting
requirements that required the Company to recognize significant revenue on loans
sold in securitization transactions ("gain on sale") even though these
transactions generated negative cash flow.
Gain (Loss) on sale of loans decreased from a gain of $45.1 million for the
fiscal year ending August 31, 1997 to a loss of $26.6 million for the fiscal
year ending August 31, 1998. This decline was primarily attributable to the
substantially lower amount of loans sold in securitization transactions in
fiscal 1998 due to the continuing cash flow deficits of the Company. The Company
also experienced a decline in the revenues from loans sold for cash. This
decline may have been attributed in part by the market's knowledge that the
Company was liquidating its loan portfolio to pay down the Company's lenders.
The Company's revenues from Gain (Loss) on the sale of loans for cash in fiscal
1998 were also impacted by a lower of cost or market write down of $13.7 million
of the Company's $21.9 million principal amount of loans in its portfolio at the
end of fiscal 1998. The loans in the Company's portfolio at August 31, 1998
primarily had document deficiencies or the borrowers were delinquent in their
loan payments. The lower of cost or market adjustment is based on the Company's
estimate of the proceeds to be received when these loans are sold. The Company
believes that liquidity shortages in the specialty finance industry may have
also hurt the market value of these loans. In fiscal year ended August 31, 1998,
the Company also had a loss of $4.0 million when it terminated its master
warehouse line as part of the Recapitalization.
Revenues from net Unrealized gain (loss) on mortgage related securities
were negative $70.0 million in fiscal 1998 compared with a positive $3.5 million
in fiscal 1997. Substantially all of fiscal 1998's negative revenues resulted
from a write down of $73.0 million in the value of the Company's mortgage
related securities. The write down was required because prepayment, delinquency,
default and credit loss rates of the Equity + and Title I loans backing these
securities substantially exceeded the assumptions the Company used to value its
mortgage related securities at the end of fiscal 1997. These loans were produced
by the Company in prior periods. Additionally, in response to recent adverse
changes in the liquidity and market value of these and other similar asset
backed residual interests, the Company increased the rate used to discount to
present value the anticipated cash flow to be received on its mortgage related
securities from 12% the end of fiscal 1997 to 16% at the end of fiscal 1998.
Loan servicing income, net, decreased from $3.0 million in fiscal 1997 to
$1.0 million is fiscal 1998. The decrease was a result of negative revenues of
$1.1 million from a write down in the fair value of the Company's mortgage
servicing rights in the third quarter of fiscal 1998 due to an increase in the
Company assumptions of prepayment, delinquency, default, and credit loss rates
on the loans in the Company's servicing portfolio, which reduced the discounted
present value of the Company's anticipated servicing revenues on those loans. In
addition, in fiscal 1998 the Company had negative loan servicing revenues of
$703,000 from the loss on the sale of the Company's servicing rights to City
Mortgage Services as part of the Recapitalization.
Revenues from net interest income decreased from $3.1 million is fiscal
1997 to $1.6 million in fiscal 1998. Interest income increased from $9.5 million
in fiscal 1997 to $14.8
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million in fiscal 1998. The increase was due to the sale of the Company's 1998
loan production in cash transactions over a period of time, compared with the
sale of fiscal 1997 loan production in quarterly securitization transactions. In
addition, the Company earned approximately $304,600 in interest in fiscal 1998
from the short-term investment of $50.0 million in proceeds from the
Recapitalization.
Interest expense in fiscal 1998 was substantially higher than interest
expense in fiscal 1997 due primarily to additional interest expense of $3.5
million on the Company's Original Notes as a result of the October 1997 issuance
of $40.0 million principal amount of 12 1/2% subordinated notes. In addition,
the Company borrowed an aggregate of $15.0 million secured by certain of its
mortgage related securities in the first quarter of fiscal 1998. The principal
amount of these borrowings were outstanding for all of fiscal 1998 and for only
a portion of fiscal 1997.
Provision for Credit Losses. The net provision for credit losses decreased
$9.5 million to income of $3.2 million for fiscal 1998 from losses of $6.3
million for fiscal 1997. The decrease in the provision for credit losses was due
to the decrease in the volume of loans produced and the ratio of Equity + loans
to Title I loans produced during fiscal 1998 compared to fiscal 1997. An
allowance for credit losses is not established on loans sold in securitization
transactions, because the Company typically does not have recourse obligations
for these losses. Estimated credit losses on loans sold in securitization
transactions are considered in the Company's determination of the fair value of
its mortgage related securities. The provision for credit losses is based upon
periodic analysis of the portfolio, economic conditions and trends, historical
credit loss experience, borrowers' ability to repay, collateral values, and
estimated FHA insurance recoveries on Title I loans originated and sold.
Total General and Administrative Expenses. Total general and
administrative expenses increased $10.0 million or 42.0%, to $33.8 million
during fiscal 1998 from $23.8 million during fiscal 1997. The increase was
primarily a result of increase costs of professional services due to (1)
increased outside legal and audit expenses associated with additional securities
filings; (2) the Recapitalization; (3) amendments to existing debt agreements;
(4) increased loan servicing expenses due to an increase in loans serviced; and
(5) increased payroll and benefits related to the hiring of additional personnel
to support the Company's expansion in the first quarter of fiscal 1998.
Payroll and benefits expense increase $5.5 million, or 42.4% to $18.6
million during fiscal 1998 from $13.1 million during fiscal 1997 primarily due
to an increased number of employees prior to January 1998 and expenses
associated with the reduction in the Company's workforce. Although the number of
employees decreased to 134 at August 31, 1998 from 405 at August 31, 1997, the
average number of employees was higher during fiscal 1998 than fiscal 1997.
Rent and lease expenses increased $417,000 or 34.8% to $1.6 million for
fiscal 1998 from $1.2 million for fiscal 1997 due to annual escalation in rent
and expiration of tenant discounts the Company enjoyed in fiscal 1997 for office
space at the Company's corporate offices.
Professional services increased $2.5 million or 110.6%, to $4.8 million for
fiscal 1998 from $2.3 million for fiscal 1997 due to increased outside legal and
audit expenses associated with the Company's private placement of $40.0 million
principal amount of Original Notes in fiscal 1998, additional securities
filings, amendments to existing debt
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agreements and higher consulting and management services expenses. A substantial
portion of the increase in professional services was due to actions taken by the
Company subsequent to January 1, 1998 as a result of its adverse financial
position and the Recapitalization.
Sub-servicing fees increased $286,000, or 15.3% to $2.2 million for fiscal
1998 from $1.9 million for fiscal 1997 due primarily to a larger average loan
servicing portfolio, partially offset by a lower sub-servicing rate paid to the
sub-servicer in the latter part of fiscal 1998.
Other general and administrative expenses increased $1.3 million, or
125.6%, to $2.4 million during fiscal 1998 from $1.1 million during fiscal 1997
due primarily to increased expenses related to the expansion of facilities
related to the Company's business expansion at the beginning of fiscal 1998.
Net Loss. The Company had a $126.0 million loss before income taxes for
fiscal 1998 compared to income of $23.8 million for fiscal 1997. An income tax
expense of $9.1 million was provided for in fiscal 1997 while an income tax
benefit of $6.3 million has been provided for in fiscal 1998.
As a result of the above, the Company incurred a net loss of $119.7 million
for fiscal 1998 compared to net income of $14.7 million for fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
In order to improve its liquidity situation, the Company has obtained
commitments from the holders of $28 million principal amount of its outstanding
Old Notes to exchange such outstanding Old Notes for discounted New Notes due
August 2006 and for the equivalent of 22 1/2% of the Company's outstanding
Common Stock based on the number of fully-diluted shares of Common Stock
(excluding out-of-the money options). In addition, the holders of such Old Notes
have agreed to waive the payment of approximately $2.0 million of accrued
interest payable to them in December 1999 under the terms of the Old Indenture
governing the Old Notes. (Under the terms of the New Indenture, no interest will
be payable to the holders of the New Notes by Altiva until June 15, 2001,
although interest will accrue from the date of issuance). The issuance of Common
Stock to the current holders of Old Notes requires the approval of the Company's
stockholders under the rules of the Nasdaq Stock Market. Altiva expects that the
discount in the principal amount of notes outstanding and the waiver of the
interest payment will result in the reduction of the Company's projected cash
expenditure by $3.4 million over the next twelve months.
In addition, the Company has received a commitment from Value Partners,
Ltd. to purchase an additional $4.0 million principal amount of Amended Notes in
addition to the Original Secured Notes already purchased. Consummation of this
sale of Amended Notes is subject to the execution of mutually agreed upon
amendments to the Secured Note Purchase Agreement between the parties ("Secured
Note Purchase Agreement") and other related agreements ("Related Agreements").
Assuming completion of both the exchange and the issuance of the Amended
Notes, the Company expects to have sufficient cash and cash equivalents to fully
fund its operations and meet its obligations until August 2000. On an ongoing
basis, the Company expects to generate additional liquidity through increased
production and controlling expenses.
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There can be no assurances that the exchange of the Old Notes and the
issuance of the Amended Notes will be consummated. A failure to consummate these
transactions may cause defaults with respect to the Company's outstanding
indebtedness or lead the Company to become insolvent. In addition, there is no
guarantee that the Company will not suffer additional unforeseen events that
will cause further liquidity shortages.
During fiscal 1999 the Company had five significant sources of financing
and liquidity: (1) the balance of the cash proceeds from the sale of Preferred
Stock and Common Stock in the Recapitalization which totaled approximately $4.2
million at August 31, 1999; (2) a warehouse line of $25.0 million with Sovereign
(the "Sovereign Warehouse Line"); (3) a warehouse line of $25.0 million with
First Collateral (the "First Collateral Warehouse Line"); (4) a warehouse line
of $30.0 million with Centura Bank (the "Centura Bank Warehouse Line"); and (5)
sales of loans in the institutional whole loan market. The Sovereign Warehouse
Line was reduced to $25.0 million from $50.0 million as of March 31, 1999.
As of December 31, 1999, the Company's cash and cash equivalents were
$336,000. The Company is currently funding its operating and capital
expenditures primarily through the periodic issuance of additional Old Secured
Notes to Value Partners. Upon consummation of the issuance of the Amended Notes
to Value Partners, the Company's primary sources of liquidity and financing will
be: (1) the net proceeds to the Company from the sale of $4.0 million of Amended
Notes to Value Partners; (2) the $25.0 million Sovereign Warehouse Line (of
which $22.4 million was outstanding as of November 30, 1999); (3) the $25.0
million First Collateral Warehouse Line (of which $23.4 million was outstanding
as of November 30, 1999); and (4) sales of loans in the institutional whole loan
market. The Company expects that upon consummation of the Exchange Offer and the
sale of $4.0 million of Amended Notes, the Company will be able to obtain
additional warehouse financing to fund its loan production activities. There can
be no assurances, however, that such additional warehouse financing will be
available, and a failure to obtain such additional financing would have a
material adverse effect on the Company's operations.
The Company's liquidity and capital resources are impacted by certain
material covenant restrictions existing in the Old Indenture governing the
Company's outstanding Old Notes. These covenants include limitations on the
Company's ability to incur certain types of additional indebtedness, grant liens
on its assets and to enter into extraordinary corporate transactions. The
Company may not incur certain additional indebtedness if, on the date of such
incurrence and after giving effect thereto, the Consolidated Leverage Ratio
would exceed 1.5:1, subject to certain exceptions. At November 30, 1999, the
Consolidated Leverage Ratio was 1.84:1. The Company expects the removal of
certain covenants contained in the Old Indenture in connection with the
completion of the Exchange Offer; however, going forward, the Company's ability
to incur additional indebtedness may be limited by covenants contained in the
New Indenture. See "Description of New Notes -- Certain Covenants," below.
The Sovereign Warehouse Line had an original termination date of December
29, 1998 and was renewable, at Sovereign's option, in six-month intervals for up
to five years. During December 1998, the Sovereign Warehouse Line was renewed at
$50.0 million and was reduced to $25.0 million on March 31, 1999 through
December 31, 1999. The Sovereign Warehouse Line may be increased with certain
consents and contains pricing/fees which vary by product and the dollar amount
outstanding. The Sovereign Warehouse Line is secured by specific loans held for
sale and includes certain material
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covenants including maintaining books and records, providing financial
statements and reports, maintaining its properties, maintaining adequate
insurance and fidelity bond coverage and providing timely notice of material
proceedings. As of August 31, 1999, the Company had approximately $19.3 million
outstanding under the Sovereign Warehouse Line.
The Money Centre, Inc. utilizes two warehouse lines with Centura and First
Collateral Bank. The Centura Bank facility provides for a warehouse line of up
to $30 million, accrues interest at a prime rate + .5% to 1.75%, depending on
the age of the loan, and expired on November 30, 1999 and was not renewed as the
Company feels it can obtain another or extend the existing facility with equal
or more favorable terms. The First Collateral facility provides for a warehouse
line of credit of up to $25.0 million and accrues interest at LIBOR rate 2.25% +
.375%. The Company is currently negotiating an extension on the First Collateral
Warehouse Line. There have been no restrictions on the use of this facility
during these negotiations. The facilities are secured by specific loans held for
sale and includes certain material covenants including maintaining books and
records, providing financial statements and reports, maintaining its properties,
maintaining adequate insurance and fidelity bond coverage and providing timely
notice of material proceedings. The outstanding balance of these First
Collateral facility as of November 30, 1999 totaled $23.4 million.
In April 1997, the Company entered into a pledge and security agreement
with Greenwich Capital Financial Products for an $11.0 million revolving credit
facility. The amount that can be borrowed under the agreement was increased to
$15.0 million in June 1997 and $25.0 million in July 1997. This facility was
secured by a pledge of certain of the Company's interest only and residual class
certificates relating to securitizations carried as mortgage related securities
on the Company's Statements of Financial Condition, payable to the Company
pursuant to its securitization agreements. As of August 31, 1999, approximately
$1.7 million was outstanding under the agreement. The agreement, which was
originally scheduled to mature in December 1998 was extended until December
1999. On December 2, 1998, the Company obtained an amendment to the agreement
whereby the financial institution waived its right to declare an event of
default of borrower due to the Company's failure to comply with the minimum
required net worth and the debt to net worth ratio as of August 31, 1998.
Additionally, the minimum net worth test was amended such that the Company is
required to maintain a net worth equal to or greater than 75% of the Company's
net worth as of the end of the preceding fiscal quarter. Additionally, the
Company agreed to pay down the outstanding borrowings from $10.0 million at
August 31, 1998 to $6.0 million at December 31, 1998 and subsequently agreed to
pay the remaining $6.0 million in equal monthly payments during calendar 1999.
All remaining amounts outstanding under the agreement were paid off in December
1999.
In October 1997, the Company entered into a credit agreement with Textron
Financial which converted into a term loan in May 1998 with monthly amortization
derived from the cash flow generated from the respective mortgage related
securities pledged as collateral. This term loan bears interest at the prime
rate plus 2.5%, and matures in October 2002. The credit agreement governing the
October 1997 revolving line of credit includes certain material covenants. These
covenants include restrictions relating to extraordinary corporate transactions,
maintenance of adequate insurance and complying with certain financial tests.
These tests include complying with a minimal consolidated adjusted tangible net
worth and that the consolidated adjusted leverage ratio shall not exceed 3:1. As
of August 31, 1998, the Company's consolidated adjusted tangible net worth was
$54.1 million below the minimum required and the consolidated adjusted
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leverage ratio was 0.53:1. On December 9, 1998, the parties agreed to
temporarily amend the borrowing base definition for the period from September
30, 1998 through April 30, 1999 by increasing the borrowing base from 50% to
55%. On May 1, 1999, the borrowing base returned to 50%. The minimum
consolidated tangible net worth covenant was also adjusted, commencing
retroactively, as of September 30, 1998 and the Company agreed to paydown the
line by approximately $405,000 (the amount exceeding the applicable maximum
amount of tranche credit) and pay an accommodation fee of $10,000. As of August
31, 1999, the Company's consolidated adjusted tangible net worth was $19.4
million above the minimum required and the consolidated adjusted leverage ratio
was 2.188:1. As of August 31, 1999, approximately $3.8 million was outstanding
under the agreement.
In August 1999, the Company issued $7.0 million principal amount of
Original Secured Notes. The proceeds were used to acquire Money Centre. The
facility is secured by a pledge of certain of the Company's mortgage related
securities. The loan balance under this agreement bears interest at 12% and
matures in August 2006. As of January 31, 2000, $10.0 million of Old Secured
Notes were outstanding. The Company expects to amend and restate these Old
Secured Notes shortly before completion of the Exchange Offer to increase the
principal amount to $14.0 million and to add certain additional covenants which
will be substantially similar to the covenants contained in the New Indenture.
LIQUIDITY USES
The Company's liquidity is primarily used to originate loans, pay operating
and interest expenses and historically, to fund the negative cash flow from the
sale of loans in securitization transactions. Substantially all of the loans
produced by the Company are sold. The Sovereign Warehouse Line is to be repaid
primarily from the proceeds from the sale of loans collateralizing the line in
the secondary market. The Company resumed the production of new loans on July 1,
1998. The Company's cash requirements necessitate continued access to sources of
warehouse financing and sales of loans in the secondary market for premiums.
The Company generally expects to incur monthly operating expenses of
approximately $1.0 million. The Company currently does not have sufficient cash
or cash equivalents on hand to fund such expenses after February 29, 2000.
Management expects that consummation of the sale of an additional $4.0 million
principal amount of Amended Notes to Value Partners, Ltd., as described above
under "-- Liquidity Uses," will provide the Company with sufficient liquidity to
pay its operating and capital expenditures through May 31, 2000. There can be no
assurance that such funds will be sufficient to pay such expenditures or that
unforeseen events will not cause additional liquidity shortages. The Company may
effect a reduction in its real-estate lease expenditures through the subletting
of all or a portion of its current office space. If the Company subleases all of
its current office space, the Company intends to relocate its corporate offices
to another location suitable for the Company's needs.
In January 1999, the Company purchased substantially all of the assets of a
retail production platform in Las Vegas, Nevada for approximately $3.3 million
in cash.
In February 1999, the Company repurchased $11.0 million of the Company's
Old Notes, which resulted in an extraordinary gain, net of income tax, of $4.8
million.
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In July 1999, the Company purchased all of the outstanding stock of The
Money Centre, Inc. The principal components of the purchase price were $7.0
million of cash, 600,000 shares of Common Stock valued at $5 per share, and 20%
of the pre-tax net cash flow of the post-acquisition divisions, for a period not
to exceed 48 months.
Net cash used in the Company's operating activities for the fiscal years
ended August 31, 1998 and 1999 was $39.7 million and $35.0 million,
respectively. During the fiscal year ended August 31, 1998 and 1999, cash
provided by financing activities amounted to $70.4 million and $16.4 million,
respectively.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's various business activities generate liquidity, market and
credit risk:
- Liquidity risk is the possibility of being unable to meet all present and
future financial obligations in a timely manner.
- Market risk is the possibility that changes in future market rates or
prices will make the Company's positions less valuable.
- Credit risk is the possibility of loss from a customer's failure to
perform according to the terms of the transaction.
Compensation for assuming these risks is reflected in interest income and
fee income. The following table provides information as of August 31, 1999 about
the Company's mortgage related securities and other financial instruments that
are sensitive to changes in interest rates. The table presents sensitivity
analysis associated with fluctuations in prepayment speeds, increase or decrease
in defaulted loans and the discount rates associated with valuing the
securities.
[DEFAULT, DISCOUNT AND PREPAY SENSITIVITY CHART]
Although the Company is exposed to credit loss in the event of
non-performance by the borrowers, this exposure is managed through credit
approvals, review and monitoring procedures into the extent possible restricting
the period during which unpaid balances are allowed to accumulate.
As of August 31, 1999 the net fair value of all financial instruments held
by the Company with exposure to interest rate risk was approximately $31.8
million. The potential
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decrease in fair value resulting from a hypothetical 500 basis point increase in
interest rates would be approximately $23.8 million.
There are certain shortcomings inherent to the Company's sensitivity
analysis. The model assumes interest rate changes are instantaneous parallel
shifts in the yield curve. In reality, changes are rarely instantaneous.
Although certain assets and liabilities may have similar maturities or periods
to repricing, they may not react in line with changes in market interest rates.
Also, the interest rates on certain types of assets and liabilities may
fluctuate with changes in market interest rates while interest rates on other
types of assets and liabilities may lag behind changes in market rates.
Prepayments on the Company's mortgage related instruments are directly affected
by a change in interest rates. However, in the event of a change in interest
rates, actual loan prepayments may deviate significantly from the Company's
assumptions. Further, certain assets, such as adjustable rate loans, have
features, such as annual and lifetime caps that restrict changing the interest
rates both on a short-term basis and over the life of the asset. Finally, the
ability of certain borrowers to make scheduled payments on their adjustable rate
loans may decrease in the event of an interest rate increase.
EFFECTS OF CHANGING PRICES AND INFLATION
The Company's operations are sensitive to increases in interest rates and
to inflation. Increased borrowing costs resulting from increases in interest
rates may not be immediately recoverable from prospective purchasers. The
Company's loans held for sale consist primarily of fixed-rate long-term
obligations the interest rates of which do not increase or decrease as a result
of changes in interest rates charged to the Company. In addition, delinquency
and loss exposure may be affected by changes in the national economy. See Note 5
to the Company's financial statements contained in the Form 10-K.
RECENT ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting
and reporting standards for derivative instruments and for hedging activities.
It requires the entity to recognize all derivative instruments as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for changes in fair value of these
designated derivatives ("hedge accounting") depends on the intended use and
designation. An entity that elects to apply hedge accounting is required to
establish at the inception of its hedge the method it will use for assessing the
effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. Those methods must be
consistent with the entity's approach to managing risk. In June 1999, the FASB
issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of SFAS No. 133" for fiscal quarters
within all fiscal years beginning after June 15, 2000. The Company has not yet
evaluated the effect of adopting SFAS 133.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by Mortgage Banking Enterprise" ("SFAS 134"), which allows the
reclassification of mortgage-related securities and other beneficial interests
retained after the securitization of mortgage loans held for sale from the
trading category, as required by FASB 115, to either available for sale or held
to maturity based upon the Company's ability and intent to hold those
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investments. SFAS 134 is effective for fiscal 1999. The Company is no longer
securitizing any of its mortgage loans and has continued to account for its
remaining securitized mortgages as trading securities.
IMPACT OF THE YEAR 2000 ISSUE
The Company previously recognized the material nature of the business
issues surrounding computer processing of dates into and beyond the Year 2000
and began taking corrective action. Management believes the Company has
completed all of the activities within its control to ensure that the Company's
systems are Year 2000 compliant and the Company has experienced no interruptions
to normal operations due to the start of the Year 2000.
The Company's Year 2000 readiness costs were approximately $99,000 to
purchase or upgrade its own hardware/software. The Company does not currently
expect to apply any further funds to address Year 2000 issues.
As of January 13, 2000, the Company has not experienced any material
disruptions of its internal computer systems or software applications and has
not experienced any problems with the computer systems or software applications
of its third party vendors, suppliers or service providers. The Company will
continue to monitor these third parties to determine the impact, if any, on the
business of the Company and the actions the Company must take, if any, in the
event of non-compliance by any of these third parties. Based upon the Company's
assessment of compliance by third parties, there appears to be no material
business risk posed by any such non-compliance.
Although the Company's Year 2000 rollover did not present any material
business disruption, there are some remaining Year 2000 related risks, including
risks due to the fact that the Year 2000 is a leap year. Management believes
that appropriate actions has been taken to address these remaining Year 2000
issues and contingency plans are in place to minimize the financial impact to
the Company. Management, however, cannot be certain that Year 2000 issues will
not have a material adverse impact on the Company, since it is early in the Year
2000.
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<PAGE> 87
THE RECAPITALIZATION
GENERAL
As described earlier in this Memorandum, the Company has historically
operated on a negative cash flow basis primarily due to substantial increases in
loan production and general and administrative expenses used to support the
expansion of the Company's operations and the significant negative cash flow
from the Company's sale of a substantial majority of its loan production in
securitization transactions.
Continuing deficits in cash flow combined with a $32.5 million loss
recognized by the Company for the three months ended November 30, 1997 and a
$32.5 million loss recognized for the Company for the six months ended February
28, 1998 resulted in the Company's violation of certain covenants contained in
agreements with its warehouse lender and some of its other lenders. From January
1998, when the Company violated these covenants with its lenders, until the
completion of the Recapitalization on July 1, 1998, the Company's principal
activities consisted of liquidating its portfolio of loans to reduce the
Company's borrowings, maintaining the systems and personnel necessary to enable
the Company to resume operations and exploring alternatives to raise new
capital.
PRIVATE PLACEMENTS
In an effort to resume operations, the Company explored a number of
alternatives to raise new capital. These activities resulted in the Company's
Recapitalization, completed on July 1, 1998, which provided the Company with
approximately $84.5 million of new equity. Two strategic partners, City National
Bank and Sovereign Bancorp, each purchased 10,000 shares of the Company's newly
designated Series A convertible Preferred Stock at a price of $1,000 per share.
The terms of the Preferred Stock are described under "Description of Capital
Stock -- Preferred Stock" later in this Memorandum. In addition, City National
Bank and Sovereign Bancorp were each granted an option, which expires in
December 2000, to acquire 666,666 shares of Common Stock at a price of $15.00
per share. City National Bank and Sovereign Bancorp each has a right of first
refusal to purchase the Company in the event the Company's Board of Directors
determines to sell the Company. In addition, one other private investor
purchased an aggregate of 5,000 shares of Series A convertible Preferred Stock
at a purchase price of $1,000 per share and several other investors purchased an
aggregate of 1.67 million shares of Common Stock at a purchase price of $15.00
per share. An additional 160,000 shares of Common Stock were issued to FBR as
the placement agent's fees for the Recapitalization. In addition, the Company
has paid FBR an advisory fee of $416,667 in connection with the Recapitalization
and reimbursed FBR for out-of-pocket expenses of approximately $250,000. These
sales were made pursuant to private placements.
The cash proceeds from the Recapitalization were approximately $50.0
million. Approximately $5.1 million was used to pay interest on the Company's
Original Notes, $2.4 million was used to retire the old warehouse line, $1.6
million was used for the payment of loan and management fees and other
miscellaneous charges due to Mego Financial, and approximately $428,000 was used
for the payment of a portion of the costs of the recapitalization. The balance
will be used to fund, purchase and make new loans and for general and
administrative expenses and other corporate purposes.
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<PAGE> 88
EXCHANGE OFFER
As part of the recapitalization, the Company completed an exchange offer of
Old Notes and Preferred Stock for any and all of the outstanding $80.0 million
principal amount of the Company's Original Notes. Pursuant to that exchange
offer, the Company issued approximately 37,500 shares of Series A convertible
Preferred Stock at a price of $1,000 per share and $41.5 million principal
amount of Old Notes in exchange for approximately $79.0 million principal amount
of the Original Notes. The Company completed the purchase of all of the
remaining Original Notes in September and October 1998.
MANAGEMENT
Upon completion of the Recapitalization, Jerome J. Cohen, Robert
Nederlander, Herbert B. Hirsch and Don A. Mayerson resigned as directors of the
Company and Champ Meyercord was elected the Company's Chairman of the Board of
Directors and Chief Executive Officer. Mr. Meyercord has been a special
consultant to the Company since May 1998. In addition, City National Bank and
Sovereign Bancorp each were granted the right to appoint one member to the
Company's Board of Directors and have the right to appoint an additional board
member if they exercise their option to purchase additional shares of Common
Stock. Upon completion of the Recapitalization, David J. Vida, Jr. was appointed
to the Board of Directors at the request of City National Bank. Three private
investors each have the right to appoint one board member. Wm. Paul Ralser was
appointed to the Board of Directors at the request of an ad hoc committee of
holders of the Original Notes, and Hubert J. Stiles, Jr. was appointed to the
Board of Directors at the request of one of the two private investors. Sovereign
Bancorp and the other private investor have not exercised their right to appoint
a board member, but have exercised their right to have a representative attend
each board meeting. On August 14, 1998, Jeffrey S. Moore resigned as President
of the Company. Effective September 1, 1998, Mr. Ralser was elected the
President and Chief Operating Officer of the Company.
TRANSACTIONS WITH STRATEGIC PARTNERS
As part of the recapitalization, the Company and each of Sovereign Bancorp
and City Holding Company entered into the following agreements (some of which
are described earlier in the prospectus) that the Company believes will provide
liquidity and increase the efficiency of the Company's operations:
- Sovereign Bancorp and City National Bank each purchased 10,000 shares of
Series A convertible Preferred Stock at a price of $1,000 per share
- Sovereign Bancorp agreed to provide the Company up to $90.0 million in
borrowings under the Sovereign Warehouse Line to fund its loan production
prior the sale of the loans, this amount was lowered to $25 million as of
March 31, 1999
- Sovereign Bancorp agreed to purchase up to $100.0 million of the
Company's loans per quarter and has a right of first refusal to purchase
all other loans produced by the Company
- City National Bank purchased the Company's existing mortgage servicing
rights
- City Mortgage Services agreed to service all of the Company's mortgage
loans held for sale and loans sold on a servicing retained basis by the
Company
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<PAGE> 89
- Sovereign Bancorp and City National Bank were each granted an option to
purchase 666,666 shares of Common Stock at a price of $15.00 per share
- Sovereign Bancorp and City National Bank each has a right of first
refusal to purchase a controlling voting interest or a majority of the
Company's assets if the Board of Directors determines to sell the Company
- City National Bank has appointed, and Sovereign Bancorp has the right to
appoint, one member to the Board of Directors. Each has the right to
appoint an additional member to the Board of Directors if they exercise
their option to purchase shares of common stock
89
<PAGE> 90
BUSINESS
GENERAL
Altiva Financial Corporation, (the "Company") is a specialized consumer
finance company that makes sub-prime residential mortgage loans for the purpose
of debt consolidation or creating liquidity from the borrower's home equity
secured by deeds of trust. The Company sells these consumer loans to other
financial institutions. The Company's borrowers generally do not qualify for
traditional "A" credit mortgage loans. Typically, their credit histories, income
or other factors do not conform to the lending criteria of government-chartered
agencies (including GNMA, FHMA, FHLMC) that traditional lenders rely on in
evaluating whether to make loans to potential borrowers.
The Company's current loan products are first mortgage loans and Home
Equity loans typically secured by first liens, and in some cases by second
liens, on the borrower's residence. In making Home Equity loans, the Company
relies primarily on the appraised values of the borrower's residences. The
Company determines the loan amount based on the appraised values and the
creditworthiness of the borrowers.
In prior years, the Company also made high loan-to-value loans ("Equity +
loans") based on the borrowers' credit. These loans typically were secured by
second liens on the borrowers' primary residences. The Company exited the home
improvement and Equity + loan markets because these loans failed to meet
targeted returns and after-market liquidity.
The Company's loans are produced by its wholesale and retail origination
platforms. The wholesale platform represents the Company's largest source of
loan production. Through its wholesale platform, the Company funds loans
originated through a nationwide network of licensed mortgage brokers. The
wholesale platform conducts operations from Atlanta, Georgia and Charlotte,
North Carolina. The Company has one wholly-owned operating subsidiary, The Money
Centre, Inc. headquartered in Charlotte, North Carolina.
The Company's marketing strategies are typical of those used in retail
production including: telemarketing, direct mail, television and radio
advertising, third-party loan programs and consumer trade shows. A Company
website is currently under construction and may be used to provide consumer loan
applications and information to the public about the Company's products and
services. The retail production platforms are located in Las Vegas, Nevada and
Charlotte, North Carolina.
STRATEGIC INITIATIVES
The Company's strategic initiatives have been substantially impacted by
recent events in the capital markets and their effect on the specialty finance
industry. There has been a significant reduction in the number of institutions
willing to provide warehouse facilities to mortgage lenders producing home
equity and high loan-to-value loans. Additionally, there has been a reduction in
the number of buyers of senior interests issued in securitization transactions
backed by home equity and high loan-to-value loans, and a concurrent increase in
the yield (and a reduction in the price) demanded by such buyers on the senior
interests they purchase. Finally, the number of institutional investors
acquiring loans similar to the loans the Company produces has declined, along
with the premiums, if any, these investors are willing to pay for these loans.
These events have substantially reduced the liquidity available to companies in
the specialty finance industry to make new loans. With these events in mind the
Company redefined its strategic initiatives in October 1998.
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<PAGE> 91
The Company's Primary Focus Is To Produce Home Equity Loans. The Company
has reduced its reliance on Equity + loans with high loan-to-value ratios and
significantly increased the percentage and amount of our business devoted to the
production of Home Equity loans by expanding its network of brokers and
acquiring other entities that produce Home Equity loans. The Company produces
Home Equity loans solely for sale for cash, generally at premiums to their
principal amounts, to institutional purchasers in the secondary market without
recourse for credit losses or risk of prepayment.
Dual Production Platforms Should Lower The Company's Total Loan Production
Costs. While pursuing its mortgage broker wholesale loan programs, the Company
has purchased the assets of a retail loan production facility in January 1999.
Using this facility, the Company is pursuing loan production on a retail
(direct-to-consumer) basis. The Company's wholly owned subsidiary, The Money
Centre, Inc., acquired in July 1999, also produces approximately 20% of its
loans through retail channels. Although a retail loan platform is relatively
expensive, the Company expects it to produce loans at a lower cost than its
wholesale platform. When the Company makes a loan directly to a consumer, it
typically receives loan fees and avoids any premium due when the Company
purchases a loan from its network of mortgage brokers. The Company expects its
dual loan production platform strategy to lower its overall cost of producing
mortgage loans and improve its cash flow.
The Company Intends to Increase Production by Acquiring Other Mortgage
Lending Companies. The Company intends to increase its loan production by
acquiring companies that produce mortgage loans. The Company expects the current
lack of liquidity available in the specialized consumer finance industry to
create acquisition opportunities.
Selling Loans for Cash will be the Company's Primary Method of Loan
Disposition. The Company sells substantially all of the loans it produces for
cash to institutional purchasers in the secondary market. The Company expects
this method of loan sales to generate positive cash flow, because Home Equity
loans can generally be sold for more than their principal amount. To this end,
the Company has expanded the number of institutions with which it has loan
purchase and sale relationships.
The Company Intends to Continue to Implement Cost Saving Measures. The
Company has reduced its workforce from a peak of 475 employees in January 1998
to 267 employees as of November 30, 1999. This reduction and other cost saving
measures have significantly reduced the Company's monthly recurring general and
administrative expenses.
MORTGAGE INDUSTRY
Home Equity
A substantial number of residential homeowners are unable or unwilling to
obtain mortgage financing from conventional financing sources, whether for
reasons of credit impairment, income qualification, credit history, or a desire
to receive loan approval and funding more quickly than that offered by
conventional sources. Many of these homeowners have credit scores or debt ratios
that prohibit them from meeting the requirements of lenders who sell loans to
FNMA or FHLMC. Such borrowers seek loans that rely more heavily upon the
borrower's equity in their home, and to a lesser extent, upon the borrower's
credit scores or debt ratios. Because the properties securing such loans are the
borrower's primary residence, the borrower is less likely to default on payment
than might be the case with unsecured debt -- and in the event of the borrower's
bankruptcy,
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<PAGE> 92
the loan is fully secured. Such loans rely more heavily on accurate appraisals
of the property prior to funding, and are generally made in loan-to-value ratios
of less than 80%.
Home Improvement
As the costs of home improvements escalate, homeowners are seeking
financing as a means to improve their property and maintain and enhance its
value. The National Association of Home Builders Economics Forecast in 1995
estimated that home improvement expenditures will exceed $200.0 billion by the
year 2003. Lenders of home improvement financing typically rely more heavily on
the borrowers' creditworthiness, and ability to pay their debts than on the
value of the collateral. These loans are secured by a real estate mortgage lien
on the improved property. The market for Equity + loans and Home Equity loans
continues to grow, as many homeowners have limited access to traditional
financing sources due to insufficient home equity, limited or impaired credit
history or high ratios of debt service-to-income. The loan proceeds can be used
for a variety of improvements such as large remodeling projects. Borrowers also
have the opportunity to consolidate a portion of their outstanding debt in order
to reduce their monthly debt service.
Debt Consolidation
An increasing number of financial institutions are originating loans to
borrowers who use the proceeds to reduce outstanding consumer finance
obligations. These loans may also be made in conjunction with a home improvement
project where the borrower seeks to enhance the value of his residence and
ultimately reduce his monthly debt service obligations. These consumer finance
obligations are often in the form of unsecured credit card debt, which have high
interest rates and relatively short-term maturities. Under this type of loan,
the consumer uses the loan proceeds to consolidate multiple outstanding
obligations into a single loan. In turn, the consumer receives the benefit of a
lower interest rate and extended loan maturity date, often as high as 25 years,
reducing the amount of monthly debt service payments, and in certain instances
the interest paid may be tax deductible. These loan products are secured by a
mortgage lien on the consumer's primary residence. These liens are typically in
a junior position and when combined with first mortgage liens may exceed the
market value of the subject residence. Debt consolidation loans are made to high
creditworthy borrowers who have a credit history of honoring their financial
obligations on a timely basis. Within the specialty finance industry it is
typical for loans to qualified borrowers to be limited to the amount which, when
added to the outstanding senior debt on the property, will not exceed 125% of
the market value of the property.
COMPANY LOAN PRODUCTS
The Company originates Home Equity loans and, in prior years, Equity +
loans. Home Equity loans generally have a lower loan-to-value ratio than Equity
+ loans. When combined with other outstanding senior secured indebtedness on the
residence, Equity + loans may result in a combined loan-to-value ratio of up to
125%. During fiscal 1998, the Company's Equity + loans had an average
loan-to-value ratio of 112%. The Company
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lends to borrowers of varying degrees of creditworthiness. See "-- Loan
Processing and Underwriting." The Company's primary loan products include the
following:
<TABLE>
<CAPTION>
EQUITY + LOANS (NONE PRODUCED IN FISCAL YEAR
HOME EQUITY LOANS 1999)
- ----------------- --------------------------------------------
<S> <C>
- - fixed and adjustable rate - fixed rate
- - typically secured by first liens, - secured by a junior lien on the borrowers'
and to a lesser extent, second principal residence
mortgage liens on the borrowers'
principal residence
- - terms up to 360 months - terms from 60 to 300 months
- - principal amounts up to $350,000 - principal amounts up to $50,000
</TABLE>
Home Equity Loans
In furtherance of its strategy to expand its loan products, in December
1997 the Company commenced the production of Home Equity loans to borrowers with
a credit grade ranging from "A" to "D". Loan amounts may range up to a maximum
of $350,000 for "A" credit borrowers with maturities of up to 360 months. The
Company expects the average loan amount to be less than $100,000. The average
loan amount in this program for the fiscal year ended August 31, 1999 was
$65,000. In making Home Equity loans, the Company places increased emphasis on
the underlying collateral value of the residence which is fully supported by an
independent appraisal. The Company intends to pool its Home Equity loans for
eventual sale in the secondary market to institutional purchasers on a
servicing-released basis, without recourse for credit losses or risk of
prepayment, for cash premiums over the principal amount of the loan. The company
believes that there are several advantages to producing Home Equity loans
including:
- the existence of a more liquid secondary market than for Equity + loans
- the larger average principal amount of such loans which are typically two
times greater than that of a Equity + loan
- the lower total costs of producing Home Equity loans from mortgage
brokers than the Company's Equity + loans
Equity + Loans
An Equity + loan is a non-insured debt consolidation or home improvement
loan typically used to retire consumer debt and/or pay for a home improvement
project. All of the Equity + loans produced by the Company are secured by a
mortgage lien on the borrower's principal residence. The Company began producing
Equity + loans through its wholesale division in May 1996. Debt consolidation
loans account for a major portion of the Company's Equity + loan production.
Currently, the Company is not making any Equity + loans.
Historically, the Company focused its Equity + loan program on higher
credit quality borrowers who may have limited equity in their residence after
giving effect to other debt secured by the residence. Most of the Company's
Equity + loans have loan-to-value ratios greater than 100% and, accordingly, the
value of the residence securing the loan generally will not be sufficient to
cover the principal amount of the loan in the event of default. The Company
relied principally on the creditworthiness and income stability of the borrower
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and, to a lesser extent, on the underlying value of the borrower's residence for
repayment of its Equity + loans.
LENDING OPERATIONS
Mortgage Brokers
The Company produces loans through its wholesale and retail divisions. The
wholesale division represents the Company's largest source of loan production.
Through its wholesale division, the Company funds loans originated through a
nationwide network of licensed mortgage brokers. Mortgage brokers initiate the
loan application and process necessary underwriting documentation. Mortgage
brokers ordinarily do not fund loans with their own money, but work as agents on
behalf of investors, including mortgage bankers, banks, savings and loans or
investment bankers. The Company funds loans originated by mortgage brokers by
lending the Company's funds to the borrower and closing the loan to the borrower
in the Company's name.
The Company funds loans originated by mortgage brokers on an individual
loan basis, pursuant to which each loan is underwritten by the Company and is
closed in the Company's name. The Company's network of mortgage brokers earn
fees which are paid by the borrower at closing, and which are disclosed and
agreed to by the borrower as required by law. The wholesale division conducts
operations from Atlanta, Georgia and Charlotte, North Carolina. To build and
maintain its networks of mortgage brokers, the wholesale division uses account
executives responsible for developing and maintaining relationships with
mortgage brokers. At August 31, 1999, the Company had a network of 460 active
mortgage brokers.
Mortgage brokers qualify to participate in the Company's programs only
after a review by the Company's management of the mortgage brokers' reputations
and expertise, including a review of references and financial statements. The
Company's compliance department performs a periodic review of each mortgage
broker, recommending suspension or continuance of a relationship with the
mortgage broker based upon the results of the review. The Company does not
believe that the loss of any particular mortgage broker would have a material
adverse effect upon the Company.
None of the Company's arrangements with its mortgage brokers is on an
exclusive basis. Each relationship is documented by a written agreement,
pursuant to which the Company agrees to fund or purchase loans that comply with
the Company's underwriting guidelines. On each loan produced, the mortgage
broker makes customary representations and warranties regarding, among other
things, the credit history of the borrower, the status of the loan, and its lien
priority, if applicable, and agrees to indemnify the Company for breaches of any
representation or warranty. In the agreements, the mortgage broker makes
customary representations and warranties regarding, among other things, their
corporate status, as well as regulatory compliance, title to the property,
enforceability, status of payments and advances on the loans to be originated.
The mortgage brokers agree, among other things, not to disclose confidential
information of the Company, to provide supplementary financial and licensing
information, maintain government approvals, and to refrain from soliciting the
Company's borrowers. Each agreement also contains provisions requiring that the
mortgage broker indemnify the Company against material misrepresentations or
non-performance of its obligations.
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Retail Loans
The Company began making direct-to-consumer Equity + loans in September
1997 and Home Equity loans in December 1997. As previously discussed, the
Company curtailed its retail loan production in January, 1998 due to liquidity
problems. With the purchases of the retail production platforms in Las Vegas in
January 1999 and the purchase of The Money Centre in July 1999, the Company is
now actively pursuing its retail loan production channels. The Company's
marketing strategies are typical of those used in retail production including,
telemarketing, direct mail, television and radio advertising, third-party loan
programs and consumer trade shows. Telemarketing services, both inbound and
outbound, are outsourced to keep the cost of originations to a minimum. A
Company website is currently under construction and may be used to provide
consumer loan applications and information to the public about the Company's
products and services.
By making direct-to-consumer loans, the Company avoids the payment of
premiums that it pays when it purchases closed loans from its network of
mortgage brokers. The loan fees charged by the Company to consumers on the
direct loans are expected to cover the Company's total cost of the underwriting
and making the loan and place the Company on a positive cash flow basis with
respect to the production of direct-to-consumer loans.
The following table provides information about the Company's loan
applications processed and loans produced during the periods indicated. As a
result of recent changes to the Company's business strategy, we do not believe
that this information is indicative of future loan applications and loans
produced.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
------------------------------------------------------
1997 1998 1999
---------------- ---------------- ----------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Principal balance of loans
produced:
Wholesale (includes
Bankers/Brokers):
Title I loans.......... $ 50,815 9.7% $ 7,081 2.1% $ -- 0.0%
Equity + loans......... 409,603 77.7 289,354 85.4 236 0.2
Home Equity loans...... -- 0.0 -- 0.0 97,070 81.5
-------- ----- -------- ----- -------- -----
Total Wholesale...... 460,418 87.4% 296,435 87.5 97,306 81.7
-------- ----- -------- ----- -------- -----
Dealers(1):
Title I loans.......... $ 47,270 9.0% $ 11,619 3.4% $ -- 0.0%
Equity + loans......... 19,229 3.6 14,051 4.2 -- 0.0
Home Equity loans...... -- 0.0 8,940 2.6 -- 0.0
-------- ----- -------- ----- -------- -----
Total Dealers........ 66,499 12.6% 34,610 10.2 -- 0.0
-------- ----- -------- ----- -------- -----
Retail:
Equity + loans......... $ -- 0.0% $ 7,114 2.1% $ 1,986 1.7%
Home Equity loans...... -- 0.0 783 0.2 19,820 16.6
-------- ----- -------- ----- -------- -----
Total Retail......... -- 0.0 7,897 2.3 21,806 18.3%
-------- ----- -------- ----- -------- -----
Total principal
amount of loans
produced.......... $526,917 100% $338,942 100% $119,112 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
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<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
------------------------------------------------------
1997 1998 1999
---------------- ---------------- ----------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Number of loans produced:
Wholesale (includes
Bankers/Brokers):
Title I loans.......... 2,445 12.0% 327 2.9% -- 0.0%
Equity + loans......... 12,831 62.7 8,848 78.6 7 0.4
Home Equity loans...... -- 0.0 -- 0.0 1,620 84.1
-------- ----- -------- ----- -------- -----
Total Wholesale...... 15,276 74.7% 9,175 81.5 1,627 84.5
-------- ----- -------- ----- -------- -----
Dealers(1):
Title I loans.......... 3,893 19.0% 975 8.7% -- 0.0%
Equity + loans......... 1,296 6.3 744 6.6 -- 0.0
Home Equity loans...... -- 0.0 145 1.2 -- 0.0
-------- ----- -------- ----- -------- -----
Total Dealers........ 5,189 25.3% 1,864 16.5 -- 0
-------- ----- -------- ----- -------- -----
Retail:
Equity + loans......... -- 0.0% 208 1.8% 52 2.7%
Home Equity loans...... -- 0.0 17 0.2 247 12.8
-------- ----- -------- ----- -------- -----
Total Retail......... -- 0.0 225 2.0 299 15.5
-------- ----- -------- ----- -------- -----
Total number of loans
produced.......... 20,465 100.0% 11,264 100.0% 1,926 100.0%
======== ===== ======== ===== ======== =====
Loans serviced at end of
fiscal year (including
loans securitized, sold to
investors with servicing
retained and held for
sale):
Title I loans............. $255,446 40.7% $ 23,005 73.7% $ -- 0.0%
Conventional(2)........... 372,622 59.3 8,217 26.3 -- 0.0
-------- ----- -------- ----- -------- -----
Total loans serviced
at end of fiscal
year.............. $628,068 100.0% $ 31,222 100.0% $ -- 0.0%
======== ===== ======== ===== ======== =====
</TABLE>
- -------------------------
(1) The Company closed its dealer division, which purchased loans from home
improvement contractors, in February 1998.
(2) Conventional loans include Equity + and Home Equity loans.
LOAN PROCESSING AND UNDERWRITING
The Company's loan application and approval process generally is conducted
over the telephone with applications usually received from mortgage brokers and
consumers at the Company's processing facilities located in Atlanta, Georgia,
Las Vegas, Nevada and The Money Centre, Inc. in Charlotte, North Carolina. Upon
receipt of an application, the information is entered into the Company's system
and processing begins. The information provided in loan applications is first
verified by, among other things the following:
- written confirmations of the applicant's income and, if necessary, bank
deposits
- a formal credit bureau report on the applicant from a credit reporting
agency
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- a title report
- a real estate appraisal, if necessary
- evidence of flood insurance, if necessary
Loan applications are then reviewed to determine whether or not they
satisfy the Company's underwriting criteria, including loan-to-value ratios,
occupancy status, borrower income qualifications, employment stability,
purchaser requirements and necessary insurance and property appraisal
requirements.
The Company has developed its credit index profile ("CIP") as a statistical
credit based tool to predict likely future performance of a borrower. A
significant component of the CIP system is the credit evaluation score
methodology developed by Fair, Issacs & Co. ("FICO"), a consulting firm
specializing in creating default predictive models using a number of variable
components. A FICO score is calculated by a system of scorecards. FICO uses
actual credit data on millions of consumers, and applies complex mathematical
methods to perform extensive research into credit patterns that attempt to
forecast consumer credit performance. The principal components of the FICO
predictive model include a consumer's credit payment history, outstanding debt,
availability and pursuit of new credit, and types of credit in use. Through this
scorecard process, FICO identifies distinctive credit patterns, which correspond
to a likelihood that a consumer will make their future loan payments. The score
is based on all the credit-related data in the credit report. The other major
components of the CIP include debt-to-income analysis, employment stability,
self-employment criteria, residence stability, and whether the applicants use
the premises as their primary residence. By using both scoring models together,
all applicants are considered on the basis of their ability to repay the loan
obligation while allowing the Company to price the loan based on the extent of
the evaluated risk.
The Company's underwriters review the applicant's credit history, based on
the information contained in the application as well as reports available from
credit reporting bureaus, to determine the applicant's acceptability under the
Company's underwriting guidelines. Based on the underwriter's approval authority
level, certain exceptions to the guidelines may be made when there are
compensating factors subject to approval from a more senior designated
authority. The underwriter's decision is communicated to the broker or consumer
depending on the source of the loan and, if approved, the proposed loan terms
are fully explained. The Company attempts to respond to the loan source within
24 hours of receipt of a loan application.
Loan commitments are generally issued for periods of up to 30 days. Prior
to disbursement of funds, all loans are carefully reviewed by funding auditors
to ensure that all documentation is complete, all contingencies specified in the
approval have been met and the loan complies with Company and regulatory
procedures.
Home Equity Loans
The Company produces Home Equity loans through a mortgage broker loan
source network as well as through the Company's retail division. Home Equity
loan mortgages produced under this program are limited to a first or second lien
position. Loan amounts are determined by taking a specific amount of the
collateral value of the property and adjusting the percentage based on the
creditworthiness of the borrower. For example, if the Company's guidelines set a
minimum loan-to-value ratio of 75% ($75,000 for a home with
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a collateral value of $100,000), a more creditworthy borrower may be able to
borrow in excess of $75,000, and a less credit worthy borrower may only be able
to borrow $65,000. Full appraisals generated by approved licensed appraisers are
required on all loans within the Uniform Standards of Professional Appraisal
Practice (the "Uniform Standards of Appraisal"). Any loan amount of $250,000 or
more would require two independent appraisals. In connection with Home Equity
loans, the Company seeks commitments from third party financial institutions to
purchase the loans in accordance with their respective guidelines, without
recourse for credit losses or risk of prepayment.
As part of the underwriting process, the Company requires an appraisal of
the residence that will be the collateral for the loan. The Company requires the
independent appraiser to be state licensed and certified. The Company requires
that all independent appraisals be completed within the Uniform Standards of
Appraisal as adopted by the Appraisal Standards Board of the Appraisal
Foundation. The Company audits the appraisal for accuracy to ensure that the
appraiser used sufficient care in analyzing data to avoid errors that would
significantly affect the appraiser's opinion and conclusion. This audit includes
a review of housing demand, physical adaptability of the real estate,
neighborhood trends and the highest and best use of the real estate. In the
event the audit reveals any discrepancies as to the method and technique that
the Company believes are necessary to produce a credible appraisal, the Company
will perform additional property data research or may request a second appraisal
to be performed by an independent appraiser selected by the Company in order to
further substantiate the value of the subject property.
The Company may require a full title insurance policy substantially in
compliance with the requirements of the American Loan Title Association. The
applicant also is required to secure hazard insurance and may be required to
secure flood insurance if the mortgaged property has been identified by the
Federal Emergence Management Agency as having special flood hazards.
Equity + Loans
In prior years when the Company was producing Equity + loans, the Company
implemented policies for its Equity + loan program that were designed to
minimize losses by adhering to high credit quality standards. Based on FICO
score default predictors, borrowers were classified by the Company based on its
belief of their credit risk and quality, from "A" credits to "D" credits.
Quality is a function of both the borrowers' creditworthiness and the extent of
the value of the collateral, which was typically a second lien on the borrowers'
primary residence. "A+" credits generally have a FICO score greater than 700. An
applicant with a FICO score of less than 640 would be rated a "C" credit. The
Company did not approve an Equity + loan to a borrower with less than an "A" or
"B" credit grade. All of the Equity + loans originated by the Company were
secured by first or second mortgage liens on single-family, owner occupied
properties.
Terms of Equity + loans produced by the Company, as well as the maximum
combined loan-to-value ratios and debt service to income coverage (calculated by
dividing fixed monthly debt payments by gross monthly income), varied depending
upon the Company's evaluation of the borrower's creditworthiness. In general,
Equity + loans have higher interest rates than Home Equity loans, but are
generally lower than rates changed on credit cards. Borrowers with lower
creditworthiness generally pay higher interest rates and loan origination fees.
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<PAGE> 99
QUALITY CONTROL
The Company employs various quality control personnel and procedures in
order to ensure that loan product standards are adhered to and regulatory
compliance is maintained.
In accordance with Company policy, the quality control department reviews a
statistical sample of loans produced each month. This review is generally
completed within 60 days of funding and circulated to appropriate department
heads and senior management. Finalized reports are maintained in the Company's
files for a period of two years from completion. Typical review procedures
include reverification of employment and income, re-appraisal of the subject
property, obtaining separate credit reports and recalculation of debt-to-income
ratios. The statistical sample is intended to cover 10% of all new loan
products. Emphasis is also placed on those loan sources where higher levels of
delinquency are experienced or payment defaults occur within the first six
months of funding. On occasion, the quality control department may review all
loans generated from a particular loan source in the event an initial review
determines a higher than normal number of exceptions. The account selection of
the quality control department is also designed to include a statistical sample
of loans by each processor, closer and underwriter, and thereby provide
management with information as to any material difference from Company policies
and procedures in the loan production process.
On a daily basis, a sample of recently approved loans is reviewed to insure
compliance with underwriting guidelines. Particular attention may be focused on
those underwriters who have developed a higher than normal level of exceptions.
TECHNOLOGY SYSTEMS
The Company uses a computerized loan production tracking system that allows
us to monitor the performance of our wholesale and retail divisions. The system
automates various other functions such as Home Mortgage Disclosure Act and HUD
reporting requirements and routine tasks such as decline letters and the flood
certification process. The system also affords management access to a wide range
of decision support information such as data on the approval pipeline, loan
delinquencies by source, and the activities and performance of underwriters and
funders. The Company uses intercompany electronic mail for internal
communications and for receiving loan servicing, collection and delinquency
information from City Mortgage Services on each group of loans being serviced.
The Company's existing loan production system provides for the automation
of the loan production as well as loan file indexing and routing. This system
includes automated credit report inquiries and consumer credit scoring, along
with on-screen underwriting and approval functions. The Company also uses a
system which allows for electronic routing of loan application facsimiles. The
Company recognizes that there have been significant advances made by a number of
mortgage production software vendors in the last year and intends to review a
number of the solutions provided by these vendors. It is the intention of the
Company to upgrade its automation infrastructure by the purchase of a new
software system.
LOAN SERVICING
In connection with the Recapitalization, the Company and City Mortgage
Services, a division of City National Bank, entered into agreements for City
Mortgage Services to
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purchase the Company's existing loan servicing rights and service all of the
Company's loans held for sale and loans sold on a servicing retained basis. The
Company obtained an option, contingent upon the delivery to City Mortgage
Services of servicing on $1.0 billion of loans under the Flow Servicing
Agreement, to purchase an equity position of up to 20% in any new entity created
should City National Bank determine to spin-off City Mortgage Services into a
separate entity. This option has been terminated by an agreement between the
Company and City National Bank. In the past, the Company's strategy had been to
retain the bulk of the servicing rights associated with the loans it originated.
When the Company sold its loan servicing portfolio to City Mortgage, the Company
eliminated substantially all of its collections and claims staff.
Among the Company's loan servicing activities sold to City Mortgage
Services are processing and administering loan payments, reporting and remitting
principal and interest to the loan purchasers who own interests in the loans and
to the trustee and others with respect to securitizations, collecting delinquent
loan payments, processing Title I insurance claims, conducting foreclosure
proceedings and disposing of foreclosed properties and other administration
duties. In addition, under the loan servicing agreements, the Company is
entitled to receive a certain portion of the servicing fees collected by City
Mortgage Services. The Company will retain responsibility for certain functions
related to initial customer service and continued tax and insurance monitoring.
The following table sets forth the Title I loan and Home Equity and Equity
+ delinquency as of the dates indicated. The Company is not producing a
significant amount of Title I loans.
<TABLE>
<CAPTION>
AUGUST 31,
------------------------
1997 1998 1999
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Home equity and Equity + delinquency data(1):
31-60 days past due..................................... 0.40% 7.14% 7.23%
61-90 days past due..................................... 0.20 1.52 2.24
91 days and over past due............................... 0.34 24.83 13.50
----- ----- -----
Total past due....................................... 0.94 33.49 22.97
===== ===== =====
Title I loan delinquency data(1):
31-60 days past due..................................... 3.19 7.88 --
61-90 days past due..................................... 1.68 2.39 --
91 days and over past due............................... 7.06 25.00 4.36
----- ----- -----
Total past due....................................... 11.93 35.27 4.36
===== ===== =====
</TABLE>
- -------------------------
(1) Represents the dollar amount of delinquent loans as a percentage of the
total dollar amount of each respective type of loan serviced by the Company
(including loans owned by the Company but excluding loans repurchased and
loans contained in securitization 1998-1) as of period end.
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SALE OF LOANS
Sales of loans in securitization transactions had historically been the
main source of the Company's revenues and income. In a securitization
transaction, a specific group of the Company's mortgage loans having similar
characteristics, loan type (Equity + or Title I) and loan amounts are pooled for
sale. As part of its new business strategy, the Company is no longer pursuing
securitization transactions but is instead focusing on the sale of whole loans.
The following table sets forth the principal balance of loans sold or
securitized and related Gain (Loss) on sale data for the twelve months ended
August 31, 1998 and 1999.
<TABLE>
<CAPTION>
COMPONENTS OF GAIN (LOSS)
ON THE SALE OF LOANS
-----------------------------------------
FISCAL 1997 FISCAL 1998 FISCAL 1999
----------- ----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Gain (Loss) on the sale of loans in
securitization transactions.............. $ 62,014 $ (6,187) $ 0
Gain on the sale of loans for cash......... 833 11,775 4,403
Mark-to-market adjustment to loans held for
sale..................................... -- (13,674) (3,462)
Write off of loan origination costs........ (12,573) (12,541) 266
Write off of commitment fee................ -- (2,849) 0
Amortization of commitment fee............. (817) (734) 0
Write off of placement fee................. (4,129) (1,153) 0
Interest expense........................... (205) 0 0
Write off of servicing..................... -- (1,215) 0
-------- -------- -------
Total.................................... $ 45,123 $(26,578) $ 1,207
======== ======== =======
</TABLE>
The Gain (Loss) on sale of loans can vary for several reasons, including
the relative amounts of Equity +, Home Equity, and Title I loans, each of which
type of loan had different (i) estimated prepayment rates, (ii) weighted average
interest rates, (iii) weighted-average maturities, and (iv) estimated future
default rates. Typically, the gain on sale of loans through securitizations is
higher than on whole loan sales; however, engaging in securitizations requires
an up-front cash expenditure and can have an adverse effect on a company's
financial condition due to unanticipated write downs in the value of the
residual securities retained by the company which may be caused by, among
things, unanticipated changes in prepayment and default rates assumed by the
company. The Company did no securitizations during the twelve months ended
August 31, 1999.
As the holder of the residual securities issued in securitizations, the
Company is entitled to receive certain excess cash flows. These excess cash
flows are calculated as the difference between (a) principal and interest paid
by borrowers and (b) the sum of (i) pass-through interest and principal to be
paid to the holders of the regular securities and interest only securities, (ii)
trustee fees, (iii) third-party credit enhancement fees, (iv) servicing fees,
and (v) estimated loan pool losses. The Company's right to receive the excess
cash flows is subject to the satisfaction of certain reserve or
over-collateralization requirements that are specific to each securitization and
are used as a means of credit enhancement.
COMPETITION
The Company faces intense competition in the business of originating and
selling Home Equity loans and, in the past, to a lesser extent, Equity + loans.
The Company's
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competitors include other consumer finance companies, mortgage banking
companies, commercial banks, credit unions, thrift institutions, credit card
issuers and insurance companies. Many of these entities are substantially
larger, have lower costs of capital and have considerably greater financial,
technical and marketing resources than the Company. In addition, many of the
financial services organizations that are much larger than the Company have
formed national loan production networks offering loan products that are
substantially similar to the Company's loan programs. The Company believes that
The Money Store, Associates First Capital Corporation, RFC and Household Finance
Corporation are some of its largest direct competitors. The Company competes
principally by providing prompt, professional service to its mortgage brokers
and retail customers and, depending on circumstances, by providing competitive
lending rates.
Competition among industry participants can take many forms, including
convenience in obtaining a loan, customer service, marketing and distribution
channels, amount and term of the loan, loan origination fees and interest rates.
Additional competition may lower the rates the Company can charge borrowers,
potentially lowering the gain on future loan sales. The Company may face
competition from, among others, government-sponsored entities, such as FNMA,
FHLMA, and GNMA. The Company's competitors may expand their existing or new loan
purchase programs to include Home Equity loans. Entries of government-sponsored
entities into the Home Equity loan market could lower the interest the Company
is able to charge its borrowers and reduce or eliminate premiums on loan sales.
To the extent any of these competitors significantly expand their activities in
the Company's market, the Company could be materially adversely affected.
Fluctuations in interest rates and general economic conditions may also affect
the Company's competition. During periods of rising rates, competitors that have
locked in low borrowing costs may have a competitive advantage. During periods
of declining rates, competitors may solicit the company's customers to refinance
their loans.
If the Company is unable to remain competitive in these areas, the volume
of the Company's loan production may be materially adversely affected as
borrowers seek out other lenders for their financing needs. Lower loan
production may have an adverse effect on the Company's ability to negotiate and
obtain sufficient financing under warehouse lines of credit upon acceptable
terms. Establishing a broker-sourced loan business typically requires a
substantially smaller commitment of capital and personnel resources than a
direct-sourced loan business. This relatively low barrier to entry permits new
competitors to enter the broker-sourced loan market quickly, particularly
existing direct-sourced lenders which can draw upon existing branch networks and
personnel seeking to sell products through independent brokers. Competition may
be affected by fluctuations in interest rates and general economic conditions.
During periods of rising rates, competitors which have locked in low borrowing
costs may have a competitive advantage.
The Company has historically been dependent on certain of its competitors
to purchase loans it has originated. If such competitors refrained from
purchasing the Company's loans and the Company was unable to replace such
purchasers, the Company's financial condition and results of operations could be
materially adversely affected. The Company continues to seek other purchasers
who are not competitors of the Company.
GOVERNMENT REGULATION
The Company's lending activities are subject to the Truth in Lending Act
and Regulation Z (including the Home Ownership and Equity Protection Act of
1994), the
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Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, as
amended, the Real Estate Settlement Procedures Act and Regulation X, the Home
Mortgage Disclosure Act of 1975, the Fair Debt Collection Practices Act and the
Fair Housing Act, as well as other federal and state statutes and regulations
affecting the Company's activities. Failure to comply with these requirements
can lead to loss of approved status, demands for indemnifications of mortgage
loan repurchasers, certain rights of rescission for mortgage loans, class action
lawsuits and administrative enforcement actions.
The Company is subject to the rules and regulations of, and examinations
by, HUD, VA and other federal and state regulatory authorities with respect to
originating, underwriting, funding, acquiring, selling and, to the extent that
it engages in servicing activities, servicing consumer and mortgage loans. In
addition, there are other federal and state statutes and regulations affecting
the Company's activities. These rules and regulations, among other things,
impose licensing obligations on the Company, establish eligibility criteria for
loans, prohibit discrimination, provide for inspection and appraisals of
properties, require credit reports on prospective borrowers, regulate payment
features and, in some cases, fix maximum interest rates, fees and loan amounts.
The Company is required to submit annual audited financial statements to various
governmental regulatory agencies that require the maintenance of specified net
worth levels. The Company's affairs are also subject to examination, at all
times, by the Federal Housing Commissioner to assure compliance with FHA
regulations, polices, and procedures.
Although the Company is no longer originating a significant volume of Title
I Loans, the Company is a HUD approved Title I mortgage lender and is subject to
the supervision of HUD. In addition, the Company's operations are subject to
supervision by state authorities (typically state banking or consumer credit
authorities), many of which generally require that the Company be licensed to
conduct its business. This normally requires state examinations and reporting
requirements on an annual basis.
The Federal Consumer Credit Protection Act ("FCCPA") requires a written
statement showing an annual percentage rate of finance charges and requires that
other information be presented to debtors when consumer credit contracts are
executed. The Fair Credit Reporting Act requires certain disclosures to
applicants concerning information that is used as a basis for denial of credit.
The Equal Credit Opportunity Act prohibits discrimination against applicants
with respect to any aspect of a credit transaction on the basis of sex, marital
status, race, color, religion, national origin, age, derivation of income from
public assistance program, or the good faith exercise of a right under the
FCCPA.
The interest rates, which the Company may charge on its loans, are subject
to state usury laws, which specify the maximum rate that may be charged to
consumers. In addition, both federal and state truth-in-lending regulations
require that the Company disclose to its customers prior to execution of the
loans, all material terms and conditions of the financing, including the payment
schedule and total obligation under the loans. The Company believes that it is
in compliance in all material respects with such regulations.
SEASONALITY
The Company's production of Home Equity and Equity + loans is seasonal to
the extent that borrowers use the proceeds for home improvement contract work.
The Company's production of loans for this purpose tends to build during the
spring and early summer months, particularly where the proceeds are used for
pool installations. A decline
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is typically experienced in late summer and early fall until temperatures begin
to drop. This change in seasons precipitates the need for new siding, window and
insulation contracts. Peak volume is experienced in November and early December
and declines dramatically from the holiday season through the winter months.
EMPLOYEES
As of November 1, 1999 the Company had 267 employees. None of the Company's
employees is represented by a collective bargaining agreement. The Company
believes that its relations with its employees are satisfactory.
PROPERTIES
The Company leases 45,950 square feet of office space at 1000 Parkwood
Circle, Atlanta, Georgia, consisting of two full floors. The Company's corporate
headquarters have been consolidated into 22,975 square feet, consisting of one
floor at this location. The Company has subleased the other floor at this
location. The Company's lease is for an initial six-year term expiring August
2002 with a conditional option to extend the term to August 2007. In addition,
the Company also leases 5,000 square feet of office space for the facilities in
Las Vegas, Nevada on a month-to-month basis and 17,900 square feet of office
space for the facilities in Charlotte, North Carolina for The Money Centre, Inc.
The Company also leases office space on short-term or month-to-month leases in
Waldwick, New Jersey; Blue Springs, Missouri; Austin, Texas; Seattle,
Washington; Waterford, Michigan; Columbus, Ohio; Elmhurst, Illinois;
Bridgeville, Pennsylvania; Denver, Colorado; Phoenix, Arizona; Patchogue, New
York; Woburn, Massachusetts; Dublin, California; Tallahassee, Florida;
Brentwood, Tennessee; Las Vegas, Nevada; Charlotte, North Carolina and Atlanta,
Georgia. The Company believes that all of its facilities are suitable and
adequate for its current operations.
LEGAL PROCEEDINGS
On October 8, 1998, the Office of the Consumer Credit Commissioner of the
State of Texas issued a denial of the Company's application for licensing as a
secondary mortgage lender. On October 20, 1998, the Company filed an appeal of
the Commissioner's decision. As a result of settlement terms reached with the
Commissioner on May 13, 1999, the Company's secondary mortgage license
application was granted.
On February 23, 1998, an action was filed in the United States District
Court for the Northern District of Georgia by Robert J. Feeney, as a purported
class action against the Company and Jeffrey S. Moore, the Company's former
President and Chief Executive Officer. The complaint alleges, among other
things, that the defendants violated the federal securities laws in connection
with the preparation and issuance of certain of the Company's financial
statements. The named plaintiff seeks to represent a class consisting of
purchasers of the Company's Common Stock between April 11, 1997 and December 18,
1997, and seeks damages in an unspecified amount, costs, attorney's fees and
such other relief as the court may deem proper. On June 30, 1998, the plaintiff
amended the complaint to add additional plaintiffs, and to add as a defendant
Mego Financial, the Company's former parent On September 18, 1998, the Company,
Jeffrey S. Moore, and Mego Financial filed motions to dismiss the complaint. On
April 8, 1999, the court granted each of these motions. In the court's order
dismissing the complaint, the plaintiffs were permitted, upon proper motions, to
serve and file a second amended and redrafted complaint within
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30 days. On May 10, 1999, the Plaintiffs moved for leave to file and serve the
second amended and redrafted complaint contemplated in the earlier order. On
July 19, 1999, the Company, Jeffrey S. Moore and Mego Financial filed motions to
dismiss the second amended and redrafted complaint. Those motions are still
pending. The Company believes that it has meritorious defenses to this lawsuit
and that resolution of this matter will not result in a material adverse effect
on the business or financial condition of the Company.
On October 2, 1998, an action was filed in the United States District Court
for the Western Division of Tennessee by Traci Parris, as a purported class
action against Mortgage Lenders Association, Inc., the Company and City Mortgage
Services, Inc., one of the Company's strategic partners. The complaint alleges,
among other things, that the defendants charged interest rates, origination fees
and loan brokerage commissions in excess of those allowed by law. The named
plaintiff seeks to represent a class of borrowers and seeks damages in an
unspecified amount, reform or nullification of loan agreements, injunction,
costs, attorney's fees and such other relief as the court may deem just and
proper. On October 27, 1998, the Company filed a motion to dismiss the complaint
for lack of jurisdiction, which the court denied on May 18, 1999. On July 6,
1999, the court denied the Company's subsequent motion for reconsideration, and
on the same date granted the Company's request for interlocutory appeal to the
United States Court of Appeals for the Sixth Circuit on the question of
jurisdiction. On July 15, 1999, the Company filed an interlocutory appeal to the
Court of Appeals. On September 28, 1999, the Court of Appeals agreed to accept
the Company's interlocutory appeal on the jurisdictional question, and docketed
the appeal. That interlocutory appeal is still pending. The Company believes it
has meritorious defenses to this lawsuit and that resolution of this matter will
not result in a material adverse effect on the business or financial condition
of the Company.
In the ordinary course of its business, the Company is, from time to time,
named in lawsuits. The Company believes that it has meritorious defenses to
these lawsuits and that resolution of these matters will not have a material
adverse effect on the business or financial condition of the Company.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Company as of August 31, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Champ Meyercord........................... 59 Chairman of the Board and Chief
Executive Officer
J. Richard Walker......................... 53 Executive Vice President and Chief
Financial Officer
Spencer I. Browne......................... 49 Director
Hubert M. Stiles.......................... 52 Director
David J. Vida, Jr......................... 33 Director
John D. Williamson, Jr.................... 64 Director
</TABLE>
Edward B. "Champ" Meyercord has been Chairman and Chief Executive Officer
of the Company since July 1998 and, prior thereto, he was a special consultant
to the Company since May 1998. From 1994 to 1998, Mr. Meyercord was a senior
investment banker with Greenwich Capital Markets, most recently as a co-head of
the Mortgage and Asset Backed Finance Group. In addition to his involvement with
asset backed securities, Mr. Meyercord was involved in the development of
financing vehicles for specialty finance companies. Greenwich Capital Markets
has performed investment banking services for the Company since 1994. Prior to
1994, Mr. Meyercord was a co-managing partner of Hillcrest Partners, a private
investment bank specializing in mergers and acquisitions for financial
institutions. Mr. Meyercord is a member of the Board of Directors of The
National Home Equity Mortgage Association.
J. Richard Walker has been Executive Vice President and Chief Financial
Officer of the Company since October 1998. Since 1988, Mr. Walker has been a
principal of Walker & Mikloucich, P.C., an accounting firm. Since 1986, Mr.
Walker has been managing director of Vulcan Capital, Inc., formerly TVG
Associates, Inc., a business advisory services firm.
Spencer I. Browne has been a Director of the Company since consummation of
the initial public offering in November 1996. For more than five years prior to
September 1996, Mr. Browne held various executive and management positions with
several publicly traded companies engaged in businesses related to the
residential and commercial mortgage loan industry. From August 1988 until
September 1996, Mr. Browne served as President, Chief Executive Officer and a
Director of Asset Investors Corporation ("AIC"), a New York Stock Exchange
("NYSE") traded company he co-founded in 1986. He also served as President,
Chief Executive Officer and a Director of Commercial Assets, Inc., an American
Stock Exchange traded company affiliated with AIC, from its formation in October
1993 until September 1996. In addition, from June 1990 until March 1996, Mr.
Browne served as President and a Director of M.D.C. Holdings, Inc., a NYSE
traded company and the parent company of a major home builder in Colorado.
Hubert M. Stiles, Jr. Mr. Stiles has been a Director of the Company since
July 1998. Since September 1996, Mr. Stiles has been a money manager for and
President of T. Rowe Price Recovery Fund II Associates, L.L.C. Mr. Stiles has
been Vice President of
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T. Rowe Price Associates, Inc. and a money manager for and President of T. Rowe
Price Recovery Fund Associates, Inc. since May 1988.
David J. Vida, Jr. Mr. Vida has been a Director of the Company since June
1998. Since July 1996, Mr. Vida has been President of City Mortgage Services, a
division of City National Bank. Mr. Vida served as Chief Financial Officer of
Prime Financial Corp. from June 1994 until June 1996. From January 1992 to June
1996, Mr. Vida was a Senior Accountant for KPMG Peat Marwick LLP.
John D. Williamson, Jr. has been a Director of the Company since September
1998. Since January 1997, Mr. Williamson has been engaged in the corporate
practice of law and as a consultant. From 1983 to January 1997, Mr. Williamson
worked in various capacities at Transport Life Insurance Company (a subsidiary
of Travelers Group, Inc.) including Chief Executive Officer, Vice Chairman of
the Board, and Chairman of the Board.
The Company's officers are elected annually by the Board of Directors and
serve at the discretion of the Board of Directors. The Company's directors hold
office until the next annual meeting of stockholders and until their successors
have been duly elected and qualified. The Company reimburses all directors for
their expenses in connection with their activities as directors of the Company.
Directors of the Company who are also employees of the Company do not receive
additional compensation for their services as directors. Members of the Board of
Directors of the Company who are not employees of the Company receive an annual
retainer fee of $30,000. Directors are also reimbursed for their expenses
incurred in attending meetings of the board of directors and its committees.
The board of directors has delegated certain functions to the following
standing committees:
Audit Committee. The Audit Committee's functions include recommending to
the board the engagement of the Company's independent certified public
accountants, reviewing with the accountants the plan and results of their audit
of the Company's financial statements and determining the independence of the
accountants. The Audit Committee held six meetings in fiscal 1999. The Audit
Committee is currently composed of Messrs. Stiles, Browne and Vida.
Compensation Committee. The Compensation Committee has the authority to
approve the compensation of the Company's executive officers. The Compensation
Committee held three meetings in fiscal 1999. Currently, the Compensation
Committee consists of Messrs. Williamson and Browne.
Nominating Committee The Company currently does not maintain a nominating
committee.
Plan Committee. The Plan Committee was established in January 1999 to
administer the Plan. The Plan Committee is currently composed of Messrs. Stiles
and Williamson.
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EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and
long-term compensation earned by the Company's chief executive officers and the
other executive officer as of August 31, 1999 whose annual salary and bonus
during fiscal 1999 exceeded $100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION NUMBER OF
FISCAL ------------------- OTHER ANNUAL OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) GRANTED(2) COMPENSATION(3)
- --------------------------- ------ -------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Champ Meyercord(4)....... 1999 $306,627 $250,000 $ -- -- $
Chairman of the 1998 63,462 -- -- 481,859 --
Board and Chief 1997 -- -- -- -- --
Executive Officer
J. Richard Walker(5)..... 1999 $183,333 -- $ 1,000 50,000 --
Executive Vice 1998 -- -- -- -- --
Chief Financial 1997 -- -- -- -- --
Officer
Wm. Paul Ralser(6)....... 1999 $264,423 -- $ 1,547 -- --
President and Chief 1998 -- -- -- -- --
Operating Officer 1997 -- -- -- -- --
James L. Belter(7)....... 1999 $ 58,333 $120,000(8) $ 2,519 -- --
Executive Vice 1998 212,519 100,000(8) 9,919 -- 135,868
President and 1997 180,003 100,000(8) 15,896 10,000 --
Treasurer
</TABLE>
- -------------------------
(1) Other annual compensation consisted of car allowances, contributions to
401(k) plans and moving expenses.
(2) See "-- Employment Agreements" and "-- Company Stock Option Plans" below.
(3) All other compensation consisted of funds received from the Company to
repurchase outstanding SARs and stock options.
(4) Mr. Meyercord became Chief Executive Officer of the Company in July 1998.
(5) Mr. Walker became Executive Vice President and Chief Financial Officer of
the Company in October 1998.
(6) Mr. Ralser began employment with the Company on September 1, 1998 and
resigned from the Company on July 31, 1999.
(7) Mr. Belter resigned from the Company on November 30, 1998.
(8) Bonuses paid to Mr. Belter during fiscal years 1996 and 1997 were
discretionary bonuses determined by the Board of Directors. The bonus paid
during fiscal 1998 was paid pursuant to an employment contract entered into
with Mr. Belter in August 1997.
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The following table sets forth certain information concerning grants of
stock options made during the fiscal year ended August 31, 1999 to the Named
Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS GRANTED
OPTIONS TO EMPLOYEES IN EXERCISE EXPIRATION POTENTIAL
NAME GRANTED(#) FISCAL YEAR PRICE($/SH) DATE REALIZABLE VALUE
- ---- ---------- ---------------- ----------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Champ Meyercord......... -- -- -- --
Chairman of the
Board and Chief
Executive Officer
James L. Belter......... -- -- -- --
Executive Vice
President and
Treasurer (1)
J. Richard Walker....... 50,000 12.7% $15.00 1/12/09 $250,000
Executive Vice
President and Chief
Financial Officer
</TABLE>
- -------------------------
(1) Mr. Belter resigned from the Company on November 30, 1998.
The following table sets forth certain information concerning unexercised
stock options held by the Named Executive Officers as of August 31, 1999. No
stock options were exercised by the Named Executive Officers during the fiscal
year ended August 31, 1999. See "-- Company Stock Option Plans."
AGGREGATED FISCAL YEAR-END OPTION VALUE TABLE
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS HELD AT HELD AT
AUGUST 31, 1999 AUGUST 31, 1999(1)
--------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Champ Meyercord................. 160,620 321,239 $ -- --
J. Richard Walker............... -- 50,000 -- --
</TABLE>
- -------------------------
(1) The closing sales price of the Company's common stock as reported on the
Nasdaq Small Cap Market on August 31, 1999 was $4.50, as adjusted to reflect
the one-for-ten reverse stock split. All options held by Messrs. Belter,
Meyercord and Walker as of August 31, 1999 were granted at exercise prices
in excess of such market price.
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<PAGE> 110
EMPLOYMENT AGREEMENTS
On June 23, 1998, the Company entered into an employment agreement with
Champ Meyercord pursuant to which Mr. Meyercord became the Chairman of the Board
and Chief Executive Officer of the Company. The Company and Mr. Meyercord
elected to renegotiate the original employment agreement and entered into a new
employment agreement (the "Meyercord Agreement") on February 12, 1999. The
initial term of the Meyercord Agreement terminates on December 31, 2001 and the
agreement will continue on a year-to-year basis unless terminated by either
party. The Meyercord Agreement provides for an initial annual base salary of
$300,000. From the date of the Meyercord Agreement until December 31, 1998, Mr.
Meyercord is entitled to a bonus of at least $250,000. For each subsequent
calendar year during the term of the agreement, Mr. Meyercord shall be entitled
to receive bonuses pursuant to a management incentive compensation plan for
senior management to be established by the Company. Pursuant to the Meyercord
Agreement Mr. Meyercord was granted options to purchase 481,859 shares of common
stock upon approval by the Company's stockholders of the 1999 Plan.
Upon termination of the agreement for "cause," Mr. Meyercord will be
entitled to receive his base salary through the effective date of termination
and any determined but unpaid incentive compensation for any bonus period ending
on or before the date of termination. In the event of his termination by the
Company "without cause" or his voluntary termination on six months notice, Mr.
Meyercord will be entitled to (1) any unpaid base salary through the date of
termination, (2) accrued but unpaid incentive compensation, if any, for the
bonus period ending on or before the date of termination, (3) the continuation
of any benefits through the expiration of the Meyercord Agreement and (4) the
payment, through the date of expiration of the Meyercord Agreement, of his base
salary and incentive compensation (in an amount equal to the incentive
compensation paid to Mr. Meyercord for the calendar year immediately preceding
termination). In the event of a change of control of the Company accompanied
within two years by either (1) termination of Mr. Meyercord's employment by the
Company "without cause" or (2) Mr. Meyercord's voluntarily termination for "good
reason," Mr. Meyercord will be entitled to the amounts receivable upon a
termination "without cause." In addition, upon a change of control any vested
stock options granted to Mr. Meyercord will accelerate and become immediately
vested. The Meyercord Agreement contains a non-competition provision that
generally prohibits Mr. Meyercord from competing with the Company during his
employment by the Company and for the lesser of the two-year period following
the termination of his employment for any reason or the period of time during
which Mr. Meyercord is entitled to continuing payments from the Company due to a
termination of the Meyercord Agreement due to disability, voluntary termination,
termination "without cause" or change of control of the Company.
On September 1, 1999, the Company entered into an employment agreement with
J. Richard Walker, employing Mr. Walker as Executive Vice President and Chief
Financial Officer of the Company. The initial term of the employment agreement
(the "Walker Agreement") terminates on August 31, 2001 and the agreement will
continue on a year-to-year basis unless terminated by either party. The Walker
Agreement provides an initial annual base salary of $200,000. For each fiscal
year during the term of the agreement, Mr. Walker shall be entitled to receive
bonuses pursuant to a management incentive compensation plan to be established
by the Company. Pursuant to the terms of the Company's stock option plan and the
agreement, Mr. Walker is eligible to receive options
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<PAGE> 111
to purchase shares of stock at the discretion of the Company's stock option plan
committee.
Upon termination of the agreement for "cause," Mr. Walker will be entitled
to receive his base salary through the effective date of termination and any
determined but unpaid incentive compensation for any bonus period ending on or
before the date of termination. In the event of his termination by the Company
"without cause" or termination by Mr. Walker for "good reason" on six months
notice, Mr. Walker will be entitled to (1) any unpaid base salary through the
date of termination, (2) accrued but unpaid incentive compensation, if any, for
the bonus period ending on or before the date of termination, (3) the
continuation of any benefits through the expiration of the Walker agreement, and
(4) the payment, through the date of expiration of the Walker Agreement, of his
base salary and incentive compensation (in amount equal to the incentive
compensation paid to Mr. Walker for the calendar year immediately preceding
termination). In the event of a change of control of the Company accompanied
within two years by either (1) termination of Mr. Walker's employment by the
Company "without cause" or (2) Mr. Walker's voluntary termination for "good
reason", Mr. Walker will be entitle to the amounts receivable upon a termination
"without cause". In addition, upon a change of control any vested stock options
granted to Mr. Walker will accelerate and become immediately vested. The Walker
Agreement contains a non-competitive provision that generally prohibits Mr.
Walker from competing with the Company during his employment by the Company and
for the one-year period following the termination of his employment for any
reason.
During fiscal 1999, James Belter, the Company's Executive Vice President
and Chief Financial Officer until November 30, 1998, was employed pursuant to an
employment agreement entered into in August 1997. The employment agreement
provided that Mr. Belter was entitled to receive discretionary performance
bonuses based on factors determined by the Committee and the board of directors
in accordance with the Company's executive bonus pool program. Notwithstanding
the foregoing, Mr. Belter was guaranteed to receive a bonus of $100,000 for each
of the first two years of his employment agreement.
The Company intends to enter into employment agreements with certain other
members of senior management, including Mr. Walker.
COMPANY STOCK OPTION PLANS
1996 Plan
Under the Company's 1996 Employee Stock Option Plan (the "1996 Plan"),
1,000 shares of Common Stock remain reserved for issuance upon exercise of stock
options. The 1996 Plan was designed as a means to retain and motivate key
employees and directors. The Board of Directors, or a committee thereof,
administers and interprets the 1996 Plan and is authorized to grant options
thereunder to all eligible employees and directors of the Company, except that
no incentive stock options (as defined in Section 422 of the Code) may be
granted to a director who is not also an employee of the Company or a
subsidiary. The 1996 Plan provides for the granting of both incentive stock
options and nonqualified stock options. Options may be granted under the 1996
Plan on such terms and at such prices as determined by the Board of Directors,
or a committee thereof, except that the per share exercise price of incentive
stock options cannot be less than the fair market value of the Common Stock on
the date of grant. Each option is exercisable after the period or
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<PAGE> 112
periods specified in the related option agreement, but no option may be
exercisable after the expiration of ten years from the date of grant. Options
granted to an individual who owns (or is deemed to own) at least 10% of the
total combined voting power of all classes of stock of the Company must have an
exercise price of at least 110% of the fair market value of the Common Stock on
the date of grant and a term of no more than five years. The 1996 Plan also
authorizes the Company to make or guarantee loans to optionees to enable them to
exercise their options. Such loans must (1) provide for recourse to the
optionee, (2) bear interest at a rate no less than the prime rate of interest,
and (3) be secured by the shares of Common Stock purchased. The Board of
Directors has the authority to amend or terminate the 1996 Plan, provided that
no such action may impair the rights of the holder of any outstanding option
without the written consent of such holder, and provided further that certain
amendments of the 1996 Plan are subject to stockholder approval. Unless
terminated sooner, the 1996 Plan will continue in effect until all options
granted thereunder have expired or been exercised, provided that no options may
be granted ten years after commencement of the 1996 Plan. In connection with the
spin-off of the Company, all options outstanding under the 1996 Plan were
converted into SARs in August 1997. In October 1997, the Company repurchased all
SARs outstanding under the 1996 Plan.
1997 Plan
In August 1997, the Company's Board of Directors adopted the Company's 1997
Stock Option Plan (the "1997 Plan"). The 1997 Plan was approved by the
stockholders of the Company in June 1998. Under the 1997 Plan, as amended,
200,000 shares of Common Stock are reserved for issuance upon the exercise of
stock options and/or SARs. The Board of Directors, or a committee thereof,
administers and interprets the 1997 Plan and is authorized to grant options
and/or SARs thereunder to any person who has rendered services to the Company,
except that no incentive stock options may be granted to any person who is not
also an employee of the Company or any subsidiary. As of August 31, 1998, a
total of 120,000 options had been granted under the 1997 Plan, of which 6,325
were held by directors and executive officers.
1999 Plan
In February 1999, the Company's stockholders approved the Company's 1999
Incentive Stock Plan (the "1999 Plan"). 1,200,000 shares were reserved for
issuance under the 1999 Plan. The 1999 Plan provides for the issuance of options
and restricted stock to certain of the Company's employees and outside directors
and the issuance of SARs to certain of the Company's key employees. The 1999
Plan is administered by a committee of two or more of the Company's outside
directors each of whom must satisfy the requirements for a "non-employee"
director under Rule 16b-3 of the Securities Exchange Act of 1934 and an "outside
director" under Section 162(m) of the Code. No Key Employee of the Company (as
defined in the 1999 Plan) may be granted an option or SAR with respect to more
than 150,000 shares of the Company's Common Stock, except that an option to
purchase 481,859 shares of common stock may be granted to the Company's chief
executive officer in connection with the renegotiation of his June 23, 1998
employment agreement.
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<PAGE> 113
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1999, Messrs. John D. Williamson, Jr. and Spencer I. Browne
served as members of the Compensation Committee. Mr. Browne was a consultant of
the Company during fiscal 1999, for which he was paid $80,000.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of January 17, 2000, information with
respect to the beneficial ownership of the Common Stock by (1) each person known
by the Company to be the beneficial owner of more than 5% of the outstanding
shares of Common Stock, (2) each director of the Company, (3) each of the Named
Executive Officers, and (4) all directors and executive officers of the Company
as a group. Unless otherwise noted, the Company believes that all persons named
in the table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED OWNERSHIP(2)
- --------------------------------------- ------------------ -------------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Champ Meyercord(3)............................... 163,120 8.1%
J. Richard Walker................................ -- *
Spencer I. Browne(4)............................. 70,976 1.7
Hubert M. Stiles, Jr.(5)(6)...................... 675,569 16.6
David J. Vida, Jr.(6)............................ 1,666 *
John D. Williamson, Jr.(6)....................... 14,185 *
All executive officers and directors of the
Company as a group (6 persons)................. 856,842 20.0
OTHER LARGE STOCKHOLDERS:
Value Partners, Ltd.(7).......................... 1,474,550 26.9
City National Bank(8)............................ 1,333,336 24.7
Sovereign Bancorp(9)............................. 1,333,336 24.7
Friedman, Billings, Ramsey Group, Inc.(10)....... 974,245 21.6
Emanuel J. Friedman(10)(11)...................... 666,666 16.4
T. Rowe Price Recovery Fund II, L.P.(5).......... 675,569 16.6
First Fidelity Bancorp, Inc.(12)................. 333,335 7.6
Merrill Lynch Phoenix Fund, Inc.(13)............. 300,000 7.4
Premium Total Return Fund(14).................... 266,667 6.6
</TABLE>
- -------------------------
* Less than 1%
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this prospectus
upon the exercise of options and warrants. Each beneficial owner's
percentage ownership is determined by assuming that options and warrants
that are held by such person (but not those held by any other person) and
that are exercisable within 60 days from the date of this prospectus have
been exercised. Unless otherwise stated, the address for each of the
following persons is 1000 Parkwood Circle, 6th Floor, Atlanta, Georgia
30339.
(2) Based on 4,062,697 shares of Common Stock outstanding as of January 17,
2000, and, where applicable, the conversion of the stock equivalents held
by a particular holder or group but no other holders.
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<PAGE> 114
(3) Includes 160,620 shares issuable upon the exercise of currently outstanding
options.
(4) Includes 67,250 shares issuable upon the exercise of currently outstanding
options.
(5) The address of Mr. Stiles and T. Rowe Price Recovery Fund II, L.P. is 100
East Pratt Street, Baltimore, Maryland 21202. Represents shares
beneficially owned by T. Rowe Price Recovery Fund II, L.P., T. Rowe Price
Recovery Fund II Associates, L.L.C. and T. Rowe Price Associates, Inc. (of
which Mr. Stiles is a vice president). Mr. Stiles disclaims beneficial
ownership of these shares. Based on a Schedule 13G filed with the SEC on
July 10, 1998. Includes 3,151 shares currently issuable pursuant to the
conversion of Original Secured Notes in which T. Rowe Price Recovery Fund
II, L.P. has a participation interest. Does not include shares of Common
Stock issuable if the stockholders approve, at the annual meeting of
stockholders scheduled to be held on March 9, 2000, the issuance of
14,284,363 shares of Common Stock upon the conversion of $14.0 million
principal amount of Amended Notes which the Company proposes to issue to
Value Partners, Ltd.
(6) Includes 1,666 shares issuable upon the exercise of currently outstanding
options.
(7) The address of Value Partners, Ltd. is 4514 Cole Avenue, Suite 808, Dallas,
Texas 75205. Represents shares issuable upon the conversion of 22,000
shares of Preferred Stock and 11,027 shares currently issuable upon the
conversion of Original Secured Notes owned by Value Partners, Ltd.. Does
not include shares of common stock issuable if the stockholders approve, at
the annual meeting of stockholders scheduled to be held on March 9, 2000,
the issuance of 14,284,363 shares of Common Stock upon the conversion of
$14.0 principal amount of Amended Notes which the Company proposes to issue
to Value Partners, Ltd.
(8) City National Bank's address is 25 Gatewater Road, Charleston, West
Virginia 25313. Represents (i) 666,670 shares issuable upon conversion of
Preferred Stock and (ii) 666,666 shares issuable upon exercise of currently
outstanding options.
(9) Sovereign Bancorp's address is 1130 Berkshire Boulevard, P.O. Box 12646,
Reading, Pennsylvania 19612. Represents (i) 666,670 shares issuable upon
conversion of Preferred Stock and (ii) 666,666 shares issuable upon
exercise of currently outstanding options.
(10) The address of Friedman, Billings, Ramsey Group, Inc. ("FBRG") is 1001 19th
Street North, Arlington, Virginia 22209. As of March 31, 1999, FBRG,
through its two wholly-owned subsidiaries Friedman, Billings, Ramsey
Investment Management, Inc. ("Investment Management") and Orkney Holdings,
Inc. ("Orkney"), had sole voting and dispositive power with respect to
535,910 shares of Common Stock. This number does not include 666,666 shares
of Common Stock owned by Emanuel J. Friedman, as to which FBRG disclaims
beneficial ownership. Investment Management serves as general partner and
discretionary investment manager for FBR Ashton, L.P. ("Ashton") which, as
of March 31, 1999, owned 4,450 shares of Preferred Stock (which are
convertible into 296,668 shares of Common Stock). Investment Management
also serves as discretionary manager for FBR Opportunity Fund, Ltd.
("Opportunity Fund") which, as of March 31, 1999, owned 90,680 shares of
Common Stock. Orkney is a wholly-owned subsidiary of FBRG which, as of
March 31, 1999, owned 445,230 shares of Common Stock and 2,125 shares of
Preferred Stock (which are convertible into an aggregate of 141,667 shares
of Common Stock). Each of FBRG, Ashton, Investment Management, Opportunity
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<PAGE> 115
Fund and Orkney disclaims beneficial ownership of the shares of Common
Stock owned by the other four entities. In addition, Emanuel J. Friedman,
Eric F. Billings and W. Russell Ramsey are each control persons with
respect to FBRG.
(11) Mr. Friedman's address is 1001 19th Street, Arlington, Virginia 22209.
Excludes 535,910 shares beneficially owned by FBRG, as to which Mr.
Friedman disclaims beneficial ownership. Mr. Friedman has notified the
Company that, until the earlier of (i) the first date on which he, together
with FBR and its affiliates, holds shares of Common Stock representing less
than 20% of the total issued and outstanding Common Stock or (ii) the date
on which he deposits his shares of Common Stock in a voting trust to be
voted by an unaffiliated third party, he waives the right to vote his
shares of Common Stock.
(12) The address of First Fidelity Bancorp, Inc. is 2601 Main Street, Suite 100,
Irvine, California 72614. Represents shares issuable upon conversion of
Preferred Stock.
(13) The address of Merrill Lynch Phoenix Fund, Inc. is 4 New York Plaza, 11(th)
Floor, c/o Chase Manhattan Bank, New York, New York.
(14) Represents shares issuable upon the conversion of Preferred Stock.
115
<PAGE> 116
CERTAIN TRANSACTIONS
Listed below are transactions the Company has entered into with its
affiliates in the past three years. An "affiliate" generally is a person or
entity that is (1) "controlled by the Company," such as an officer of the
Company, (2) that "controls the Company" such as a director of a company, and in
the case of the Company, Mego Financial, the Company's former parent; or (3)
entities under "common control" with a company. PEC, a subsidiary of Mego
Financial, is an affiliate of Mego Financial because it is "controlled by" Mego
Financial, and is an affiliate of the Company, because the directors that
controlled the Company until the completion of the recapitalization also
controlled Mego Financial.
PURCHASE OF PARTICIPATION INTEREST IN SECURED NOTES BY T. ROWE PRICE RECOVERY
FUND II, L.P.
T. Rowe Price Recovery Fund II, L.P. purchased from Value Partners a $2.0
million participation interest in the current Secured Notes. The managing
general partner of T. Rowe Price Recovery Fund II, L.P. is T. Rowe Price
Recovery Fund II Associates, L.L.C. of which Hubert M. Stiles, Jr., a member of
the Board, is president.
RELATIONSHIP WITH GREENWICH
Champ Meyercord, the Company's Chairman of the Board and Chief Executive
Officer, was formerly a senior investment banker at Greenwich Capital Markets
("Greenwich"). In October 1996, Greenwich agreed to purchase from the Company
$2.0 billion of loans over a five year period. The Company has sold Greenwich
approximately $800.0 million in loans from the inception of the agreement. The
agreement with Greenwich was terminated in June 1998 and the Company has no
further obligation under the agreement.
In April 1997, the Company entered into a pledge and security agreement
with Greenwich for an $11.0 million revolving credit facility. The amount which
could be borrowed under the agreement was increased to $15.0 million in June
1997 and to $25.0 million in July 1997. This facility is secured by a pledge of
certain of the Company's interest only and residual class certificates relating
to securitizations carried as mortgage related securities on the Company's
Statements of Financial Condition, payable to the Company pursuant to its
securitization agreements. As of August 31, 1998, approximately $10.0 million
was outstanding under the agreement. This agreement, which was originally
scheduled to mature in December 1998, was extended until December 1999, and all
amounts outstanding under the agreement have now been repaid by the Company.
TAX SHARING AND INDEMNITY AGREEMENT
For taxable periods up to the date of the spin-off of the Company by Mego
Financial, the Company's results of operations were includable in the tax
returns filed by Mego Financial's affiliated group for federal income tax
purposes. Under a tax allocation and indemnity agreement with Mego Financial,
the Company recorded a liability to Mego Financial for federal income taxes
calculated on a separate company basis. Under a prior tax sharing arrangement
with Mego Financial, the Company recorded a liability to Mego Financial for
federal income taxes applied to the Company's financial statement income after
giving consideration to applicable income tax law and statutory rates. In
addition, both the agreement and the arrangement provided that the Company and
Mego Financial
116
<PAGE> 117
each will indemnify the other under certain circumstances. The Company no longer
files consolidated returns with Mego Financial's affiliated group. The Company
believes that all obligations under the tax sharing agreement have been
satisfied.
MANAGEMENT SERVICES AGREEMENT WITH PEC
Until the Recapitalization, PEC, a subsidiary of Mego Financial, supplied
the Company on an as-needed basis with certain executive, accounting, legal,
management information, data processing, human resources, advertising services
and promotional personnel of PEC provided services to the Company on an "as
needed" basis. The Company paid management fees to PEC in an amount equal to the
direct and indirect expenses of PEC related to the services supplied by its
employees to the Company, including an allocable portion of the salaries and
expenses of these employees based upon the percentage of time these employees
spent performing services for the Company. This arrangement was formalized on
September 1, 1996 by execution of a management agreement (the "Management
Agreement"), in which PEC agreed to provide management services to the Company
for an aggregate annual fee of approximately $967,000. Effective January 1,
1998, the annual fee payable by the Company under the Management Agreement was
reduced to $528,000. The Management Agreement was terminated on June 29, 1998
and no fees have been paid to PEC pursuant to the Management Agreement since
that date. For the years ended August 31, 1997 and 1998 and the three months
ended November 30, 1998 and 1999, approximately $967,000, $617,000, and $0,
respectively, of the salaries and expenses of these employees of PEC were
attributable to and paid by the Company in connection with services supplied by
these employees to the Company.
SUB-SERVICING AGREEMENT WITH PEC
Prior to September 1, 1996, PEC sub-serviced the Company's loans pursuant
to which it paid servicing fees of 50 basis points on the principal balance of
loans serviced per year. For the years ended August 31, 1997, 1998 and 1999 and
the three months ended November 30, 1998 and 1999, the Company paid
sub-servicing fees to PEC of approximately $709,000, $1.9 million, $2.1 million,
$0 million and $0, respectively. The Company entered into a servicing agreement
with PEC (the "Servicing Agreement"), effective as of September 1, 1996,
providing for the payment of servicing fees of 50 basis points on the principal
balance of loans serviced per year. For the years ended August 31, 1997, 1998
and 1999 and the three months ended November 30, 1998 and 1999, the Company
incurred interest expense in the amount of $16,000, $0, $0, $0 and $0,
respectively, related to fees payable to PEC for these services. The interest
rates were based on PEC's average cost of funds and equaled 10.48% in 1997.
Effective September 1, 1997, the servicing fees were reduced to 40 basis points
per year and effective January 1, 1998, the servicing fees were further reduced
to 35 basis points per year. The Servicing Agreement has been terminated as the
mortgage servicing rights were transferred to City National Bank.
FUNDING AND GUARANTEES BY MEGO FINANCIAL
In order to fund the Company's past operations and growth, and in
conjunction with filing consolidated returns, the Company borrowed money from
Mego Financial. As of August 31, 1997, 1998 and 1999, the amount of intercompany
debt owed to Mego Financial was $0, $9.7 million, $0 and $0, respectively. Prior
to the initial public offering,
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<PAGE> 118
Mego Financial had guaranteed the Company's obligations under the Company's
credit agreements and an office lease. The guarantees of the Company's credit
agreements were released on the completion of the initial public offering. The
Company did not pay any compensation to Mego Financial for such guarantees.
In November 1996, Greenwich agreed to purchase from the Company $2.0
billion of loans over a five year period. Pursuant to the agreement, Mego
Financial issued to Greenwich four-year warrants to purchase 1.0 million shares
of Mego Financial's common stock. The value of the warrants, estimated at $3.0
million (0.15% of the commitment amount) as of the commitment date (the "Warrant
Value") plus a $150,000 fee has been written off as the commitment for the
purchase of loans has been terminated.
On August 29, 1997, the Company and Mego Financial entered into a Payment
Agreement for the Company's repayment after the spin-off of (1) a portion of the
debt owed by the Company to Mego Financial as of May 31, 1997 and (2) debt owed
by the Company to Mego Financial as of August 31, 1997 (the "Payment
Agreement"). Upon consummation of the sale of the Original Notes in October
1997, $3.9 million was paid in accordance with the Payment Agreement. In April
1998, the Company and Mego Financial entered into an agreement (the "1998
Agreement") superseding the Payment Agreement. Pursuant to the 1998 Agreement,
the parties agreed to reduce the amounts owed to Mego Financial and agreed to
pay such amounts upon the occurrence of certain events. In connection with the
Recapitalization, the Company paid PEC $1.6 million to satisfy fully all amounts
owed to Mego Financial pursuant to the Payment Agreement and the 1998 Agreement,
and the 1998 Agreement was terminated.
RELATIONSHIPS WITH FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
Friedman, Billings, Ramsey & Co, Inc. ("FBR") a subsidiary of FBRG served
as placement agent for the private placements pursuant to a placement agreement
(the "Placement Agreement"). Under the terms of the Placement Agreement, the
Company paid FBR a fee 160,000 shares of Common Stock equal to 6.0% of the gross
proceeds received by the Company from the sale of the shares of Common Stock and
Preferred Stock in the Recapitalization. The gross proceeds did not include
$10.0 million of Common Stock acquired by an affiliate of FBR. In addition, the
Company has agreed, pursuant to the Placement Agreement, to indemnify FBR
against certain liabilities, including liabilities under the Securities Act, and
other liabilities incurred in connection with the Recapitalization.
In addition, FBR was a managing underwriter for the Company's initial
public offering and the Company's public offering of the Old Notes, and was the
purchaser of Old Notes. FBR received compensation for such services and the
Company agreed to indemnify FBR against certain liabilities, including
liabilities under the Securities Act, and other liabilities arising in
connection with such offerings. In addition, FBR has in the past provided
certain investment banking services to the Company and affiliates of the
Company.
During fiscal 1998, the Company paid FBR 1.6 million shares of common stock
for its investment services in conjunction with the Recapitalization.
Additionally, the Company has reimbursed FBR for out of pocket expenses totaling
approximately $250,000 and paid FBR a cash fee of $416,667 in connection with
the Recapitalization. The Company paid FBR $100,000 for its investment services
provided in connection with the purchase of the Las Vegas production platform.
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THE RECAPITALIZATION
The Company completed a Recapitalization on July 1, 1998, which provided
the Company with approximately $84.5 million of new equity. City National Bank
and Sovereign Bancorp, each purchased 10,000 shares of the Company's Preferred
Stock at a price of $1,000 per share. In addition, City National Bank and
Sovereign Bancorp were each granted an option, which expires in December 2000,
to acquire 666,667 shares of Common Stock at a price of $15.00 per share. City
National Bank and Sovereign Bancorp each has a right of first refusal to
purchase the Company in the event the Company's Board of Directors determines to
sell the Company. In addition, City National Bank and Sovereign Bancorp each
were granted the right to appoint one member to the Company's Board of Directors
and have the right to appoint an additional board member if they exercise their
option to purchase additional shares of Common Stock. Upon completion of the
recapitalization, David J. Vida, Jr. was appointed to the Board of Directors at
the request of City National Bank. Sovereign Bancorp has not exercised its right
to appoint a board member but has exercised its right to have a representative
attend each board meeting. In addition to the transactions described above, part
of the Recapitalization, the Company and each of Sovereign Bancorp and City
Holding Company, the parent company of City National Bank, entered into the
following agreements: (1) Sovereign Bancorp agreed to provide the Company up to
$90.0 million in borrowings under a warehouse line to fund its loan production
prior the sale of the loans (this amount has subsequently been reduced to $25.0
million); (2) Sovereign Bancorp agreed to purchase up to $100.0 million of the
Company's loans per quarter and has a right of first refusal to purchase all
other loans produced by the Company; (3) City National Bank purchased the
Company's existing mortgage servicing rights; and (4) City Mortgage Services
agreed to service all of the Company's mortgage loans held for sale and loans
sold on a servicing retained basis by the Company.
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DESCRIPTION OF THE NEW NOTES
GENERAL
The Company is offering to issue up to $19.3 million aggregate principal
amount of New Notes under the Exchange Offer. The following summary of the
principal terms of the New Notes does not purport to be complete and is
qualified in its entirety by reference to all of the provisions of the New
Indenture governing the New Notes and the New Notes, copies of which are
available from the Exchange Agent. A copy of the New Indenture is available from
the Company upon request.
RANKING; RELATION TO SECURED NOTES
The New Notes and the Original Secured Notes (which we expect to amend,
restate and increase to $14.0 million of Amended Notes upon consummation of the
Exchange Offer) shall be considered a single class of pari passu indebtedness of
the Company. The New Notes are equivalent in right of payment of principal and
premium, if any, to the Amended Notes. The New Notes and the Amended Notes
represent the senior indebtedness of the Company shall not be subordinate in
right or priority of payment to any existing or future indebtedness of the
Company.
SECURITY
The New Notes received by QIBs, as defined in the Securities Act, as a
result of the Exchange Offer will be secured, on an equivalent or pari passu
basis with the Amended Notes, by a pledge by us of certain of our
mortgage-related securities and all of the capital stock of Money Centre. The
New Notes received by non-QIBs as a result of the Exchange Offer will be secured
only by a pledge of the capital stock of Money Centre. The security interest of
the non-QIB holders in the capital stock of the Money Centre will be senior to
that of the QIB holders and the holders of the Amended Notes; however, the
recovery of the non-QIB holders pursuant to this senior security interest will
be limited proportionately to the amount recoverable by the QIB holders and the
holders of the Amended Notes pursuant to their respective security interests in
the collateral.
The Intercreditor Agreement provides for a pro-rata recovery by the holders
of the New Notes and the Amended Notes of the proceeds of a liquidation of the
collateral pledged by the Company following a Default or an Event of Default
(each as defined in the New Indenture), except that the holders of the New Notes
that are not QIBs may not receive proceeds from the liquidation of certain
collateral that may only be pledged to QIBs, even if this fact results in such
non-QIB holders of the New Notes receiving a lesser pro-rata recovery upon the
liquidation of the collateral than the QIB holders of the New Notes and the
holders of the Amended Notes.
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REDEMPTION
The New Notes are redeemable, in whole but not in part, prior to maturity
at the option of the Company at any time and from time to time at a redemption
price (the "Redemption Price") (expressed as a percentage of principal amount),
including accrued but unpaid interest:
- after June 15, 2004, of 106%; and
- after June 15, 2005 of 106%.
In addition, the Company has the right to redeem the New Notes at any time
if the trading price of the Common Stock closes above $5.00 per share for 35
consecutive trading days after the Expiration Date.
FAILURE TO OBTAIN STOCKHOLDER APPROVAL
If the Company does not obtain stockholder approval of the conversion of up
to $6,428,000 principal amount of the New Notes into Common Stock or the
conversion of the Secured Notes into Common Stock (1) the interest rate on the
New Notes shall be increased 1% per annum on a monthly basis to a maximum of 18%
(2) the holders of the New Notes shall have the right to have such New Notes
repurchased by the Company at a price equal to 112% of the principal amount of
such New Notes.
Based on the Company's current liquidity situation and forecasts, the
Company expects that it would be unable to repurchase New Notes at the required
112% premium or to pay any additional interest with respect to the New Notes
should the stockholders fail to approve the issuance of Common Stock with
respect to the Convertible New Notes or the issuance of Common Stock with
respect to the Amended Notes.
SINKING FUND
There is no mandatory sinking fund for the Notes.
PAYMENT ON THE NEW NOTES
The principal amount or redemption price of the New Notes shall be payable
upon presentation and surrender by a holder of the New Notes held by such holder
at the office of the Trustee in New York, New York or at the office of any other
Paying Agent (as defined in the New Indenture) designated by the Company.
Payments of principal, interest and premium, if any, shall be paid by check
mailed to the address of such person on the register maintained by the Trustee,
provided that at the request of a holder in writing to the Company at least five
days prior to the date set for the such payment, the payment will be made to
such holder by wire transfer out of immediately available funds.
CERTAIN COVENANTS
Set forth below are descriptions of certain covenants set forth in the New
Indenture.
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Limitation on Indebtedness. The Company will not incur, and the Company
will not permit any Subsidiary to incur, directly or indirectly, any
Indebtedness or issue any Disqualified Capital Stock provided that the Company
may incur Indebtedness if, on the date of such Incurrence (as such capitalized
terms are defined in the New Indenture) and after giving effect thereto, (1) the
Fixed Charge Coverage Ratio would have been at least 1.6 to 1.0 and (2) the
ratio of (X) the aggregate consolidated liabilities of the Company and its
Subsidiaries to the Consolidated Net Worth of the Company is less than 6.0 to
1.0. Notwithstanding this prohibition, as long as no Default or Event of Default
exists and as long as certain other conditions are met, the Company may incur
certain Indebtedness, including:
- certain warehouse indebtedness;
- debt evidenced by the New Notes issued in this Exchange Offer and the
Amended Notes;
- certain debt related to interest rate hedging; and
- certain refinancing debt.
In addition, mortgage-related securities issued in a securitization
transaction entered into by a subsidiary of the Company formed for such purpose
shall not be considered Indebtedness of the Company provided generally that (1)
the Company nor any subsidiary of the Company provides credit support for such
securitization (except for overcollateralization of the senior certificates
issued in such transaction or recourse to the Excess Spread Receivables (as
defined) retained in such transaction), (2) neither the Company nor any
subsidiary is directly or indirectly liable for such securities and (3) no
default with respect to such securities would allow a holder of any other
indebtedness of the Company to declare a default with respect to such
indebtedness.
Fixed Charge Coverage Ratio means generally with respect to the Company and
its subsidiaries for any period, the ratio of the Consolidated Cash Flow to the
Fixed Charges (each as defined in the New Indenture) of the Company and its
Subsidiaries for such period.
Financial Covenants. The Company is subject to certain financial covenants
under the New Indenture, including covenants regarding minimum net worth and,
commencing August 31, 2000, the ratio of liabilities to net worth and the ratio
of fixed charges to cash flow.
Maintenance of Money Centre. The Company must use its reasonable best
efforts to operate Money Centre in a manner that will maintain the corporate
existence and enterprise value of Money Centre.
Limitation on Liens. The Company cannot, and will not permit any
Subsidiary, to directly or indirectly, incur or permit to exist any lien of any
nature whatsoever on any of its properties without effectively providing that
the New Notes and the Amended Notes be secured by a lien on the same property as
secures the obligations so secured. Under certain conditions, the Company may
incur certain "Permitted Liens," including:
- liens securing indebtedness permitted by the New Indenture;
- liens incurred in the ordinary course of business; and
- certain liens on the Company's mortgage-related securities.
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Limitation on Affiliate Transactions. The Company will not, and will not
permit any Subsidiary to, enter into any transaction with or for the benefit of,
any Affiliate (as defined in the Indenture) of the Company (an "Affiliate
Transaction") unless the terms thereof: (1) are in the ordinary course of
business and consistent with past practice; (2) are fair to the Company and are
no less favorable to the Company or such Subsidiary than those that could be
obtained at the time of such transaction in arm's-length dealings with a Person
who is not an Affiliate; and (3) if such Affiliate Transaction involves an
amount in excess of $250,000, such Affiliate Transaction is (A) set forth in
writing and (B) approved by a majority of the members of the Board of Directors
having no personal stake in such Affiliate Transaction.
Merger and Consolidation. The Company cannot merge with or sell all or
substantially all its assets to, any entity (a "Successor Company") unless,
among other things:
- the Successor Company expressly assumes, by execution of a supplemental
indenture delivered to the Trustee, all of the Company's obligations
under the New Notes and the New Indenture, among other things, including
the Amended Notes;
- immediately after giving effect to such transactions (and treating any
Indebtedness that becomes an obligation of the Successor Company as a
result of such transaction as having been incurred by such Successor
Company at the time of such transaction), no default shall have occurred
and be continuing with respect to the New Notes;
- immediately after giving effect to such transaction, the Successor
Company would be able to incur $1.00 of additional indebtedness under the
terms of the New Indenture; and
- immediately after giving effect to such transaction, the Consolidated
Tangible Net Worth of the Successor Company (as calculated pursuant to
the New Indenture) shall not be less than the Consolidated Tangible Net
Worth of the Company prior to such transaction
DEFAULTS
An Event of Default is defined in the New Indenture as, among other things:
- default in the payment of interest on the New Notes when due, continued
for 30 days;
- default in the payment of principal of and premium, if any, on any New
Note when due at its maturity date by acceleration or otherwise;
- except as otherwise provided in the Indenture, the failure by the Company
to comply with any of its obligations in the covenants and other
agreements contained in the New Indenture, for a continued period of 60
days;
- failure of the Company or any Subsidiary of the Company to make any
payment, including any applicable grace period, in respect of principal
or interest on any Indebtedness which results in Indebtedness in an
amount in excess of $1,000,000;
- default by the Company or a Subsidiary of the Company with respect to any
Indebtedness of the Company or such Subsidiary, which results in
acceleration of
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any such Indebtedness in an amount in excess of $1,000,000 without such
Indebtedness having been discharged, or such acceleration having been
rescinded or annulled, within the applicable grace period;
- certain events of bankruptcy, insolvency or reorganization of the Company
or a Subsidiary;
- any judgment or decree for the payment of money in excess of $1,000,000
is rendered against the Company or a Subsidiary and remains outstanding
for a period of 60 days following such judgment; or
- the Trustee or the holders of 25% in principal amount of the outstanding
New Notes and Amended Notes notify the Company of its failure to observe
the Covenants contained in any of the Collateral Documents (as defined in
the New Indenture) for a continued period of 30 days.
If an Event of Default occurs and is continuing, the holders of at least
25% in aggregate principal amount of the New Notes and the Amended Notes,
considered as a single class, at the time outstanding by written notice to the
Trustee, may declare the principal of the New Notes and all of the interest
accrued thereon to be due and payable immediately.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, with the consent of the registered holders
of a majority in aggregate principal amount of the New Notes and the Secured
Notes, considered as a single class, at the time outstanding when authorized by
Board resolution, the Trustee may enter into a supplemental indenture for the
purpose of adding, eliminating, waiving or modifying in any way, any of the
provisions of the New Indenture.
However, no such supplemental indenture shall, without the consent of the
Holder of each New Note affected thereby (i) extend the fixed maturity of such
New Note, or reduce the rate or extend the time of payment of interest thereon,
or reduce the principal amount thereof or premium, if any, thereon, or reduce
any amount payable on redemption thereof, or impair the right of any such Holder
to institute suit for the payment thereof, or make the principal thereof or
interest or premium, if any, thereon payable in any coin or currency other than
that provided herein, or change the obligation of the Company to repurchase any
New Note upon the occurrence of a Repurchase Event (as defined) in a manner
adverse to such Holder, or impair the right to convert the New Notes into Common
Stock in any material respect, or (ii) reduce the aforesaid percentage of New
Notes and the Amended Notes, considered as a single class, the registered
holders of which are required to consent to any such amendment, modification,
supplement or waiver.
References in the New Indenture to actions by the holders of the New Notes
includes the holders of the Secured Notes, such holders of the New Notes and the
Amended Notes acting together as the holders of a single class of securities of
the Company.
Furthermore, waivers of certain covenants and waivers of events of default
related to such covenants contained in the New Indenture, including certain
waivers with regard to the financial covenants and limitation on indebtedness
covenants contained in the New Indenture, require the consent of the holders of
at least 70% of the aggregate principal amount of the New Notes and the Amended
Notes, considered as a single class, at the time outstanding.
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TRANSFER
A holder of the New Notes will be able to register the transfer of or
exchange of the New Notes only in accordance with the provisions of the New
Indenture. The Company may require a holder to furnish appropriate endorsements
and transfer documents, and to pay a sum sufficient to cover any tax, assessment
or other governmental charge payable in connection with certain registrations of
transfers and exchanges.
DEFEASANCE
The Company may, at the option of its Board of Directors, be discharged
from its obligations with respect to all outstanding New Notes and the New
Indenture (i.e. legal defeasance), provided that the Company has complied with
the conditions below. Under similar circumstances, the Company may also, at the
option of its Board of Directors, be released from its obligations under the
covenants (i.e. covenant defeasance) described under Article 9 of the New
Indenture.
The following shall be the conditions precedent to legal or covenant
defeasance:
- the Company must irrevocably deposit in trust (i.e. the defeasement
trust) with the Trustee unencumbered money or U.S. Government Obligations
(as defined) for the payment of principal of, premium, if any, and
interest;
- the Company must deliver to the Trustee an Opinion of Counsel to (as
defined) the effect that holders will not recognize income, gain or loss
for federal income tax purposes as a result of such deposit and
defeasance and will be subject to federal income tax on the same amount
and in the same manner and at the same time as would have been the case
if such deposit and defeasance had not occurred (and, in the case of
legal defeasance only, such Opinion of Counsel must be based on a ruling
of the Internal Revenue Service or other change in applicable federal
income tax law);
- no Default of Event of Default shall have occurred and be continuing on
the date of deposit or within 91 days thereafter;
- such legal or covenant defeasance shall not result in violation of, or
constitute a default under any material agreement to which the Company or
any of its Subsidiaries is bound; and
- the Obligors will deliver to the Trustee (i) an Opinion of Counsel to the
effect that as of the 91st day after deposit, the defeasement trust is
not subject to any creditors' rights, (ii) an Officers' Certificate
stating that the deposit was not made by the Company in an effort to
evade the creditors' rights.
The Company may not effect a legal or covenant defeasance of the New Notes
without providing for the same for the outstanding Secured Notes in a manner
satisfactory to the holders of a majority of the aggregate principal amount of
the Secured Notes at the time outstanding.
CONCERNING THE TRUSTEE
US Trust is the Trustee under the New Indenture. The holders of a majority
in principal amount of the outstanding New Notes and Secured Notes, considered
as a single
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class, will have the right to direct the time, method and place of conducting
any proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions.
GOVERNING LAW
The New Indenture provides that it and the New Notes will be governed by,
and construed in accordance with, the laws of the State of New York without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
BOOK-ENTRY, DELIVERY AND FORM
Except for any New Notes issued in certificated form without coupons as
described below under "-- Certificated Securities" as Certificated Securities,
all New Notes will be represented by one or more Global Exchange New Notes
without coupons. (The Global Exchange New Notes, along with any Global Notes
representing Old Notes, herein collectively are referred to as the "Global
Notes.") Each of the Global Exchange New Notes will be issued in a denomination
equal to the outstanding New Notes represented thereby and will be held by the
DTC, as the Depositary, or its nominee. Beneficial interests in the Global
Exchange New Notes will be shown on, and transfers thereof will be effected only
through, records maintained in book-entry form by the Depositary (with respect
to its Participants' interests) and its participants.
Pursuant to procedures established by the Depositary, upon deposit of the
Global Exchange New Notes, the Depositary will credit the accounts of
participants with portions of the principal amount of the Global Exchange New
Notes. Purchases of participation interests in the Global Exchange New Notes
under the Depositary's system must be made by or through Direct Participants,
which will receive a credit for the Exchange New Notes on the Depositary's
records. The ownership interest of the beneficial owner of each New Note is in
turn to be recorded on the direct and indirect Participants' records and
ownership of the New Notes evidenced by the Global Exchange New Notes will be
shown on records maintained and procedures established by the Depositary (with
respect to the interests of the Depositary's Participants) and the indirect
participants.
Beneficial owners registered with the Trustee of New Notes will be
considered the owners or holders thereof under the New Indenture for any
purpose, including with respect to the giving of any directions, instructions or
approvals to the Trustee thereunder.
CERTIFICATED SECURITIES
Subject to certain conditions, any person having a beneficial interest in a
Global Note may, upon request to the Trustee, exchange such beneficial interest
for Certificated Securities. Upon any such exchange, the Trustee is required to
register such Certificated Securities in the name of, and cause the same to be
delivered to, such person or persons (or the nominee of any thereof). All New
Notes that are or become Certificated Securities will be subject to requirements
regarding legends. In addition, if (i) the Company notifies the Trustee in
writing that the Depositary is no longer willing or able to act as a Depositary
and the Company is unable to locate a qualified successor within 90 days, (ii)
the Company, at its option, notifies the Trustee in writing that it elects to
cause the issuance of New Notes in the form of Certificated Securities under the
New Indenture, or
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(iii) if a Default or Event of Default occurs and any owner of a beneficial
interest in a Global Note so requests, then, upon surrender by the Global Note
Holder of a Global Note, New Notes in the form of Certificated Securities will
be issued to each person that the Global Note Holder and the Depositary identify
as being the beneficial owner of the related New Notes. Upon the transfer of
Certificated Securities to a person entitled to hold an interest in a Global
Note under the New New Indenture, such Certificated Securities may, unless a
Global Note has previously been exchanged for Certificated Securities, be
exchanged for an interest in a Global Note representing the principal amount of
New Notes being transferred.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 400,000,000 shares of
common stock, $.01 par value, and 5,000,000 shares of Preferred Stock, par value
$.01 per share. The following brief description of the Company's capital stock
is not complete and is subject in all respects to applicable law and the
provisions of the Company's Certificate of Incorporation and Bylaws, copies of
which have been filed or incorporated as exhibits in the Company's various
filings with the SEC and to the applicable provisions of the Delaware General
Corporation Law.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Such stockholders do not have
cumulative voting rights in the election of directors. Subject to the rights of
any holders of Preferred Stock, holders of common stock are entitled to receive
ratably dividends, if any, as may be declared by the Board of Directors out of
funds legally available for dividend. For a description of the Company's
dividend policy see "Dividend Policy" located earlier in this prospectus. In the
event of any liquidation, dissolution or winding up of the Company, the holders
of the Common Stock would be entitled to receive, after payment or provision for
payment of all its debts and liabilities, all of the assets of the Company
available for distribution, subject to the rights of any holders of Preferred
Stock. The holders of Common Stock have no preemptive rights to subscribe for
additional shares of the Company and no right to convert their stock into other
securities. In addition, there are no redemption or sinking fund provisions
applicable to the Common Stock. All of outstanding shares of Common Stock are
fully paid and nonassessable.
PREFERRED STOCK
The Company has 5,000,000 shares of authorized Preferred Stock, of which
65,000 shares have been designated as Series A convertible Preferred Stock. The
Board of Directors is authorized to provide for the issuance of additional
classes and series of Preferred Stock out of remaining undesignated shares, and
the Board of Directors may establish the voting powers, designations,
preferences and relative, participating, optional or other special rights and
qualifications, limitations or restrictions of any such additional class or
series of Preferred Stock, including the dividend rights, dividend rate, terms
of redemption, redemption price or prices, conversion rights and liquidation
preferences of the shares constituting any series, without any further vote or
action by the stockholders of the Company. The issuance of Preferred Stock by
the Board of Directors could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company, thereby delaying, deferring or preventing a change in control of the
Company.
Series A Convertible Preferred Stock. As part of the recapitalization the
Company issued 62,500 shares of Series A convertible Preferred Stock. On any
matter on which the holders of Series A Preferred Stock may vote, each holder is
entitled to one vote for each share held. The holders of Series A convertible
Preferred Stock may vote only as a separate class, and their votes will not be
counted together with the holders of Common Stock as a single class. If declared
by the board of directors, holders of shares of Series A
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convertible preferred stock are entitled to receive cash dividends, out of funds
legally available therefor, equal to the amount of dividends payable on the
number of shares of Common Stock into which each share of Series A Preferred
Stock is convertible. With respect to dividend rights, the Series A Preferred
Stock ranks on a parity with the Common Stock. No class or series of equity
securities may rank senior to the Series A Preferred Stock as to the payment of
dividends. In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company, the holders of shares of Series A Preferred Stock
are entitled to receive out of assets of the Company available for distribution
to stockholders under applicable law, before any payment or distribution of
assets is made to holders of Common Stock or any other class or series of stock
ranking junior to the Series A Preferred Stock upon liquidation, liquidating
distributions in the amount of $1,000 per share plus accrued and unpaid
dividends (whether or not earned) to the date fixed for such liquidation,
dissolution or winding up. The Series A Preferred Stock is convertible at the
option of the holder on or after 180 days from the date of issuance, and will
automatically convert on the second anniversary of the date of issuance, into a
number of shares of Common Stock equal to $100 divided by the conversion price
(equal to $1.50, subject to certain adjustments). The holders of Series A
Preferred Stock have no preemptive rights to subscribe for additional shares of
the Company. In addition, there are no redemption or sinking fund provisions
applicable to the Series A Preferred Stock. All of the outstanding shares of
Series A Preferred Stock are fully paid and nonassessable.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is subject to the provisions of section 203 of the Delaware
General Corporation Law. Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns or within three years prior to the proposed business
combination has owned 15% or more of the corporation's voting stock.
CERTAIN CHARTER AND BYLAW PROVISIONS
The Company's Certificate of Incorporation and Bylaws contain certain
provisions that could discourage potential takeover attempts and make attempts
by stockholders to change management more difficult. The Certificate of
Incorporation and Bylaws provide that special meetings of stockholders may be
called only by the Board of Directors or upon the written demand of the holders
of not less than 30% of the votes entitled to be cast at a special meeting.
The Certificate of Incorporation permits the board of directors to create
new directorships and the Company's Bylaws permit the board of directors to
elect new directors to serve the full term of the class of directors in which
the new directorship was created. The Bylaws also provide that the Board of
Directors (or its remaining members, even though less than a quorum) is
empowered to fill vacancies on the board of directors occurring for any reason
for the remainder of the terms of the class of directors in which the vacancy
occurred.
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The Company's Certificate of Incorporation provides that liability of
directors of the Company is eliminated to the fullest extent permitted under the
Delaware General Corporation Law. As a result, no director of the Company will
be liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability: (1) for any breach of the
director's duty of loyalty to the Company or its stockholders; (2) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (3) for any willful or negligent payment of an unlawful
dividend, stock purchase or redemption; or (4) for any transaction from which
the director derived an improper personal benefit.
REGISTRATION RIGHTS
The Company has entered into a registration rights agreement with FBR (the
"Equity Registration Rights Agreement") on behalf of the purchasers of Common
Stock and Preferred Stock in the Recapitalization and on behalf of the holders
of Old Notes who received Preferred Stock in the Exchange Offer. In addition,
the Company has entered into registration rights agreements with each of City,
Sovereign and one private investor which are substantially identical to the
Equity Registration Rights Agreement. Together these agreements are referred to
as the "Equity Registration Rights Agreements." Pursuant to the Equity
Registration Rights Agreements, as amended, the Company had agreed to file with
the SEC, on or before September 16, 1998 a registration statement relating to
the shares of Common Stock issued as part of the recapitalization and the shares
of Common Stock underlying the shares of Preferred Stock issued in the Exchange
Offer. The purchasers in the Recapitalization have agreed to extend this
deadline to December 15, 1998, and this Registration Statement has been filed in
accordance with the Equity Registration Rights Agreement. The Company will use
its reasonable efforts to maintain the effectiveness of this registration
statement continuously for a period of two years or until the shares of Common
Stock covered by this registration statement may be sold without restriction
under the Securities Act. However, such continual effectiveness is subject to
periods of time when the Company must suspend the use of this prospectus for the
purpose of amending the registration statement.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock and Series A
convertible Preferred Stock is American Stock Transfer & Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
As of July 31, 1999 the Company had 3,656,666 shares of common stock
outstanding. Of these shares, 1,230,000 shares of Common Stock are freely
tradable without restriction or further registration under the Securities Act,
unless purchased by "affiliates" of the Company, as defined under the Securities
Act. The remaining 2,426,666 shares of Common Stock are "restricted shares" and
are subject to restrictions under the Securities Act. In addition 4,167,554
shares are issuable upon the conversion of Preferred Stock.
In general, under Rule 144, a person (or person whose shares are
aggregated) who has beneficially owned restricted shares for at least one year,
including a person who may be deemed an affiliate of the Company, is entitled to
sell within any three-month period a number of shares of Common Stock that does
not exceed the greater of 1% of the then-outstanding shares of Common Stock
(approximately 305,667 shares) or the average weekly trading volume of the
Common Stock on the Nasdaq Stock Market during the four calendar weeks preceding
such sale. Sale under Rule 144 are subject to certain restrictions relating to
manner of sale, notice and the availability of current public information about
the Company. A person who has not been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned shares for
at least two years, would be entitled to sell such shares without regard to the
volume limitations, manner of sale provisions and other requirements of Rule
144.
Sovereign Bank NA and City Mortgage Services each have the option to
purchase 666,666 shares of Common Stock at a price of $15.00 per share which, if
exercised in full, would add 13,333,334 shares of Common Stock to the number of
shares of Common Stock outstanding on the date these options are exercised. All
of these shares are being registered in this registration statement.
Furthermore, the Company's stock option plans authorize the granting of options
to purchase an aggregate of 1.4 million shares of Common Stock, of which options
to purchase 786,859 shares of common stock have been granted.
The Company has filed, and intends to continue to file, registration
statements on Form S-8 under the Securities Act to register shares of Common
Stock subject to outstanding options or future grants under the Company's stock
option plans.
131
<PAGE> 132
PLAN OF DISTRIBUTION
With respect to resales of New Notes and Common Stock issuable upon
conversion of a portion of the New Notes (assuming stockholder approval of such
conversion), based on existing interpretations of the Staff of the SEC, the
Company believes that the New Notes and Common Stock issued pursuant to the
Exchange Offer in exchange for the Old Notes may be offered for resale, resold
and otherwise transferred by holders thereof (other than any broker-dealers or
"affiliates" of the Company with the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
requirements of the Securities Act; provided such New Notes are acquired in the
ordinary course of such holder's business and such holder's are not engaged in,
have no arrangement with any person to participate in, and do not intend to
engage in any public distribution of the New Notes. Each participating
broker-dealer that holds out Old Notes that were acquired for its own account as
a result of market-making or other trading activities (other than Old Notes
acquired directly from the Company), may exchange such Old Notes for New Notes
pursuant to the Exchange Offer. However, a participating broker-dealer may be
deemed to be an "underwriter" within the meaning of the Securities Act and,
therefore, will be required to deliver a prospectus satisfying the requirements
of the Act in connection with any resales by it of such New Notes. Each
participating broker-dealer must acknowledge that it will deliver a resale
prospectus in connection with any resale of such New Notes. The Letter of
Transmittal which accompanies this Memorandum states that by so acknowledging
and by delivering a resale prospectus, a participating broker-dealer will be
deemed not to be acting in the capacity of an "underwriter" (within the meaning
of Section 2(11) of the Securities Act).
The Company will not receive any proceeds from the sale of the New Notes.
WHERE YOU CAN FIND MORE INFORMATION
The Company files annual, quarterly and current reports, proxy statements
and other information with the SEC. You may read and copy these reports,
statements or other information at the SEC's public reference room in
Washington, D.C. located at 450 Fifth Street, N.W., Washington, D.C. 20549. The
SEC also maintains regional offices where you can read and copy the reports.
These are located at 500 West Madison Street, Room 1400, Chicago, Illinois 60606
and at 7 World Trade Center, Suite 1300, New York, New York 10048. You can
request copies of these documents, upon payment of photocopying fees, by writing
to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the public reference rooms. Our SEC filings are also available to
the public on the SEC's internet site (http://www.sec.gov). These documents are
also available for viewing and copying at the offices of The Nasdaq Stock
Market, Inc. at 1735 K Street, NW, Washington, D.C. 20006-1506.
This Memorandum is part of a registration statement on Form S-1 that we
filed with the SEC. This Memorandum does not contain all of the information in
that registration statement. For further information with respect to the Company
and the securities offered under the registration statement, you should review
the registration statement. You can obtain the registration statement from the
SEC and The Nasdaq Stock Market at the public reference facilities we referred
to above.
132
<PAGE> 1
EXHIBIT T3E2
CONSENT OF NEW HOLDER OF
12 1/2% SUBORDINATED NOTES DUE 2001 OF
ALTIVA FINANCIAL CORPORATION
The undersigned holder (the "Holder") of $_______ principal amount of the
12 1/2% Subordinated Notes due 2001 (the "Notes") of Altiva Financial
Corporation hereby consents to the execution by Altiva Financial Corporation, as
issuer of the Notes, and by American Stock Transfer & Trust Company, as trustee
under the Indenture dated as of June 29, 1999 (the "Indenture"), of an Amended
and Restated Indenture (the "Amended Indenture"). The undersigned acknowledges
that the purpose of executing the Amended Indenture is to delete the following
from the Indenture:
(1) Section 3.9;
(2) Section 5.1(f);
(3) Section 5.13;
(4) Section 9.1;
(5) Section 9.4;
(6) Section 9.5;
(7) Section 9.6;
(8) Section 9.7;
(9) Section 9.8;
(10) Section 9.9;
(11) Section 9.10;
(12) Section 9.11;
(13) Section 9.12;
(14) Section 9.13;
(15) Section 9.14; and
(16) Article Ten
The Company and the Trustee are authorized to amend the Indenture at their
discretion to conform to the changes consented to herein. The consent shall
become effective upon the consummation of the exchange offer currently being
conducted by the Company relating to the exchange of the Notes for new 12%
Secured Convertible Senior Notes of the Company due 2006 in a discounted
principal amount.
Executed this __ day of February, 2000.
[Beneficial Owners Sign Here]
Name:
---------------------------------
By:
---------------------------------
Name:
Title:
[Registered Holders Sign Here]
Name:
---------------------------------
By:
---------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT T3E(3)
LETTER OF TRANSMITTAL
ALTIVA FINANCIAL CORPORATION
OFFER TO EXCHANGE ALL OUTSTANDING 12 1/2% SUBORDINATED NOTES DUE 2001
FOR
12% SECURED CONVERTIBLE SENIOR NOTES DUE 2006
- ------------------------------------------------------------------------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT
5:00 PM., NEW YORK CITY TIME, ON MARCH 3, 2000,
UNLESS THE OFFER IS EXTENDED.
- ------------------------------------------------------------------------------
To America Stock Transfer & Trust Company
(the "Exchange Agent")
By Mail, By Overnight Courier or By Facsimile:
By Hand: (For Eligible Institutions Only)
America Stock Transfer & Trust Company (718) 921-8334
40 Wall Street
New York, New York, 10005 Confirm by Telephone:
(718) 921-8293
For Information Call:
Isaac Kagen
(718) 921-8293
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE
LISTED ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. YOU SHOULD READ THE
INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL BEFORE YOU COMPLETE THIS
LETTER OF TRANSMITTAL.
By signing below, you will acknowledge receipt of the Confidential
Private Placement Memorandum dated February 23, 2000 of Altiva Financial
Corporation, formerly Mego Mortgage Corporation (the "Company"), and this
Letter of Transmittal, which together constitute our offer (the "Exchange
Offer") to exchange up to $19,382,000 principal amount of its 12% Secured
Convertible Senior Notes due 2006 (the "New Notes"), for up to $30,480,000
principal amount of its outstanding 12 1/2% Subordinated Notes due 2001 (the
"Old Notes"), plus premium, if any, and accrued but unpaid interest thereon.
The term "Expiration Date" means 5:00 p.m., New York City time, on March 3,
2000, unless the Exchange Offer is extended. In such case, "Expiration Date"
shall mean the latest date and time to which the Exchange Offer is extended.
Capitalized terms used but not defined herein have the meaning given to them in
the Memorandum that is a part of the registration statement.
This Letter of Transmittal is to be used by holders of Old Notes if
you plan to:
(1) tender the Old Notes by book-entry transfer to the Exchange
Agent's account at The Depository Trust Company (the "Book-Entry Transfer
Facility") pursuant to the procedures set forth on page 37 of the Memorandum
under the caption "The Exchange Offer -- Terms of the
<PAGE> 2
Exchange Offer -- Procedures for Tendering Old Notes" by any financial
institution that is a participant in the Book-Entry Transfer Facility and whose
name appears on a security position listing as the owner of Old Notes (such
participants, acting on behalf of holders, are referred to in this Letter of
Transmittal, together with such holders, as "Acting Holders"); or
(2) tender the Old Notes according to the guaranteed delivery
procedures described on page 38 of the Memorandum under the caption "The
Exchange Offer -- Terms of the Exchange Offer -- Guaranteed Delivery
Procedures." See Instruction 2. Please note that delivery of documents to the
Book-Entry Transfer Facility does not constitute delivery to the Exchange
Agent.
The term "Holder" with respect to the Exchange Offer means any person
in whose name Old Notes are registered on our books or any other person who has
obtained a properly completed bond power from the registered holder. You must
complete, execute and deliver this Letter of Transmittal to indicate the action
you wish to take with respect to the Exchange Offer. If you want to tender your
Old Notes, you must complete this letter in its entirety.
[ ] CHECK HERE IF YOU ARE DELIVERING TENDERED CURRENT NOTES BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE
BOOK ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:
------------------------------------------------
Account Number:
------------------------------------------------
Transaction Code Number:
------------------------------------------------
Principal Amount of Tendered Old Notes:
------------------------------------------------
If Holders desire to tender Old Notes pursuant to the Exchange Offer
and (1) time will not permit this Letter of Transmittal or other required
documents to reach the Exchange Agent prior to the Expiration Date, or (2) the
procedures for book-entry transfer cannot be completed prior to the Expiration
Date, such Holders may effect a tender of such Old Notes in accordance with the
guaranteed delivery procedures set forth on page 38 of the Memorandum under the
caption "The Exchange Offer -- Terms of the Exchange Offer -- Guaranteed
Delivery Procedures." See Instruction 2 below.
2
<PAGE> 3
[ ] CHECK HERE IF YOU ARE DELIVERING TENDERED CURRENT NOTES PURSUANT TO
A NOTICE OF GUARANTEED DELIVERY DELIVERED TO THE EXCHANGE AGENT AND
COMPLETE THE FOLLOWING (SEE INSTRUCTION 2):
Name of Registered or Acting Holder(s):
---------------------------------------------------------------------
Window Ticket No. (if any):
---------------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
---------------------------------------------------------------------
Name of Eligible Institution
that Guaranteed Delivery:
---------------------------------------------------------------------
If Delivered by Book-Entry Transfer,
the Account Number:
---------------------------------------------------------------------
Transaction Code Number:
---------------------------------------------------------------------
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER
Name:
---------------------------------------------------------------------
Address:
---------------------------------------------------------------------
---------------------------------------------------------------------
Attention:
---------------------------------------------------------------------
3
<PAGE> 4
[ ] CHECK HERE IF YOU ARE A QUALIFIED INSTITUTIONAL BUYER AS SUCH TERM IS
DEFINED IN RULE 144A UNDER THE SECURITIES ACT OF 1933, AS AMENDED (A
SHEET CONTAINING THE DEFINITION OF THE TERM QUALIFIED INSTITUTIONAL
BUYER IS INCLUDED IN THE INSTRUCTIONS TO THIS LETTER OF TRANSMITTAL)
Please give the reasons for your status as a Qualified Institutional
Buyer:
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ ACCOMPANYING INSTRUCTIONS CAREFULLY
4
<PAGE> 5
LADIES AND GENTLEMEN:
Subject to, and effective upon, acceptance for exchange of the Old
Notes tendered with this Letter of Transmittal in accordance with the terms and
conditions of the Exchange Offer and that certain Exchange Agreement by and
among the Company and the holders of the Old Notes who are parties thereto (the
"Exchange Agreement"), the Holder hereby sells, assigns and transfers to Altiva
all right, title and interest in and to all of the Old Notes that are being
tendered for exchange hereby. The Holder hereby irrevocably constitutes and
appoints the Exchange Agent its true and lawful agent and attorney-in-fact with
respect to such securities, with full power of substitution (such power of
attorney being deemed to be an irrevocable power coupled with an interest), to:
(1) deliver Old Notes tendered by this Letter of Transmittal or
transfer ownership of such securities on the account books maintained by DTC
together, in either such case, with the accompanying evidences of transfer and
authority, to Altiva upon the receipt by the Exchange Agent, as the Holder's
agent, of the consideration therefor pursuant to the Exchange Offer; and
(2) execute any instrument which the Trustee may deem necessary or
advisable to accomplish the purposes of the Exchange Offer now or in the
future, including, but not limited to, the Exchange Agreement between the
Company and U.S. Trust Company of New York, on behalf and for the benefit of
the holders of the New Notes (the "Exchange Agreement"), the Registration
Rights Agreement between the Company and U.S. Trust Company of New York, on
behalf and for the benefit of the holders of the New Notes, the Intercreditor
Agreement between the among the Company, Value Partners, Ltd., U.S. Trust
Company of New York, as collateral agent thereunder and between the Company and
U.S. Trust Company of New York, on behalf and for the benefit of the holders of
the New Notes, the Security Agreement between the Company and U.S. Trust
Company of New York, on behalf and for the benefit of the holders of the New
Notes who are Qualified Institutional Buyers (as defined in Rule 144A of the
Securities Act of 1933, as amended (the "QIB Security Agreement") or (if
applicable) the Security Agreement between the Company and U.S. Trust Company
of New York, on behalf and for the benefit of the holders of the New Notes who
are not Qualified Institutional Buyers (the "Non-QIB Security Agreement,
together with the QIB Security Agreement, the "Security Agreements") and
financing statements related to the collateral pledges under the Security
Agreements and any amendments, supplements or other related actions to any of
the foregoing which is consistent with the terms of the Exchange Agreement
(3) receive all benefits and otherwise exercise all rights of
beneficial ownership of such Old Notes.
All authority herein conferred or agreed to be conferred in this
Letter of Transmittal shall survive the death or incapacity of the Holder, and
any obligation of the Holder under this Letter of Transmittal shall be binding
upon the heirs, personal representatives, successors and assigns of the Holder.
Except as stated in the Memorandum, this tender is irrevocable.
5
<PAGE> 6
A tender of Old Notes pursuant to the procedures described in the
Memorandum and in the instructions to this Letter of Transmittal will
constitute the Holder's acceptance of the terms and conditions of the Exchange
Offer and a binding agreement between the tendering Holder of Old Notes and
Altiva upon the terms and subject to the conditions of the Exchange Offer. The
Holder recognizes that, under certain circumstances set forth in the
Memorandum, Altiva may not be required to accept any of the Old Notes tendered
for exchange hereby.
BY TENDERING OLD NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, THE
HOLDER IS DEEMED TO REPRESENT AND AGREE, AND HEREBY REPRESENTS AND AGREES,
THAT:
(1) The Holder has full power and authority to tender, exchange, sell,
assign and transfer the Old Notes tendered by this Letter of Transmittal and to
acquire the New Notes issuable upon the exchange of such Old Notes.
(2) The Exchange Agent, as agent of the Company, will acquire good and
unencumbered title to such tendered Old Notes, free and clear of all liens,
restrictions, charges and encumbrances.
(3) The Old Notes tendered hereby are not subject to any adverse claim
or encumbrance when the same are accepted by the Company.
(4) The Holder will, upon reasonable request, execute and deliver any
additional documents deemed by the Company or the exchange agent to be
necessary or desirable to complete the exchange, sale, assignment and transfer
of the Old Notes tendered by this Letter of Transmittal.
(5) Holder represents and warrants to the Company that the New Notes
to be acquired are being acquired for its own account for investment and with
no intention of distributing or reselling such New Notes or any part thereof or
interest therein in any transaction which would be in violation of federal or
State securities laws.
(6) Holder acknowledges that prior to the date hereof it has received
the Memorandum.
(7) Holder is not an affiliate of the Company within the meaning of
Rule 405 under the Securities Act of 1933, as amended (the "Securities Act");
or if Holder is such an affiliate it acknowledges that it must comply with the
registration and prospectus delivery requirements of the Securities Act, as
amended in connection with any resale of the New Notes.
(8) Each Holder who is a participating Broker-Dealer (as defined in
the Memorandum) holding Old Notes acquired for its own account as a result of
market-making or other trading activities that will receive New Notes in
exchange for such Old Notes pursuant to the Exchange Offer further represents
and agrees that it will deliver a prospectus in connection with any resale of
such New Notes during the period required by the Securities Act. By
acknowledging that it will deliver and by delivering a prospectus, a
participating Broker-Dealer will not be deemed to admit
6
<PAGE> 7
that it is an "Underwriter" within the meaning of the Securities Act. By
tendering Old Notes and executing this Letter of Transmittal, each Holder who
is a Broker-Dealer that will receive New Notes for its account in exchange for
Old Notes acquired directly from the Company acknowledges that it may not rely
on the interpretations of the staff of the division of corporate finance of the
Securities and Exchange Commission that are being relied upon by the Company in
making the Exchange Offer and, in connection with the resale of any such New
Notes, must comply with the registration and prospectus delivery requirements
of the Securities Act.
(9) Each Holder who is a qualified institutional buyer, as such term
is defined in Rule 144A of the Securities Act (a "QIB") understands and agrees
that it may resell the New Notes only: (i) to the Company and (ii) to any
Person reasonably believed by such Purchaser to be a QIB In connection with any
transfer pursuant to clause (ii) above, the Company may request reasonable
certification as to the status of the transferor's transferee as a QIB.
(10) Holder understands and that shares of any shares of the common
stock of the Company, par value $.01 (the "Common Stock") received by Holder as
a result of the conversion of any of the New Notes received by Holder in the
Exchange Offer may not be resold by Holder except (i) pursuant to registration
statement filed with the Securities and Exchange Commission for the purpose of
registering the resale of the Common Stock received by Holder or (ii) pursuant
to a valid exemption from the registration requirements of the Securities Act
of 1933, as amended (the "Securities Act"); however, prior to any proposed
resale of shares of Common Stock by Holder pursuant to a valid exemption from
the registration requirements of the Securities Act, Holder shall furnish to
the Company an opinion of counsel in a form reasonably satisfactory to the
Company which shall state the exemption relied upon by Holder and the facts
relied upon in support of the exemption.
(11) Holder agrees to the imprinting, so long as appropriate, (i) on
any certificate that may be issued from time to time to evidence the New Notes
and (ii) on certificates representing the Common Stock issuable upon conversion
of the New Notes of appropriate legends regarding any restrictions on
transferability of the New Notes.
(12) Holder agrees to the terms of the Exchange Agreement by and
among the Company and the U.S. Trust Company of New York, acting on behalf of
the Holder, including the terms regarding the tendering of the Old Notes held
by the Holder, and all accrued but unpaid interest thereon and any premium, if
any, in exchange for New Notes in a discounted principal amount.
7
<PAGE> 8
HOLDER SIGN HERE
X
-----------------------------------------------------------------------------
X
-----------------------------------------------------------------------------
(Signature(s) of Owner(s))
Dated
-------------------------------------------------------------------------
Holder's Telephone Number
-----------------------------------------------------
(Must be signed by the registered holder(s) exactly as name(s) appear(s) on Old
Notes. If signature is by an attorney, executor, administrator, trustee,
guardian or others acting in a fiduciary capacity, please set forth full title
and see Instruction 5.)
SIGNATURE(S) GUARANTEED
(SEE INSTRUCTION 1)
- ------------------------------------------------------------------------------
(Firm - Please Print)
- ------------------------------------------------------------------------------
(Authorized Signature)
- ------------------------------------------------------------------------------
(Date)
<TABLE>
<CAPTION>
BOX 1 BOX 2
SPECIAL REGISTRATION INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(See Instruction 5) (See Instruction 5)
<S> <C>
To be completed ONLY if New Notes issued in To be completed ONLY if or New Notes
exchange for Old Notes accepted for exchange issued in exchange for Old Notes
are to be issued in the name of someone other accepted for exchange are to be sent to
than the undersigned. someone other than the undersigned,
or to the undersigned at an address
other than that shown above.
Issue New Notes to: Deliver certificate(s) to:
Name Name
------------------------------------------ -------------------------------------------
(Please Print) (Please Print)
Address Address
--------------------------------------- ----------------------------------------
- ---------------------------------------------- -----------------------------------------------
(Include Zip Code) (Include Zip Code)
- ---------------------------------------------- -----------------------------------------------
(Tax Identification or Social Security Number) (Tax Identification or Social Security Number)
</TABLE>
8
<PAGE> 9
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER
1. Delivery of this Letter of Transmittal or Book-Entry
Confirmations. The Exchange Agent must receive the following documents at its
address set forth on the first page of this Letter of Transmittal prior to the
Expiration Date:
- confirmation of book-entry transfer into the Exchange Agent's
account with the Book-Entry Transfer Facility for tendered Old
Notes,
- a properly completed and duly executed copy of this Letter of
Transmittal (or facsimile thereof),
- a Substitute Form W-9 (or facsimile thereof), and
- any other documents required by this Letter of Transmittal.
The method of delivery of all required documents is at the election
and risk of the tendering Holder and delivery will be deemed made only when
actually received by the Exchange Agent. If delivery is by mail, we recommend
registered mail with return receipt requested, properly insured. Instead of
delivery by mail, we recommend that the Holder use an overnight or hand
delivery service. In all cases, you should allow sufficient time to assure
timely delivery. Neither Altiva nor the Exchange Agent is under an obligation
to notify any tendering Holder of the Altiva's acceptance of tendered Old Notes
prior to the Closing of the Exchange Offer.
2. Guaranteed Delivery Procedures. Holders who wish to tender their
Old Notes must tender their Old Notes according to the guaranteed delivery
procedures set forth below if they cannot:
- comply with the procedures for book-entry transfer prior to the
Expiration Date, or
- deliver this Letter of Transmittal and any other documents
required by the Letter of Transmittal to the Exchange Agent, or
- complete the procedures for book-entry transfer prior to the
Expiration Date.
Pursuant to such procedures:
(1) such tender must be made by or through a firm which is a
member firm of a registered national securities exchange or of the
National Association of New Notes Dealers, Inc., or is a commercial
bank or trust company having an office or correspondent in the United
States or an "eligible guarantor institution" within the meaning of
Rule 17Ad-15 under the New Notes Exchange Act of 1934, as amended (an
"Eligible Institution");
(2) prior to the Expiration Date, the Exchange Agent must have
received from the Holder and the Eligible Institution a properly
completed and duly executed Notice of Guaranteed Delivery (by
facsimile transmission, mail or hand delivery) setting forth:
- the name and address of the Holder,
- the principal amount of tendered Old Notes,
- stating that the tender is being made thereby,
9
<PAGE> 10
- guaranteeing that, within three Nasdaq Stock Market trading days
after the Expiration Date, the Letter of Transmittal (or
facsimile thereof), together with a confirmation of book-entry
transfer into the Exchange Agent's account with the Book-Entry
Transfer Facility for Old Notes and any other required documents
will be deposited by the Eligible Institution with the Exchange
Agent; and
(3) The Exchange Agent must receive within three Nasdaq Stock
Market trading days after the Expiration Date:
- such properly completed and executed Letter of Transmittal,
- a confirmation of book-entry transfer into the Exchange Agent's
account with the Book-Entry Transfer Facility for Old Notes, and
- all other documents required by the Letter of Transmittal.
Any Holder who wishes to tender Old Notes pursuant to the guaranteed
delivery procedures described above must ensure that the Exchange Agent
receives the Notice of Guaranteed Delivery relating to such Old Notes prior to
the Expiration Date. Failure to complete the guaranteed delivery procedures
outlined above will not, of itself, affect the validity or effect a revocation
of any Letter of Transmittal form properly completed and executed by a Holder
who attempted to use the guaranteed delivery process.
3. Tender by Holder. Only a Holder of Old Notes may tender such Old
Notes in the Exchange Offer. Any beneficial owner of Old Notes who is not the
registered Holder and who wishes to tender should arrange with such Holder to
execute and deliver this Letter of Transmittal on such owner's behalf.
4. Signatures on the Letter of Transmittal; Guarantee of Signatures.
Signature. The signature on this Letter of Transmittal must
correspond with the name as it appears on our security position listing as the
owner of the Old Notes.
If any of the tendered Old Notes are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal. If any
tendered Old Notes are held in different names on several Old Notes, you must
complete, sign and submit as many separate copies of the Letter of Transmittal
documents as there are names in which tendered Old Notes are held.
Bond Powers. If this Letter of Transmittal is signed by the registered
Holder and New Notes are to be issued and any untendered or unaccepted
principal amount of Old Notes are to be reissued or returned to the registered
Holder, then the registered Holder need not and should not provide a separate
bond power. In any other case, the registered Holder must transmit a properly
completed separate bond power with this Letter of Transmittal (in either case,
with respect to a participant in the Book-Entry Transfer Facility whose name
appears on a security position listing as the owner of Old Notes, exactly as
the name of the participant appears on such security position listings), with
the signature on the bond power guaranteed by an Eligible Institution. The bond
powers need not be guaranteed if they are signed.
If this Letter of Transmittal or any bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should indicate that capacity when signing. Unless waived by Altiva,
they must submit evidence satisfactory to Altiva of their authority to so act
with this Letter of Transmittal.
Signature Guarantee. No signature guarantee is required if:
10
<PAGE> 11
(1) this Letter of Transmittal is signed by a participant in the
Book-Entry Transfer Facility whose name appears on a security
position listing as the owner of the tendered Old Notes, and
- the New Notes or Old Notes not tendered or not accepted are to
be deposited to such participant's account at the Book-Entry
Transfer Facility, and
- neither the "Special Delivery Instructions" (Box 2) nor the
"Special Registration Instructions" (Box 1) has been completed,
or
(2) such Old Notes are tendered for the account of an Eligible
Institution.
In all other cases, all signatures on this Letter of Transmittal must
be guaranteed by an Eligible Institution.
5. Special Registration and Delivery Instructions. Tendering Holders
should indicate, in the applicable box, the account at the Book-Entry Transfer
Facility to which the New Notes and/or substitute Old Notes for principal
amounts not tendered or not accepted for exchange are to be sent (or deposited)
if different from the name and address or account of the person signing this
Letter of Transmittal. If the name is different, the employer identification
number or social security number of the person named must also be indicated and
the tendering Holders should complete the applicable box.
If no such instructions are given, the New Notes (and any Old Notes
not tendered or not accepted) will be deposited at such registered owner's
account at the Book-Entry Transfer Facility.
6. Security Transfer Taxes. Altiva will pay all security transfer
taxes, if any, applicable to the exchange of Old Notes tendered and accepted
pursuant to the Exchange Offer.
Except as provided in this Instruction 6, it will not be necessary
for transfer tax stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
7. Tax Identification Number. Federal income tax law requires that
a Holder of any Old Notes which are accepted for exchange must provide Altiva
(as payor) with its correct Taxpayer Identification Number ("TIN"). In the case
of a Holder who is an individual, this number is his or her social security
number. If Altiva is not provided with the correct TIN, the Holder may be
subject to a $50 penalty imposed by the Internal Revenue Service. (If
withholding results in an over-payment of taxes, a refund may be obtained.)
Certain Holders (including, among others, all corporations and certain foreign
individuals) are not subject to these backup withholding and reporting
requirements. See the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional instructions.
To prevent backup withholding, each tendering Holder must provide
such Holder's correct TIN by completing the Substitute Form W-9 set forth
herein, certifying that the TIN provided is correct (or that such Holder is
awaiting a TIN), and that (1) the Holder has not been notified by the Internal
Revenue Service that such Holder is subject to backup withholding as a result
of failure to report all interest or dividends or (2) the Internal Revenue
Service has notified the Holder that such Holder is no longer subject to backup
withholding. If the Old Notes are registered in more than one name or are not
in the name of the actual owner, see the enclosed "Guidelines for Certification
of Taxpayer Identification Number on Substitute Form W-9" for information on
which TIN to report.
Altiva reserves the right in its sole discretion to take whatever
steps are necessary to comply with Altiva's obligation regarding backup
withholding.
8. Validity of Tenders. Altiva will determine all questions as to
the validity, form, eligibility (including time of receipt), acceptance of
tendered Old Notes and withdrawal of tendered Old Notes. Altiva's
11
<PAGE> 12
determination will be final and binding. Altiva reserves the absolute right to
reject any and all Old Notes not properly tendered or any Old Notes it would be
unlawful for Altiva to accept. Altiva also reserves the right to waive any
defects or irregularities in or conditions of tenders of Old Notes. The
interpretation of the terms and conditions of the Exchange Offer (including
this Letter of Transmittal and these instructions) by Altiva will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as Altiva
shall determine. Altiva will use reasonable efforts to give notification of
defects or irregularities with respect to tenders of Old Notes, but shall not
incur any liability for failure to give such notification.
9. Waiver of Conditions. Altiva reserves the absolute right to
amend, waive or modify specified conditions in the Exchange Offer in the case
of any tendered Old Notes.
10. No Conditional Tender. No alternative, conditional, irregular or
contingent tender of Old Notes on transmittal of this Letter of Transmittal
will be accepted.
11. Requests for Assistance or Additional Copies. Questions and
requests for assistance and requests for additional copies of the Memorandum
may be directed to the Exchange Agent at the address specified in the
Memorandum. Holders may also contact their broker, dealer, commercial bank,
trust company or other nominee for assistance concerning the Exchange Offer.
12. Acceptances of Tendered Old Notes and Issuance of New Notes;
Return of Old Notes. Subject to the terms and conditions of the Exchange Offer,
Altiva will accept for exchange all validly tendered Old Notes as soon as
practicable after the Expiration Date and will issue New Notes therefor as soon
as practicable thereafter. For purposes of the Exchange Offer, Altiva will be
deemed to have accepted tendered Old Notes when, as and if Altiva has given
written or oral notice thereof to the Exchange Agent. If any tendered Old Notes
are not exchanged pursuant to the Exchange Offer for any reason, such
unexchanged Old Notes will be credited to the undersigned's account at the
Book-Entry Transfer Facility designated above or at a different address as may
be indicated under "Special Registration and Delivery Instructions" above.
13. Withdrawal. Tenders may be withdrawn only pursuant to the
limited withdrawal rights set forth on page __ of the Memorandum under the
caption "The Exchange Offer -- Withdrawal of Tenders of Old Notes."
12
<PAGE> 13
DEFINITION OF QUALIFIED INSTITUTIONAL BUYER
Under Rule 144A under the Securities Act, a Qualified Institutional Buyer
includes the following:
1. Any of the following entities, acting for its own account or the
accounts of other qualified institutional buyers, that in the aggregate owns and
invests on a discretionary basis at least $100 million in securities of issuers
that are not affiliated with the entity:
(A) Any insurance company as defined in Section 2(13) of the Securities
Act;
(B) Any investment company registered under the Investment Company Act
of 1940 (the "Investment Company Act") or any business development company
as defined in Section 2(a)(48) of that act;
(C) Any small business investment company licensed by the U.S. Small
Business Administration under Section 301(c) or (d) of the Small Business
Investment Act of 1958;
(D) Any plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or its political
subdivisions, for the benefit of its employees;
(E) Any employee benefit plan within the meaning of Title I of the
Employee Retirement Income Security Act of 1974;
(F) Any trust fund whose trustee is a bank or trust company and whose
participants are exclusively plans of the types identified in (D) or (E)
above, except trust funds that include as participants individual
retirement accounts or H.R. 10 plans.
(G) Any business development company as defined in Section 202(a)(22)
of the Investment Advisers Act of 1940;
(H) Any organization described in Section 501(c)(3) of the Internal
Revenue Code, corporation (other than a bank as defined in Section 3(a)(2)
of the Act or a savings and loan association or other institution
referenced in Section 3(a)(5)(A) of the Act or a foreign bank or savings
and loan association or equivalent institution), partnership, or
Massachusetts or similar business trust; and
(I) Any investment adviser registered under the Investment Advisers
Act;
2. Any dealer registered pursuant to Section 15 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), acting for its own
account or the accounts of other qualified institutional buyers, that in the
aggregate owns and invests on a discretionary basis at least $10 million of
securities of issuers that are not affiliated with the dealer, provided that
securities constituting the whole or a part of an unsold allotment to or
subscription by a dealer as a participant in a public offering shall not be
deemed to be owned by such dealer;
13
<PAGE> 14
3. Any dealer registered pursuant to Section 15 of the Exchange Act
acting in a riskless principal transaction on behalf of a qualified
institutional buyer;
4. Any investment company registered under the Investment Company Act,
acting for its own account or for the accounts of other qualified institutional
buyers, that is part of a family of investment companies which own in the
aggregate at least $100 million in securities of issuers, other than issuers
that are affiliated with the investment company or are part of such family of
investment companies. "Family of investment companies" means any two or more
investment companies registered under the Investment Company Act, except for a
unit investment trust whose assets consist solely of shares of one or more
registered investment companies, that have the same investment adviser (or, in
the case of unit investment trusts, the same depositor), provided that, for
purposes of this rule:
(A) Each series of a series company (as defined in Rule 18f-2 under the
Investment Company Act shall be deemed to be a separate investment company;
and
(B) Investment companies shall be deemed to have the same adviser (or
depositor) if their advisers (or depositors) are majority-owned
subsidiaries of the same parent, or if one investment company's adviser (or
depositor) is a majority-owned subsidiary of the other investment company's
adviser (or depositor);
5. Any entity, all of the equity owners of which are qualified
institutional buyers, acting for its own account or the accounts of other
qualified institutional buyers; and
6. Any bank as defined in Section 3(a)(2) of the Securities Act, any
savings and loan association or other institution as referenced in Section
3(a)(5)(A) of the Securities Act, or any foreign bank or savings and loan
association or equivalent institution, acting for its own account or the
accounts of other qualified institutional buyers, that in the aggregate owns and
invests on a discretionary basis at least $100 million in securities of issuers
that are not affiliated with it and that has an audited net worth of at least
$25 million as demonstrated in its latest annual financial statements, as of a
date not more than 16 months preceding the date of sale under the rule in the
case of a U.S. bank or savings and loan association, and not more than 18 months
preceding such date of sale for a foreign bank or savings and loan association
or equivalent institution.
INSTRUCTIONS:
In determining the aggregate amount of securities owned and invested on a
discretionary basis by an entity, the following instruments and interests shall
be excluded: bank deposit notes and certificates of deposit; loan
participations; repurchase agreements; securities owned but subject to a
repurchase agreement; and currency, interest rate and commodity swaps.
The aggregate value of securities owned and invested on a discretionary
basis by an entity shall be the cost of such securities, except where the entity
reports its securities holdings in its financial statements on the basis of
their market value, and no current information with respect to the cost of those
securities has been published. In the latter event, the securities may be valued
at market for purposes of this rule.
14
<PAGE> 15
<TABLE>
<S> <C> <C>
PAYER'S NAME:
SUBSTITUTE Part 1 -- PLEASE PROVIDE Social Security Number
FORM W-9 YOUR TIN IN THE BOX AT OR
RIGHT AND CERTIFY BY Employer Identification Number
SIGNING AND DATING BELOW
----------------------------
PART 2 -- CERTIFICATION -- UNDER PENALTIES OF PERJURY, I CERTIFY THAT:
(1) The number shown on this form is my correct Taxpayer
Identification Number (or I am waiting for a number to be
issued for me) and
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE (2) I am not subject to backup withholding because: (a) I am exempt
PAYER'S from backup withholding, or (b) I have not been notified by the Internal
REQUEST FOR TAXPAYER Revenue Service (the "IRS") that I am subject to backup withholding as a
IDENTIFICATION NUMBER ("TIN") result of a failure to report all interest or dividends, or (c) the IRS
has notified me that I am no longer subject to backup withholding.
CERTIFICATION INSTRUCTIONS-YOU
MUST CROSS OUT ITEM (2) ABOVE IF YOU HAVE
BEEN NOTIFIED BY THE IRS THAT YOU ARE
CURRENTLY SUBJECT TO BACKUP WITHHOLDING
BECAUSE OF UNDER REPORTING INTEREST OR
DIVIDENDS ON YOUR TAX RETURN. HOWEVER, IF
AFTER BEING NOTIFIED BY THE IRS THAT YOU
WERE SUBJECT TO BACKUP WITHHOLDING YOU
RECEIVED ANOTHER NOTIFICATION FROM THE IRS
THAT YOU ARE NO LONGER SUBJECT TO BACKUP
WITHHOLDING, DO NOT CROSS OUT SUCH ITEM (2).
SIGNATURE_________________________ Date:___________, 199___
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C>
PART 3: [ ] Check this box if you have not been issued a
TIN and have applied for one or intend to
apply for one in the near future.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO
ANY PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS
REQUIRED TO AVOID BACKUP WITHHOLDING.
SIGNATURE_________________________ Date:___________, 199___
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACK-UP
WITHHOLDING OF 31% OF ANY CASH PAYMENTS MADE TO YOU. PLEASE REVIEW
THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
IN PART 3 OF SUBSTITUTE FORM W-9.
16
<PAGE> 17
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (1) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office, or (2) I intend to
mail or deliver an application in the near future. I understand that if I do
not provide a taxpayer identification number within sixty (60) days 31% of all
reportable payments made to me thereafter will be withheld until I provide a
number.
Signature:_________________________________ Date: __________________ 199__
17
<PAGE> 18
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GUIDE THE
PAYER. -- Social Security numbers have nine digits separated by two hyphens:
i.e. 000-00-0000. Employer identification numbers have nine digits separated by
only one hyphen: i.e. 00-0000000. The table below will help determine the
number to give the payer.
<TABLE>
<CAPTION>
FOR THIS TYPE OF ACCOUNT: GIVE THE SOCIAL SECURITY NUMBER OF--
<S> <C>
1. An individual's account, The individual,
2. Two or more individuals joint account), The actual owner of the account or,
3. Custodian account of a minor (Uniform Gift to Minors if combined funds: any one of the individuals(l)
Act), The minor(2)
4. (a) The usual revocable savings trust account (grantor is The grantor-trustee(1)
also trustee), The actual owner(1)
(b) So-called trust account that is not a legal or valid The owner(3)
trust under State law,
5. Sole proprietorship account
- ------------------------------------------------------------- -------------------------------------------
FOR THIS TYPE OF ACCOUNT: GIVE THE EMPLOYER IDENTIFICATION
NUMBER OF--
- ------------------------------------------------------------- -------------------------------------------
6. A valid trust, estate, or pension trust, The legal entity (Do not furnish the identifying number
7. Corporate account, of personal representative or trustee unless the legal
8. Religious, charitable, or educational organization account, entity itself is not designated in the account title.)(4)
9. Partnership, The corporation
10. Association, club or other tax-exempt organization, The organization
11. A broker or registered nominee, The partnership
12. Account with the Department of Agriculture in the name The organization
of a public entity (such as a State or local government, The broker or nominee
school district, or prison) that receives agricultural The public entity
program payments
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Show the name of the owner. You may also enter your business name. You may
use your Social Security Number or Employer Identification Number.
(4) List first and circle the name of the legal trust, estate, or pension
trust.
NOTE: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or
Form SS-4, Application for Employer Identification Number, at the local office
of the Social Security Administration or the Internal Revenue Service and apply
for a number.
18
<PAGE> 19
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on broker transactions
include the following:
- - A corporation.
- - A financial institution.
- - An organization exempt from tax under section 501(a), or an individual
retirement plan.
- - The United States or any agency or instrumentality thereof.
- - A State, the District of Columbia, a possession of the United States, or
any subdivision or instrumentality thereof.
- - A foreign government, a political subdivision of a foreign government, or
any agency or instrumentality thereof.
- - An international organization or any agency, or instrumentality thereof.
- - A registered dealer in securities or commodities registered in the United
States or a possession of the United States.
- - A real estate investment trust.
- - A common trust fund operated by a bank under section 584(a).
- - An entity registered at all times under the Investment Company Act of
1940.
- - A foreign central bank of issue.
Payments of dividends not generally subject to backup withholding include the
following:
- - Payments to nonresident aliens subject to withholding under section 1441.
- - Payments to partnerships not engaged in a trade or business in the U.S.
and which have at least one nonresident partner.
- - Payments of patronage dividends where the amount received is not paid in
money.
- - Payments made by certain foreign organizations.
Exempt payees described above should file Substitute Form W-9 to avoid
possible erroneous backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH
YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM,
SIGN AND DATE THE FORM AND RETURN IT TO THE PAYER.
PRIVACY ACT NOTICE - Section 6109 requires most recipients of dividend,
interest, or other payments to give taxpayer identification numbers to payers
who must report the payments to IRS. IRS uses the numbers for identification
purposes. Payers must be given the numbers whether or not recipients are
required to file tax returns. Payers must generally withhold 31% of taxable
interest, dividend, and certain other payments to a payee who does not furnish
a taxpayer identification number to a payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER - If you
fail to furnish your taxpayer identification number to a payer, you are
subject to a penalty of $50 for each such failure unless your failure is
due to reasonable cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING - If you
make a false statement with no reasonable basis which results in no
imposition of backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION - Falsifying certifications or
affirmations may subject you to criminal penalties including fines and/or
imprisonment. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR
THE INTERNAL REVENUE SERVICE.
19
<PAGE> 20
CONSENT OF HOLDER OF
12 1/2% SUBORDINATED NOTES DUE 2001 OF
ALTIVA FINANCIAL CORPORATION
The undersigned holder (the "Holder") of $ ____________________
principal amount of the 12 1/2% Subordinated Notes due 2001 (the "Notes") of
Altiva Financial Corporation hereby consents to the execution by Altiva
Financial Corporation, as issuer of the Notes, and by American Stock Transfer &
Trust Company, as trustee under the Indenture dated as of June 29, 1999 (the
"Indenture"), of an Amended and Restated Indenture (the "Amended Indenture").
The undersigned acknowledges that the purpose of executing the Amended Indenture
is to delete the following from the Indenture:
(1) Section 3.9;
(2) Section 5.1(f);
(3) Section 5.13;
(4) Section 9.1;
(5) Section 9.4;
(6) Section 9.5;
(7) Section 9.6;
(8) Section 9.7;
(9) Section 9.8;
(10) Section 9.9;
(11) Section 9.10;
(12) Section 9.11;
(13) Section 9.12;
(14) Section 9.13;
(15) Section 9.14; and
(16) Article Ten
The Company and the Trustee are authorized to amend the Indenture
at their discretion to conform to the changes consented to herein. The consent
shall become effective upon the consummation of the exchange offer currently
being conducted by the Company relating to the exchange of the Notes for new 12%
Secured Convertible Senior Notes of the Company due 2006 in a discounted
principal amount.
Executed this ____ day of February, 2000.
[BENEFICIAL OWNER SIGN HERE]
Name:
-----------------------------------
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
<PAGE> 21
[REGISTERED OWNER/
DTC PARTICIPANT SIGN HERE]
Name:
--------------------------------------
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
<PAGE> 22
INSTRUCTION TO REGISTERED HOLDER AND/OR
BOOK-ENTRY TRANSFER FACILITY PARTICIPANT FROM OWNER
OF
ALTIVA FINANCIAL CORPORATION
12 1/2% SUBORDINATED NOTES DUE 2001
To Registered Holder and/or Participant of the Book-Entry Transfer Facility:
The undersigned hereby acknowledges receipt of the Private Placement
Memorandum, dated February 23, 2000 (the "Memorandum"), of Altiva Financial
Corporation, formerly Mego Mortgage Corporation, a Delaware corporation, the
Exchange Agreement by and among the Company and the holders of the 12 1/2%
Subordinated Notes due 2001 (the "Old Notes") of the Company who shall execute
the same, and the accompanying Letter of Transmittal, that together constitute
Altiva's offer. Capitalized terms used but not defined herein have the meanings
ascribed to them in the Memorandum.
This will instruct you, the registered Holder and/or book-entry transfer
facility participant, as to the action to be taken by you relating to the
Exchange Offer with respect to the 12 1/2% Subordinated Notes due 2001 (the "Old
Notes") held by you for the account of the undersigned.
The aggregate principal amount of the Old Notes held by you for the account
of the undersigned is (fill in amount): $ __________________ of the Old
Notes.
With respect to the Exchange Offer, the undersigned hereby instructs you
(check appropriate box):
[ ] TO TENDER the following Old Notes held by you for the account of the
undersigned (insert principal amount of Old Notes to be tendered, if
any):
$ _____________ of the 12 1/2% Subordinated Notes due 2001.
[ ] NOT TO TENDER any Old Notes held by you for the account of the
undersigned.
If the undersigned instructs you to tender the Old Notes held by you for
its account, it is understood that you are authorized:
(a) to make, on behalf of the undersigned (and the undersigned, by its
signature below, hereby makes to you), the representation and warranties
contained in the Letter of Transmittal that are to be made with respect to the
undersigned as a beneficial owner, including but not limited to the
representations that:
(1) the undersigned's principal residence is in the state of (fill in
state) _______________,
(2) the undersigned is acquiring Altiva's 12% Secured Convertible Senior
Notes due 2006 (the "New Notes") in the ordinary course of business of the
undersigned,
(3) the undersigned is not participating, does not intend to
participate, and has no arrangement or understanding with any person to
participate in a public distribution (within the meaning of the Securities
Act) of the New Notes,
(4) the undersigned acknowledges that (A) any person who is a
broker-dealer or is participating in the Exchange Offer for the purpose of
making a public distribution of the
<PAGE> 23
New Notes must, in the absence of an exemption therefrom, comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction of the New Notes acquired by
such person and cannot rely on the position of the Staff of the Securities
and Exchange Commission set forth in no-action letters that are discussed
in the section of the Memorandum entitled "Plan of Distribution" and (B)
failure to comply with such requirements in such instance could result in
the undersigned or such person incurring liability under the Securities Act
for which the undersigned is not indemnified by Altiva, and
(5) the undersigned is not an "affiliate," as defined in Rule 405 of the
Securities Act of Altiva, or if it is such an affiliate, that it will
comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable to it;
(b) to agree, on behalf of the undersigned, as set forth in the Letter of
Transmittal, including, without limitation, to agree that if the undersigned is
a broker or dealer that will receive New Notes for its own account in exchange
for Old Notes that were acquired as a result of marketmaking or other trading
activities that it will deliver a copy of the Memorandum in connection with any
resale by it of such New Notes; however, by so acknowledging and by delivering a
prospectus, the undersigned does not and will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act; and
(c) to take such other action as necessary under the Memorandum or the
Letter of Transmittal to effect the valid tender of such Old Notes.
SIGN HERE
Name of beneficial owner(s):
----------------------------------------------------
Signature(s):
-------------------------------------------------------------------
Name (please print):
------------------------------------------------------------
Address:
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
Telephone number:
---------------------------------------------------------------
Taxpayer Identification or Social Security Number:
------------------------------
Date:
---------------------------------------------------------------------------
<PAGE> 24
NOTICE OF GUARANTEED DELIVERY
WITH RESPECT TO
ALTIVA FINANCIAL CORPORATION
12 1/2% Subordinated Notes due 2001
This form must be used by a Holder of the 12 1/2% Subordinated Notes
due 2001 (the "Old Notes") of Altiva Financial Corporation, formerly Mego
Mortgage Corporation, who wishes to tender Old Notes to the Exchange Agent
pursuant to the guaranteed delivery procedures described in "The Exchange Offer
- - Guaranteed Delivery Procedures" of the Private Placement Memorandum (the
"Memorandum") dated February 23, 2000 and in Instruction 2 to the enclosed
Letter of Transmittal. Any Holder who wishes to tender Old Notes pursuant to
such guaranteed delivery procedures must ensure that the Exchange Agent receives
this Notice of Guaranteed Delivery prior to the Expiration Date of the Exchange
Offer. Capitalized terms not defined herein have the meanings ascribed to them
in the Memorandum or the Letter of Transmittal.
To: American Stock Transfer & Trust Company, Exchange Agent
<TABLE>
<S> <C>
By Mail, By Overnight Courier or By Facsimile:
By Hand: (718) 921-8334
America Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
Confirm by Telephone
(718) 921-8293
</TABLE>
For information call:
Isaac Kagen
(718) 921-8293
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS SET
FORTH FOR THE DEPOSITARY ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE
NUMBER OTHER THAN AS LISTED ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
Please read the accompanying instructions carefully.
Ladies and Gentleman:
The undersigned hereby tenders to Altiva, upon the terms and subject to
the conditions set forth in the Memorandum, the related Letter of Transmittal,
and the Exchange Agreement by and between Altiva and the holders of the Old
Notes who shall execute the same, receipt of which is hereby acknowledged, the
principal amount of Old Notes specified below pursuant to the guaranteed
delivery procedures set forth in the Memorandum and in Instruction 2 of the
Letter of Transmittal. The undersigned hereby tenders the Old Notes listed
below:
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL
ACCOUNT NUMBER AT THE BOOK-ENTRY FACILITY AMOUNT REPRESENTED AMOUNT TENDERED
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 25
SIGN HERE
Name of Registered or Acting Holder:
--------------------------------------------
Signature(s):
-------------------------------------------------------------------
Name(s) (please print):
---------------------------------------------------------
Address:
-----------------------------------------------------------------------
Telephone number:
--------------------------------------------------------------
Date:
---------------------------------------------------------------------------
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm which is a member of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., or is a commercial bank or trust company having an office or
correspondent in the United States, or is otherwise an "eligible institution"
within the meaning on Rule 17Ad-15 under the Securities Exchange Act of 1934,
as amended, guarantees deposit with the Exchange Agent of the Letter of
Transmittal (or facsimile thereof), together with confirmation of the
book-entry transfer of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility described in the Memorandum under the caption
"The Exchange Offer -- Guaranteed Delivery Procedures" and in the Letter of
Transmittal and any other required documents, all by 5:00 p.m., New York City
time, on the third New York Stock Exchange trading day following the
Expiration Date. Failure to do so could result in a financial loss to such
Eligible Institution.
Name of Firm:
-------------------------------------------------------------------
Authorized Signature:
-----------------------------------------------------------
Title:
--------------------------------------------------------------------------
Address:
------------------------------------------------------------------------
Area Code and Telephone Number:
-------------------------------------------------
Date:
---------------------------------------------------------------------------
INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY
1. Delivery of this Notice of Guaranteed Delivery. The Exchange Agent
must receive, prior to the Expiration Date, a properly completed and duly
executed copy of this Notice of Guaranteed Delivery and any other documents
required by this Notice of Guaranteed Delivery at its address set forth herein.
The method of delivery of this Notice of Guaranteed Delivery and any other
required documents to the Exchange Agent is at the election and risk of the
Holder. The delivery will be deemed made only when actually received by the
Exchange Agent. If delivery is by mail, we recommend registered mail with return
receipt requested, properly insured. Instead of
<PAGE> 26
delivery by mail, we recommend that the Holders use an overnight or hand
delivery service or facsimile. In all cases, you should allow sufficient time to
assure timely delivery. For a description of the guaranteed delivery procedures,
see Instruction 2 of the Letter of Transmittal.
2. Signatures on this Notice of Guaranteed Delivery. The signature on
this Notice of Guaranteed Delivery must correspond with the name shown on the
security position listing as the owner of the Old Notes.
If this Notice of Guaranteed Delivery is signed by a person other than
a participant of the Book-Entry Transfer Facility, this Notice of Guaranteed
Delivery must be accompanied by appropriate bond powers, signed as the name of
the participant shown on the Book-Entry Transfer Facility's security position
listing.
If this Notice of Guaranteed Delivery is signed by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation or other
person acting in fiduciary or representative capacity, such person should so
indicate when signing. Unless waived by Altiva, you must submit with the Letter
of Transmittal evidence satisfactory to Altiva of such person's authority to so
act.
3. Requests for Assistance of Additional Copies. Questions and requests
for assistance and requests for additional copies of the Memorandum may be
directed to the Exchange Agent at the address specified in the Memorandum.
Holders may also contact their broker, dealer, commercial bank, trust company or
other nominee for assistance concerning the Exchange Offer.
<PAGE> 1
EXHIBIT T3E(4)
INSTRUCTION TO REGISTERED HOLDER AND/OR
BOOK-ENTRY TRANSFER FACILITY PARTICIPANT FROM OWNER
OF
ALTIVA FINANCIAL CORPORATION
12 1/2% SUBORDINATED NOTES DUE 2001
To Registered Holder and/or Participant of the Book-Entry Transfer Facility:
The undersigned hereby acknowledges receipt of the Private Placement
Memorandum, dated February 23, 2000 (the "Memorandum"), of Altiva Financial
Corporation, formerly Mego Mortgage Corporation, a Delaware corporation, the
Exchange Agreement by and among the Company and the holders of the 12 1/2%
Subordinated Notes due 2001 (the "Old Notes") of the Company who shall execute
the same, and the accompanying Letter of Transmittal, that together constitute
Altiva's offer. Capitalized terms used but not defined herein have the meanings
ascribed to them in the Memorandum.
This will instruct you, the registered Holder and/or book-entry transfer
facility participant, as to the action to be taken by you relating to the
Exchange Offer with respect to the 12 1/2% Subordinated Notes due 2001 (the "Old
Notes") held by you for the account of the undersigned.
The aggregate principal amount of the Old Notes held by you for the account
of the undersigned is (fill in amount): $ __________ of the Old Notes.
With respect to the Exchange Offer, the undersigned hereby instructs you
(check appropriate box):
[ ] TO TENDER the following Old Notes held by you for the account of the
undersigned (insert principal amount of Old Notes to be tendered, if
any):
$__________ of the 12 1/2% Subordinated Notes due 2001.
[ ] NOT TO TENDER any Old Notes held by you for the account of the
undersigned.
If the undersigned instructs you to tender the Old Notes held by you for
its account, it is understood that you are authorized:
(a) to make, on behalf of the undersigned (and the undersigned, by its
signature below, hereby makes to you), the representation and warranties
contained in the Letter of Transmittal that are to be made with respect to the
undersigned as a beneficial owner, including but not limited to the
representations that:
(1) the undersigned's principal residence is in the state of (fill in
state) ____________,
(2) the undersigned is acquiring Altiva's 12% Secured Convertible
Senior Notes due 2006 (the "New Notes") in the ordinary course of business
of the undersigned,
(3) the undersigned is not participating, does not intend to
participate, and has no arrangement or understanding with any person to
participate in a public distribution (within the meaning of the Securities
Act) of the New Notes,
(4) the undersigned acknowledges that (A) any person who is a
broker-dealer or is participating in the Exchange Offer for the purpose of
making a public distribution of the
<PAGE> 1
EXHIBIT T3E(5)
NOTICE OF GUARANTEED DELIVERY
WITH RESPECT TO
ALTIVA FINANCIAL CORPORATION
12 1/2% SUBORDINATED NOTES DUE 2001
This form must be used by a Holder of the 12 1/2% Subordinated Notes due
2001 (the "Old Notes") of Altiva Financial Corporation, formerly Mego Mortgage
Corporation, who wishes to tender Old Notes to the Exchange Agent pursuant to
the guaranteed delivery procedures described in "The Exchange Offer --
Guaranteed Delivery Procedures" of the Private Placement Memorandum (the
"Memorandum") dated February 23, 2000 and in Instruction 2 to the enclosed
Letter of Transmittal. Any Holder who wishes to tender Old Notes pursuant to
such guaranteed delivery procedures must ensure that the Exchange Agent receives
this Notice of Guaranteed Delivery prior to the Expiration Date of the Exchange
Offer. Capitalized terms not defined herein have the meanings ascribed to them
in the Memorandum or the Letter of Transmittal.
To: American Stock Transfer & Trust Company, Exchange Agent
By Mail, By Overnight Courier or By Facsimile:
By Hand: (718) 921-8334
America Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
Confirm by Telephone
(718) 921-8293
For information call:
Isaac Kagen
(718) 921-8293
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS SET
FORTH FOR THE DEPOSITARY ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE
NUMBER OTHER THAN AS LISTED ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
Ladies and Gentleman:
The undersigned hereby tenders to Altiva, upon the terms and subject to the
conditions set forth in the Memorandum, the related Letter of Transmittal, and
the Exchange Agreement by and between Altiva and the holders of the Old Notes
who shall execute the same, receipt of which is hereby acknowledged, the
principal amount of Old Notes specified below pursuant to the guaranteed
delivery procedures set forth in the Memorandum and in Instruction 2 of the
Letter of Transmittal. The undersigned hereby tenders the Old Notes listed
below:
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL
ACCOUNT NUMBER AT THE BOOK-ENTRY FACILITY AMOUNT REPRESENTED AMOUNT TENDERED
- ----------------------------------------- ------------------- -------------------
<S> <C> <C>
</TABLE>
